PROSPECTUS SUPPLEMENT
(FOR USE WITH THE PROSPECTUS DATED FEBRUARY 16, 2006)
$468,270,000
(APPROXIMATE)
ASSET BACKED FUNDING CORPORATION
DEPOSITOR
FIRST FRANKLIN MORTGAGE LOAN TRUST 2006-FFH1
ISSUING ENTITY
BANK OF AMERICA, NATIONAL ASSOCIATION
SPONSOR
NATIONAL CITY HOME LOAN SERVICES, INC.
SERVICER
FIRST FRANKLIN MORTGAGE LOAN TRUST 2006-FFH1,
ASSET-BACKED CERTIFICATES, SERIES 2006-FFH1
PRINCIPAL AND INTEREST PAYABLE MONTHLY, COMMENCING IN MARCH 2006
THE ISSUING ENTITY WILL ISSUE -
o Four classes of senior certificates.
o Ten classes of subordinated Class M Certificates all of which are
subordinate to, and provide credit enhancement for, the Class A
Certificates. Each class of Class M Certificates is also subordinated
to and provides credit enhancement for each class of Class M
Certificates, if any, with a lower number.
o The Class CE, Class P and Class R Certificates, which are not offered
hereby.
The classes of offered certificates are listed and their sizes and basic
payment characteristics are described under the heading "Offered
Certificates" in the table beginning on page S-3.
THE ASSETS OF THE ISSUING ENTITY WILL INCLUDE -
o A pool of first lien residential mortgage loans. The mortgage loans
will consist of conventional fixed-rate and adjustable-rate non-prime
mortgage loans.
CREDIT ENHANCEMENT WILL CONSIST OF -
o Excess Interest - Certain excess interest received from the mortgage
loans will be used to cover losses.
o Overcollateralization - As of the cut-off date, the assets of the
trust will exceed the aggregate principal balance of the certificates,
resulting in overcollateralization. Certain excess interest received
from the mortgage loans will also be applied as payments of principal
on the certificates to maintain a required level of
overcollateralization.
o Subordination - Each class of subordinated certificates is subordinate
to the senior certificates and to those classes of subordinated
certificates higher in order of payment priority.
o Interest Rate Swap Agreement - Net swap payments received by the trust
pursuant to the interest rate swap agreement will be available to make
distributions on the certificates.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED THE OFFERED CERTIFICATES OR DETERMINED THAT THIS
PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS IS ACCURATE OR COMPLETE.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The underwriter will purchase the offered certificates from the depositor and
will offer the offered certificates from time to time to investors in
negotiated transactions or otherwise at varying prices to be determined at the
time of sale. The depositor expects that the offered certificates will be
available for delivery to investors in book-entry form through The Depository
Trust Company, Clearstream or Euroclear on or about February 28, 2006. Total
proceeds to the depositor for the offered certificates will be approximately
99.64% of the initial certificate principal balance of the offered
certificates, before deducting expenses estimated at $600,000 payable by the
depositor.
BANC OF AMERICA SECURITIES LLC
The date of this prospectus supplement is February 24, 2006
CAREFULLY CONSIDER THE "RISK FACTORS" BEGINNING ON PAGE S-15 OF THIS PROSPECTUS
SUPPLEMENT AND ON PAGE 7 IN THE ACCOMPANYING PROSPECTUS.
Neither the offered certificates nor the underlying mortgage loans are insured
or guaranteed by any governmental agency or instrumentality or any other entity.
The offered certificates represent interests in the issuing entity only and will
not be obligations of or represent interests in the depositor, the sponsor or
any other entity.
This prospectus supplement may be used to offer and sell the offered
certificates only if accompanied by the prospectus.
TABLE OF CONTENTS
PAGE
----
SUMMARY OF PROSPECTUS SUPPLEMENT ........................................ S-5
RISK FACTORS ............................................................ S-15
High loan-to-value ratios increase risk of loss .................... S-15
There are risks involving unpredictability of prepayments and
the effect of prepayments on yields .............................. S-15
Adjustable rate mortgage loan borrowers may be more likely to prepay S-16
There is a risk that interest payments on the mortgage loans may
be insufficient to maintain overcollateralization ................. S-16
Effects of mortgage interest rates and other factors on the
certificate interest rates of the offered certificates ............ S-17
There are risks relating to alternatives to foreclosure ............ S-18
Nature of non-prime mortgage loans may increase risk of loss ....... S-18
The interest rate swap agreement and the swap provider ............. S-18
Some of the mortgage loans have an initial interest only period,
which may result in increased delinquencies and losses or rates of
prepayment ........................................................ S-19
Balloon mortgage loans increase the risk of loss ................... S-19
There are risks relating to geographic concentration of the
mortgage loans .................................................... S-20
Hurricane Katrina, Hurricane Rita and Hurricane Wilma may adversely
affect the mortgage loans ......................................... S-20
Residential real estate values may fluctuate and adversely affect
your investment ................................................... S-20
Credits scores may not accurately predict the likelihood of default S-21
The recording of the mortgages in the name of MERS may affect
the yield on your certificates .................................... S-21
There are risks in holding subordinated certificates ............... S-21
Decrement tables are based upon assumptions and models ............. S-22
The rights of the NIMS Insurer could adversely affect the
offered certificates .............................................. S-22
United States military operations may increase risk of
shortfalls in interest ............................................ S-23
THE MORTGAGE POOL ....................................................... S-23
General ............................................................ S-24
The Index .......................................................... S-27
Terms of the Mortgage Loans ........................................ S-27
THE ORIGINATOR .......................................................... S-27
UNDERWRITING STANDARDS .................................................. S-27
THE SERVICER ............................................................ S-30
National City Home Loan Services, Inc. ............................. S-30
Servicer's Delinquency and Foreclosure Experience .................. S-31
Servicer's Policies and Procedures ................................. S-33
Prior Securitizations .............................................. S-33
THE SPONSOR ............................................................. S-34
STATIC POOL INFORMATION ................................................. S-34
THE DEPOSITOR ........................................................... S-35
THE ISSUING ENTITY ...................................................... S-35
THE TRUSTEE ............................................................. S-35
THE CREDIT RISK MANAGER ................................................. S-36
THE POOLING AND SERVICING AGREEMENT ..................................... S-37
General ............................................................ S-37
Assignment of the Mortgage Loans ................................... S-37
Payments on Mortgage Loans; Deposits to Collection
Account and Distribution Account .................................. S-39
Advances ........................................................... S-40
Compensation and Payment of Expenses of the Servicer, the
Trustee and the Credit Risk Manager ............................... S-41
Optional Termination ............................................... S-42
Events of Servicing Termination .................................... S-42
Rights upon Event of Servicing Termination ......................... S-43
Voting Rights ...................................................... S-43
Amendment .......................................................... S-43
Rights of the NIMS Insurer under the Pooling and Servicing
Agreement ......................................................... S-44
DESCRIPTION OF THE CERTIFICATES ......................................... S-44
General ............................................................ S-44
Allocation of Available Funds ...................................... S-44
Interest Distributions ............................................. S-45
Principal Distributions ............................................ S-46
Allocation of Losses ............................................... S-54
Application of Monthly Excess Cashflow Amounts ..................... S-54
Certificate Interest Rates ......................................... S-58
Interest Rate Swap Agreement, the Swap Provider and the
Swap Account ...................................................... S-59
The Supplemental Interest Trust .................................... S-63
Calculation of One-Month LIBOR ..................................... S-63
YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS ........................... S-64
Weighted Average Lives ............................................. S-65
Final Scheduled Distribution Dates ................................. S-67
USE OF PROCEEDS ......................................................... S-67
FEDERAL INCOME TAX CONSEQUENCES ......................................... S-67
General ............................................................ S-67
Taxation of Regular Interests ...................................... S-68
Taxation of the Notional Principal Contract Arrangements ........... S-69
REMIC Taxes and Reporting .......................................... S-70
ERISA CONSIDERATIONS .................................................... S-70
LEGAL INVESTMENT ........................................................ S-73
METHOD OF DISTRIBUTION .................................................. S-74
REPORTS TO CERTIFICATEHOLDERS ........................................... S-74
LEGAL MATTERS ........................................................... S-75
RATINGS ................................................................. S-75
INDEX OF PROSPECTUS SUPPLEMENT DEFINITIONS .............................. S-76
Appendix A: Mortgage Loan Data .......................................... A-1
Appendix B: Decrement Tables ............................................ B-1
Appendix C: Hypothetical Mortgage Loans ................................. C-1
APPENDIX D: INTEREST RATE SWAP SCHEDULE ................................. D-1
(i)
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS
The depositor describes the certificates in two separate documents that
progressively provide more detail:
o the accompanying prospectus, which provides general information,
some of which may not apply to your certificates, and
o this prospectus supplement, which incorporates and includes the
appendices, and describes the specific terms of your certificates.
Cross-references are included in this prospectus supplement and the
accompanying prospectus to captions in these materials where you can find
further related discussions. The foregoing table of contents and the table of
contents included in the accompanying prospectus provide the location of these
captions.
You can find a listing of the pages where capitalized terms used in
this prospectus supplement and the accompanying prospectus are defined under the
caption "Index of Prospectus Supplement Definitions" beginning on page S-76 in
this document and under the caption "Index of Prospectus Definitions" beginning
on page 129 in the accompanying prospectus. Any capitalized terms used but not
defined in this prospectus supplement have the meanings assigned in the
accompanying prospectus.
This prospectus supplement and the accompanying prospectus contain
forward-looking statements relating to future economic performance or
projections and other financial items. Such forward-looking statements, together
with related qualifying language and assumptions, are found in the material,
including each of the tables, set forth under "Risk Factors" and "Yield,
Prepayment and Maturity Considerations" and in the appendices. Forward-looking
statements are also found elsewhere in this prospectus supplement and the
accompanying prospectus, and may be identified by, among other things, the use
of forward-looking words such as "expects," "intends," "anticipates,"
"estimates," "believes," "may" or other comparable words. These statements
involve known and unknown risks, uncertainties and other important factors that
could cause the actual results or performance to differ materially from such
forward-looking statements. Those risks, uncertainties and other factors
include, among others, general economic and business conditions, competition,
changes in political, social and economic conditions, regulatory initiatives and
compliance with government regulations, customer preference and various other
matters, many of which are beyond the depositor's control. These forward-looking
statements speak only as of the date of this prospectus supplement. The
depositor expressly disclaims any obligation or undertaking to update or revise
forward-looking statements to reflect any change in the depositor's expectations
or any change in events, conditions or circumstances on which any
forward-looking statement is based.
For 90 days following the date of this prospectus supplement, all
dealers selling certificates will deliver a prospectus supplement and a
prospectus. This requirement is in addition to the dealers' obligation to
deliver a prospectus when acting as underwriters of the certificates with
respect to their unsold allotments or subscriptions.
S-1
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 securities to the public in that Relevant Member State prior to the
publication of a prospectus in relation to the securities 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 securities 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
securities to the public" in relation to any securities 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 securities to be offered so as to
enable an investor to decide to purchase or subscribe the securities, 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
The 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 securities 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 securities in, from or otherwise involving the United Kingdom.
S-2
THE FIRST FRANKLIN MORTGAGE LOAN TRUST 2006-FFH1
ASSET-BACKED CERTIFICATES, SERIES 2006-FFH1
INITIAL CERTIFICATE
CERTIFICATE INTEREST PRINCIPAL INTEREST MINIMUM INCREMENTAL
CLASS BALANCE(1) RATE TYPES(2) TYPES(2) DENOMINATIONS DENOMINATIONS
- ------------- ------------- ----------- -------------- ------------- ------------- -------------
OFFERED
CERTIFICATES
Class A-1 $ 152,118,000 (5) Senior, Floating Rate $ 25,000 $ 1
Sequential Pay
Class A-2 $ 79,481,000 (5) Senior, Floating Rate $ 25,000 $ 1
Sequential Pay
Class A-3 $ 94,509,000 (5) Senior, Floating Rate $ 25,000 $ 1
Sequential Pay
Class A-4 $ 27,777,000 (5) Senior, Floating Rate $ 25,000 $ 1
Sequential Pay
Class M-1 $ 25,852,000 (5) Subordinated Floating Rate $ 25,000 $ 1
Class M-2 $ 21,951,000 (5) Subordinated Floating Rate $ 25,000 $ 1
Class M-3 $ 10,731,000 (5) Subordinated Floating Rate $ 25,000 $ 1
Class M-4 $ 7,804,000 (5) Subordinated Floating Rate $ 25,000 $ 1
Class M-5 $ 9,268,000 (5) Subordinated Floating Rate $ 25,000 $ 1
Class M-6 $ 6,829,000 (5) Subordinated Floating Rate $ 25,000 $ 1
Class M-7 $ 10,000,000 (5) Subordinated Floating Rate $ 25,000 $ 1
Class M-8 $ 8,048,000 (5) Subordinated Floating Rate $ 25,000 $ 1
Class M-9 $ 5,609,000 (5) Subordinated Floating Rate $ 25,000 $ 1
Class M-10 $ 8,293,000 (5) Subordinated Floating Rate $ 25,000 $ 1
NON-OFFERED
CERTIFICATES
Class CE N/A (6) Subordinated N/A N/A N/A
Class P $ 100 (6) Prepayment N/A N/A N/A
Charge
Class R N/A (6) Subordinated N/A N/A N/A
FINAL INITIAL RATING
SCHEDULED OF CERTIFICATES(4)
CERTIFICATE DISTRIBUTION -----------------------
CLASS FORM DATE(3) S&P MOODY'S FITCH
- ------------- ----------- ----------------- ------ ------- ------
OFFERED
CERTIFICATES
Class A-1 Book-Entry April 25, 2026 AAA Aaa AAA
Class A-2 Book-Entry October 25, 2029 AAA Aaa AAA
Class A-3 Book-Entry January 25, 2035 AAA Aaa AAA
Class A-4 Book-Entry January 25, 2036 AAA Aaa AAA
Class M-1 Book-Entry January 25, 2036 AA+ Aa1 AA+
Class M-2 Book-Entry January 25, 2036 AA Aa2 AA
Class M-3 Book-Entry January 25, 2036 AA- Aa3 AA-
Class M-4 Book-Entry January 25, 2036 A+ Aa3 A+
Class M-5 Book-Entry January 25, 2036 A A1 A
Class M-6 Book-Entry January 25, 2036 A- A2 A-
Class M-7 Book-Entry January 25, 2036 BBB+ A3 BBB+
Class M-8 Book-Entry December 25, 2035 BBB Baa1 BBB+
Class M-9 Book-Entry November 25, 2035 BBB- Baa2 BBB
Class M-10 Book-Entry October 25, 2035 None Baa3 BBB-
NON-OFFERED
CERTIFICATES
Class CE Definitive N/A None None None
Class P Definitive N/A None None None
Class R Definitive N/A None None None
(1) Approximate. The initial certificate balances of the offered certificates
may vary by a total of plus or minus 5%.
(2) See "Description of the Certificates--Categories of Classes of Securities"
in the prospectus for a description of these principal and interest types
and see "Description of the Certificates--Interest Distributions,"
"--Principal Distributions" and "--Allocation of Losses" in this prospectus
supplement for a description of the effects of subordination.
(3) Each final scheduled distribution date has been calculated as described
under "Yield, Prepayment and Maturity Considerations--Final Scheduled
Distribution Dates" in this prospectus supplement.
(4) The offered certificates will not be issued unless they receive at least
the ratings set forth in this table. See "Ratings" in this prospectus
supplement.
(5) Interest will accrue on these certificates during each interest accrual
period at a per annum rate equal to the least of (i) the sum of one-month
LIBOR plus the margin set forth in the table below, (ii) the pool maximum
rate cap and (iii) the pool cap as described under "Description of the
Certificates--Certificate Interest Rates" in this prospectus supplement.
During each interest accrual period relating to the distribution dates
after the optional termination date, the margins will increase to margins
set forth in the table below if the optional termination right is not
exercised. Interest will be calculated based on the methodology in the
table below.
S-3
MARGIN AFTER THE OPTIONAL
CLASS MARGIN TERMINATION DATE INTEREST CALCULATIONS
- ------------ -------- ------------------------- ---------------------
Class A-1 0.07% 0.140% Actual/360
Class A-2 0.13% 0.260% Actual/360
Class A-3 0.19% 0.380% Actual/360
Class A-4 0.30% 0.600% Actual/360
Class M-1 0.37% 0.555% Actual/360
Class M-2 0.40% 0.600% Actual/360
Class M-3 0.44% 0.660% Actual/360
Class M-4 0.51% 0.765% Actual/360
Class M-5 0.54% 0.810% Actual/360
Class M-6 0.67% 1.005% Actual/360
Class M-7 1.25% 1.875% Actual/360
Class M-8 1.45% 2.175% Actual/360
Class M-9 2.50% 3.750% Actual/360
Class M-10 2.50% 3.750% Actual/360
(6) The Class CE, Class P and Class R Certificates are entitled to certain
distributions as specified in the pooling and servicing agreement.
S-4
SUMMARY OF PROSPECTUS SUPPLEMENT
Because this is a summary, it does not contain all the information that
may be important to you. You should read the entire accompanying prospectus and
this prospectus supplement carefully before you decide to purchase a
certificate. If capitalized terms are not defined in this prospectus supplement,
they are defined in the prospectus.
ISSUING ENTITY
First Franklin Mortgage Loan Trust 2006-FFH1, a New York common law trust.
TITLE OF SERIES
First Franklin Mortgage Loan Trust 2006-FFH1, Asset-Backed Certificates, Series
2006-FFH1.
SPONSOR
Bank of America, National Association.
DEPOSITOR
Asset Backed Funding Corporation.
SERVICER
National City Home Loan Services, Inc.
ORIGINATOR
First Franklin Financial Corporation.
TRUSTEE AND SUPPLEMENTAL INTEREST TRUST TRUSTEE
Wells Fargo Bank, N.A.
CREDIT RISK MANAGER
Clayton Fixed Income Services Inc.
SWAP PROVIDER
The Bank of New York.
NIMS INSURER
After the closing date, a separate entity may be established to issue net
interest margin securities secured by all or a portion of the Class CE and Class
P Certificates. Those net interest margin securities may or may not have the
benefit of a financial guaranty insurance policy that guarantees payments on
those securities. The insurer that would issue any financial guaranty insurance
policy, if any, is referred to in this prospectus supplement as the "NIMS
Insurer." The references to the NIMS Insurer in this prospectus supplement are
applicable only if there is a NIMS Insurer.
CLOSING DATE
On or about February 28, 2006.
CUT-OFF DATE
February 1, 2006.
DISTRIBUTION DATE
The 25th day of each month (or if not a business day, the next business day)
beginning March 27, 2006.
DETERMINATION DATE
The fifteenth day of each month in which a distribution date occurs (or, if not
a business day, the immediately preceding business day).
RECORD DATE
The business day immediately preceding a distribution date; provided, however,
that if a certificate becomes a definitive certificate, the record date for that
certificate will be the last business day of the month immediately preceding the
month in which the related distribution date occurs.
COLLECTION PERIOD
The period from the second day of the calendar month preceding the month in
which a distribution date occurs through the first day of the calendar month in
which such distribution date occurs.
PREPAYMENT PERIOD
The period commencing on the day after the determination date in the calendar
month preceding the calendar month in which a distribution date occurs (or, in
the case of the first distribution date, on the cut-off date) and ending on the
determination date in the calendar month in which that distribution date occurs.
S-5
THE TRANSACTION PARTIES
The originator acquired and the servicer currently services the
mortgage loans. Prior to the closing date, the sponsor purchased the mortgage
loans from the originator. On the closing date the sponsor will sell the
mortgage loans to the depositor, who will in turn deposit them into a common law
trust, which is the issuing entity. The trust will be formed by a pooling and
servicing agreement, dated as of the cut-off date, among the depositor, the
servicer and the trustee. The servicer will service the mortgage loans in
accordance with the pooling and servicing agreement and provide the information
to the trustee necessary for the trustee to calculate distributions and other
information regarding the certificates.
The transfers of the mortgage loans from the sponsor to the depositor
to the issuing entity in exchange for the certificates is illustrated below:
[CHART APPEARS HERE]
THE CERTIFICATES
A summary table of the initial certificate principal balances,
principal types, certificate interest rates, interest types, denominations,
certificate forms, final scheduled distribution dates and ratings of the
certificates is set forth in the table beginning on page S-3.
The certificates represent all of the beneficial ownership interests in
the trust.
CLASSIFICATIONS OF CLASSES OF CERTIFICATES
Offered Certificates: A-1, A-2, A-3, A-4, M-1, M-2,
M-3, M-4, M-5, M-6, M-7, M-8,
M-9 and M-10
Non-Offered Certificates: CE, P and R
Senior Certificates or Class A Certificates: A-1, A-2, A-3 and A-4
Subordinated Certificates: M-1, M-2, M-3, M-4, M-5, M-6,
M-7, M-8, M-9, M-10, CE and R
Class M Certificates: M-1, M-2, M-3, M-4, M-5, M-6,
M-7, M-8, M-9 and M-10
Residual Certificate: R
S-6
THE MORTGAGE POOL
On the closing date, the issuing entity will acquire fixed and adjustable-rate
first lien mortgage loans. All of the mortgage loans were originally originated
or acquired by the originator in accordance with the underwriting guidelines
described under "Underwriting Standards" in this prospectus supplement. The
mortgage loans will consist of fixed and adjustable-rate first lien mortgage
loans that will be included in the mortgage pool on the closing date (the
"Mortgage Loans").
TOTAL MORTGAGE LOAN STATISTICS
The total Mortgage Loans had the following aggregate characteristics as of the
cut-off date (percentages are based on the aggregate principal balance of the
Mortgage Loans):
RANGE, TOTAL OR PERCENTAGE WEIGHTED AVERAGE
-------------------------- ----------------
Number of Mortgage Loans 3,182 --
Aggregate Outstanding Principal Balance $487,781,534.25 --
Outstanding Principal Balance $26,315.02 to $960,000.00 $153,294.01
Current Interest Rate 5.875% to 11.250% 8.361%
Servicing Fee Rate 0.500% --
Credit Risk Manager Fee Rate 0.015% --
Remaining Term to Maturity 177 to 360 months 357 months
Original Term to Maturity 180 to 360 months 359 months
Loan Age 0 to 9 months 2 months
Original Loan-to-Value Ratio 95.00% to 103.00% 100.00%
Original Debt-to-Income Ratio 2.00% to 55.00% 42.84%
Credit Scores 580 to 813 660
Latest Maturity Date 2/1/2036 --
Percentage of Fixed-Rate Mortgage Loans 13.34% --
Percentage of Adjustable-Rate Mortgage Loans 86.66% --
Percentage of Interest Only Mortgage Loans 29.77% --
Percentage of Mortgage Loans with Prepayment Charges 64.47% --
Percentage of Mortgage Loans with "Simultaneous Seconds" 0.00% --
Maximum Single Five-Digit Zip Code Concentration 0.32% --
Geographic Concentration of Mortgaged Properties in
Excess of 5.00% of the Aggregate Outstanding Principal Balance
California 8.74% --
Ohio 8.36% --
Illinois 8.10% --
Michigan 7.61% --
North Carolina 6.96% --
Florida 6.27% --
New York 5.84% --
Indiana 5.33% --
For the Adjustable-Rate Mortgage Loans Only:
Gross Margin 5.000% to 8.375% 6.372%
Minimum Mortgage Interest Rate 5.875% to 11.125% 8.305%
Maximum Mortgage Interest Rate 11.875% to 17.125% 14.304%
Initial Rate Adjustment Cap 2.000% to 3.000% 2.997%
Periodic Rate Adjustment Cap 1.000% 1.000%
Months to First or Next Adjustment Date 9 to 59 months 25 months
S-7
The characteristics of the mortgage pool may change because:
o Before the closing date, the depositor may remove mortgage loans
from the mortgage pool. The depositor also may substitute new
mortgage loans for mortgage loans in the mortgage pool prior to
the closing date.
o After the certificates are issued, mortgage loans may be removed
from the trust because of repurchases by the originator or the
sponsor for breaches of representations or failure to deliver
required documents. Under certain circumstances and generally only
during the two-year period following the closing date, the
originator or the sponsor may instead make substitutions for these
mortgage loans.
See "The Pooling and Servicing Agreement--Assignment of Mortgage Loans" in this
prospectus supplement for a discussion of the circumstances under which the
originator or the sponsor is required to repurchase or substitute for mortgage
loans. These removals and/or substitutions may result in changes in the mortgage
loan characteristics shown above. These changes may affect the weighted average
lives and yields to maturity of the related offered certificates.
Additional information on the mortgage pool is set forth under "The Mortgage
Pool" and in the tables in Appendix A to this prospectus supplement and
information regarding repurchases and substitutions of the mortgage loans after
the closing date will be available on the trust's monthly distribution reports
on Form 10-D. See "Reports to Certificateholders" in this prospectus supplement.
FEES AND EXPENSES
The servicing fees for the mortgage loans shown in the table below are payable
out of the interest payments on the mortgage loans, prior to any payments to the
credit risk manager or distributions to certificateholders. The servicing fees
accrue on the mortgage loans at the servicing fee rate set forth in the table
below. In addition to the servicing fees, the servicer will be entitled to
retain as additional servicing compensation (i) all service-related fees,
including assumption fees, modification fees, extension fees, bad check fees,
late payment charges and interest paid on principal prepayments during the first
fifteen days of a month, to the extent collected from mortgagors, (ii) any
interest or other income earned on funds held in the collection account and any
escrow accounts and (iii) any profits from the liquidation of mortgage loans.
The credit risk manager is entitled to the credit risk manager fee (shown in the
table below), which is payable from the interest portion of collections
described below under "--Distributions--General." The trustee shall be entitled
to all investment income earned on amounts on deposit in the distribution
account.
SERVICING FEE RATE CREDIT RISK MANAGER FEE RATE
(PER ANNUM) (PER ANNUM)
------------------ ----------------------------
0.500% 0.015%
The depositor, the servicer and the trustee are entitled to indemnification and
reimbursement of certain expenses from the trust under the pooling and servicing
agreement as discussed in the prospectus under the headings "Description of the
Agreements--Material Terms of the Pooling and Servicing Agreements and
Underlying Servicing Agreements--Certain Matters Regarding Servicers and the
Master Servicer" and "--Certain Matters Regarding the Trustee."
See "The Pooling and Servicing Agreement--Compensation and Payment of Expenses
of the Servicer, the Trustee and the Credit Risk Manager" in this prospectus
supplement for more information about fees and expenses of the servicer, the
trustee and the credit risk manager.
The Swap Provider is entitled to a monthly payment equal to the product of (x)
5.046%, (y) the Notional Amount (as set forth in Appendix D) for such
Distribution Date and (z) a fraction, the numerator of which is 30 (or, for the
first Distribution Date, the number of days elapsed from the closing date to but
excluding the first Distribution Date on a 30/360 basis), and the denominator of
which is 360. The supplemental interest trust will be entitled to a floating
S-8
amount equal to the product of (x) one-month LIBOR (as determined pursuant to
the Interest Rate Swap Agreement), (y) the Notional Amount for such Distribution
Date, and (z) a fraction, the numerator of which is the actual number of days
elapsed from the previous Distribution Date to but excluding the current
Distribution Date (or, for the first Distribution Date, the actual number of
days elapsed from the Closing Date to but excluding the first Distribution
Date), and the denominator of which is 360. Only a net payment will be required
to be made on or before each Distribution Date by the applicable party.
DISTRIBUTIONS--GENERAL
Interest distributions on the certificates will be made on each distribution
date from the interest portion of collections on the mortgage loans, less
certain expenses (such as servicing fees, reimbursements for advances made by
the servicer, amounts payable to the swap provider and payment of other expenses
and indemnities described in this prospectus supplement) and principal
distributions on the certificates will be made on each distribution date from
the principal portion of collections on the mortgage loans (less certain amounts
payable to the swap provider), in the following order of priority:
INTEREST
first, to the credit risk manager, the credit risk manager
fee;
second, to the Class A Certificates, pro rata, to pay
interest;
third, to the Class A Certificates, pro rata, to pay any
interest previously earned but not paid;
fourth, to each class of Class M Certificates in numerical
order, beginning with the Class M-1 Certificates to pay interest; and
fifth, to be distributed as part of monthly excess cashflow.
PRINCIPAL (BEFORE THE STEPDOWN DATE OR WHEN A TRIGGER EVENT
IS IN EFFECT)
first, to each class of Class A Certificates in numerical
order, beginning with the Class A-1 Certificates, to pay principal;
second, to each class of Class M Certificates in numerical
order, beginning with the Class M-1 Certificates, to pay principal; and
third, to be distributed as part of monthly excess cashflow.
PRINCIPAL (AFTER THE STEPDOWN DATE AND AS LONG AS NO TRIGGER
EVENT IS IN EFFECT)
first, to each class of Class A Certificates in numerical
order, up to the senior principal distribution amount, beginning with
the Class A-1 Certificates;
second, to each class of Class M Certificates in numerical
order, up to their principal distribution amount, beginning with the
Class M-1 Certificates; and
third, to be distributed as part of monthly excess cashflow.
On or after the subordination depletion date, all principal distributions to the
Class A Certificates will be distributed concurrently, to the Class A-1, Class
A-2, Class A-3 and Class A-4 Certificates, on a pro rata basis, based on the
certificate principal balance of each such class of certificates until the
certificate principal balances of such certificates is reduced to zero.
S-9
On each distribution date, the sum of excess interest, remaining principal
collections and excess overcollateralization amounts will be distributed in the
following order of priority:
EXCESS CASHFLOW
first, to the Class A Certificates, pro rata, to pay any
remaining current interest;
second, to the Class A Certificates, pro rata, to pay any
interest previously earned but not paid;
third, to each class of Class M Certificates, first to pay
current interest, then to pay interest previously earned but not paid
and finally to reimburse for realized losses applied to that class, in
numerical order, beginning with the Class M-1 Certificates;
fourth, to the Class A Certificates, pro rata, and then to the
Class M Certificates, sequentially in numerical order, to pay the
difference between interest accrued based on the pool cap and their
respective pass-through rates;
fifth, to the Swap Provider, any Swap Termination Payments
resulting from a Swap Provider Trigger Event; and
sixth, to the Class CE, Class P and Class R Certificates, in
the amounts specified in the pooling and servicing agreement.
The Class P Certificates will receive any prepayment charges paid by the
mortgagors during the related collection period. The amount of interest and
principal distributions on each class of certificates is more fully described
under "Description of the Certificates--Interest Distributions" and "--Principal
Distributions" in this prospectus supplement.
INTEREST DISTRIBUTIONS
On each distribution date, you will be entitled to receive interest accrued on
your certificate during the related interest accrual period, less the amount of
shortfalls allocated to your certificate due to the Servicemembers Civil Relief
Act or similar state laws, and any interest which you earned previously but
which you did not receive. The interest accrual period for all offered
certificates is the period from the distribution date in the prior month (or the
closing date, in the case of the first distribution date) through the day prior
to the current distribution date. Interest will be calculated for all offered
certificates on the basis of the actual number of days in the interest accrual
period, based on a 360-day year.
There are certain circumstances which could reduce the amount of interest paid
to you. See "Description of the Certificates--Interest Distributions" in this
prospectus supplement.
PRINCIPAL DISTRIBUTIONS
On each distribution date you will receive a distribution of principal if there
are funds available on that date for your class of certificates. As described
above under "--Distributions--General," prior the stepdown date and in the event
(i) a three-month rolling average of loans two months or more past due or (ii)
cumulative realized losses exceed certain thresholds described under
"Description of the Certificates--Principal Distributions," principal
distributions will be made to the Class A Certificates until their certificate
principal balances are reduced to zero and no principal will be distributed on
the subordinated certificates or distributed as part of excess cashflow. You
should review the priority of payments described under "Description of the
Certificates--Principal Distributions" in this prospectus supplement.
CREDIT ENHANCEMENT
Credit enhancement is intended to reduce the potential risk of loss to holders
of the certificates as a result of shortfalls in payments received on the
mortgage loans. Credit enhancement can reduce the effect of shortfalls on all
classes, or it can allocate shortfalls so they affect some classes before
others. This transaction employs the following five forms of credit enhancement.
See "Description of the Certificates" in this prospectus supplement.
Monthly Excess Interest. Because more interest is expected to be paid by the
mortgagors than is necessary to pay the interest earned on the certificates and
to pay certain fees and expenses of the trust (including any Net Swap
S-10
Payment owed to the Swap Provider and any Swap Termination Payment owed to the
Swap Provider, other than any Swap Termination Payment resulting from a Swap
Provider Trigger Event), it is expected there will be excess interest each
month. The excess interest will be used to maintain overcollateralization, to
pay interest that was previously earned but not paid to the certificates and to
reimburse the certificates for losses and certain shortfalls that they
experienced previously.
Overcollateralization. If the total assets in the trust exceed the total
certificate principal balance of the certificates other than the Class CE
Certificates, there is overcollateralization. Overcollateralization will be
available to absorb losses on the mortgage loans before such losses affect the
certificates. On the closing date, the aggregate principal balance of the
Mortgage Loans as of the cut-off date will exceed the total initial certificate
principal balance of the certificates other than the Class CE Certificates by
approximately $19,511,434. This results in overcollateralization equal to
approximately 4.00% of the aggregate principal balance of the Mortgage Loans as
of the cut-off date. If the level of overcollateralization falls below the
targeted overcollateralization amount for a distribution date, the excess
interest for that distribution date will be paid to the offered certificates as
principal. This will have the effect of reducing the aggregate certificate
principal balance of the certificates faster than the principal balance of the
mortgage loans until the required level of overcollateralization is reached.
Subordination. On each distribution date, classes that are lower in order of
payment priority will not receive payments until the classes that are higher in
order of payment priority have been paid. If there are insufficient funds on a
distribution date to pay all classes, the subordinated classes will be the first
to forego payment. The chart below summarizes the relative seniority of the
various classes of certificates and indicates the initial and expected
post-stepdown level of credit support provided to the various classes of
certificates. The initial credit support percentage shown below is the sum of
the aggregate initial class certificate balance of the class or classes of
certificates subordinate to a class or classes plus the initial
overcollateralization amount as a percentage of the initial aggregate principal
balance of the mortgage loans and the expected credit support percentage after
stepdown is the sum of the expected aggregate class certificate balance of the
class or classes of certificates subordinate to a class or classes plus the
overcollateralization amount on the stepdown date as a percentage of the
expected aggregate principal balance of the mortgage loans as of the end of the
related collection period (after giving effect to expected principal prepayments
in the related prepayment period).
Interest Rate Swap Agreement. The trustee (in its capacity as trustee of the
supplemental interest trust, the supplemental interest trust trustee), will
enter into an Interest Rate Swap Agreement (the "Interest Rate Swap Agreement")
with The Bank of New York as swap provider (the "Swap Provider"). Under the
Interest Rate Swap Agreement, on or before each distribution date, the
supplemental interest trust will be obligated to make fixed payments as
specified in this prospectus supplement and the Swap Provider will be obligated
to make floating payments equal to the product of (x) one-month LIBOR (as
determined pursuant to the Interest Rate Swap Agreement), (y) the notional
amount (as set forth in Appendix D) for that distribution date (the "NOTIONAL
AMOUNT"), and (z) a fraction, the numerator of which is the actual number of
days elapsed from the previous distribution date to but excluding the current
distribution date (or, for the first distribution date, the actual number of
days elapsed from the closing date to but excluding the first distribution
date), and the denominator of which is 360. To the extent that the fixed payment
exceeds the floating payment on any distribution date, amounts otherwise
available to certificateholders will be applied to make a net payment to the
Swap Provider, and to the extent that the floating payment exceeds the fixed
payment on any distribution date, the Swap Provider will make a Net Swap Payment
(as defined herein) for deposit into the supplemental interest trust and then
into a segregated trust account established on the closing date (the "Swap
Account").
Upon early termination of the Interest Rate Swap Agreement, the supplemental
interest trust or the Swap Provider may be liable to make a Swap Termination
Payment (as defined herein) to the other party (regardless of which party caused
the termination). The Swap Termination Payment will be computed in accordance
with the procedures set forth in the Interest Rate Swap Agreement. In the event
that the supplemental interest trust is required to make a Swap Termination
Payment, that payment will be paid to the supplemental interest trust and then
to the Swap Account for payment to the Swap Provider on the related distribution
date, and on any subsequent distribution dates until paid in full, generally
prior to any distribution to certificateholders. See "Description of the
Certificates--The Interest Rate Swap Agreement and the Swap Account" in this
prospectus supplement.
Net Swap Payments and Swap Termination Payments payable by the supplemental
interest trust will be deducted from available funds (other than Swap
Termination Payments resulting from a Swap Provider Trigger Event) before
S-11
distributions to certificateholders and will first be deposited into the Swap
Account before payment to the Swap Provider.
TARGETED CREDIT SUPPORT
PRIORITY OF INITIAL CREDIT PERCENTAGE AFTER ALLOCATION OF
PAYMENT CLASS OR CLASSES SUPPORT PERCENTAGE STEPDOWN LOSSES
- ----------------------- ----------------------- ------------------ ------------------------ ----------------------
Senior Certificates 27.45% 54.90% N/A(1)
[GRAPHIC APPEARS HERE] Class M-1 Certificates 22.15% 44.30% [GRAPHIC APPEARS HERE]
Class M-2 Certificates 17.65% 35.30%
Class M-3 Certificates 15.45% 30.90%
Class M-4 Certificates 13.85% 27.70%
Class M-5 Certificates 11.95% 23.90%
Class M-6 Certificates 10.55% 21.10%
Class M-7 Certificates 8.50% 17.00%
Class M-8 Certificates 6.85% 13.70%
Class M-9 Certificates 5.70% 11.40%
Class M-10 Certificates 4.00% 8.00%
(1) The certificate principal balances of the Class A Certificates will not be
reduced by realized losses; however, under certain loss scenarios, there
will not be enough interest and principal on the mortgage loans to pay the
Class A Certificates all interest and principal amounts to which they are
entitled.
Application of Realized Losses. If, on any distribution date after the
certificate principal balances of the certificates have been reduced by the
amount of cash paid on that date, the total certificate principal balance of the
certificates is greater than the total principal balance of the mortgage loans,
the certificate principal balance of the subordinated certificates that are
lowest in order of payment priority will be reduced by the amount of such
excess. Once the certificate principal balance of a class is reduced in this way
by realized losses allocated to it, the amount of such reduction will not be
reinstated (except in the case of subsequent recoveries). The certificate
principal balances of the Class A Certificates will not be reduced by these
realized losses, although these certificates may experience losses if the credit
enhancements described in this prospectus supplement are exhausted.
OPTIONAL TERMINATION
The NIMS Insurer, if any, will have the option to purchase all the mortgage
loans and any properties that the issuing entity acquired in satisfaction of any
of the mortgage loans, subject to certain conditions described under "The
Pooling and Servicing Agreement--Optional Termination" in this prospectus
supplement. If there is no NIMS Insurer, the majority holder of the Class CE
Certificates will have the option. If the majority holder of the Class CE
Certificates fails to exercise the option on the first possible date or is an
affiliate of the sponsor, the servicer will have the option. This option can be
exercised when the total principal balance of the mortgage loans, including the
mortgage loans related to REO properties, is 10% or less of the total principal
balance of the Mortgage Loans on the cut-off date. Any such optional termination
will be permitted only pursuant to a "qualified liquidation" as defined in
Section 860F of the Internal Revenue Code of 1986, as amended. If the option is
exercised, your certificate will be retired earlier than it would be otherwise
and you will be entitled to the following amounts (to the extent that there is
enough cash to make such payments):
o the outstanding certificate principal balance of your certificate;
o one month's interest on this balance at the related certificate interest
rate;
o any interest previously earned but not paid; and
o any "cap carryover amount," as described in this prospectus supplement,
from all previous distribution dates.
See "The Pooling and Servicing Agreement--Optional Termination" in this
prospectus supplement.
S-12
PREPAYMENT AND YIELD CONSIDERATIONS
The yields to maturity and weighted average lives of the offered certificates
will depend upon, among other things, the price at which such offered
certificates are purchased, the amount and timing of principal payments on the
mortgage loans, the allocation of available funds to various classes of offered
certificates, the amount and timing of mortgagor delinquencies and defaults on
the applicable mortgage loans, the rate of liquidations and realized losses and
the allocation of realized losses to various classes of offered certificates.
See "Yield, Prepayment and Maturity Considerations" in this prospectus
supplement.
WEIGHTED AVERAGE LIVES TO MATURITY (IN YEARS)(1)
ARM PPC 0% 50% 75% 100% 125% 150% 175%
-------- -------- -------- -------- -------- -------- -------- --------
CLASS FRM PPC 0% 50% 75% 100% 125% 150% 175%
- ------ -------- -------- -------- -------- -------- -------- -------- --------
A-1 13.52 1.57 1.20 1.00 0.86 0.76 0.69
A-2 21.98 3.41 2.47 2.00 1.72 1.52 1.37
A-3 26.32 6.87 4.71 3.38 2.37 2.05 1.83
A-4 129.49 16.20 11.14 8.28 5.04 2.54 2.22
M-1 27.40 9.49 6.50 5.19 5.55 5.56 4.47
M-2 27.40 9.47 6.48 5.07 4.74 4.24 3.64
M-3 27.40 9.45 6.46 5.02 4.50 3.91 3.35
M-4 27.40 9.43 6.45 4.99 4.40 3.80 3.24
M-5 27.40 9.41 6.43 4.96 4.32 3.71 3.17
M-6 27.40 9.39 6.41 4.94 4.26 3.65 3.12
M-7 27.39 9.35 6.38 4.90 4.20 3.59 3.06
M-8 27.39 9.29 6.34 4.87 4.14 3.52 3.01
M-9 27.39 9.22 6.29 4.83 4.09 3.48 2.96
M-10 27.38 9.11 6.20 4.75 4.01 3.40 2.92
(1) Determined as described under "Yield, Prepayment and Maturity
Considerations" in this prospectus supplement.
WEIGHTED AVERAGE LIVES TO OPTIONAL TERMINATION (IN YEARS)(1)(2)
ARM PPC 0% 50% 75% 100% 125% 150% 175%
-------- -------- -------- -------- -------- -------- -------- --------
CLASS FRM PPC 0% 50% 75% 100% 125% 150% 175%
- ------ -------- -------- -------- -------- -------- -------- -------- --------
A-1 13.52 1.57 1.20 1.00 0.86 0.76 0.69
A-2 21.98 3.41 2.47 2.00 1.72 1.52 1.37
A-3 26.32 6.87 4.71 3.38 2.37 2.05 1.83
A-4 29.13 12.69 8.57 6.35 3.80 2.54 2.22
M-1 27.31 8.63 5.87 4.72 4.95 4.06 3.29
M-2 27.31 8.63 5.87 4.62 4.40 3.96 3.38
M-3 27.31 8.63 5.87 4.57 4.16 3.65 3.14
M-4 27.31 8.63 5.87 4.56 4.07 3.54 3.04
M-5 27.31 8.63 5.87 4.54 4.01 3.47 2.98
M-6 27.31 8.63 5.87 4.54 3.96 3.41 2.93
M-7 27.31 8.63 5.87 4.52 3.92 3.36 2.88
M-8 27.31 8.63 5.87 4.52 3.88 3.31 2.85
M-9 27.31 8.63 5.87 4.52 3.86 3.30 2.81
M-10 27.31 8.63 5.87 4.50 3.82 3.25 2.80
(1) Determined as described under "Yield, Prepayment and Maturity
Considerations" in this prospectus supplement.
(2) Assumes an optional purchase of the Mortgage Loans on the earliest
Distribution Date on which it is permitted.
S-13
FEDERAL INCOME TAX CONSEQUENCES
Elections will be made to treat the assets of the trust, exclusive of the
arrangements intended to protect against basis risk for certain of the
certificates, the cap carryover reserve account, the Supplemental Interest
Trust, the Interest Rate Swap Agreement and the Swap Account, as comprised of
multiple real estate mortgage investment conduits in a tiered structure for
federal income tax purposes.
The offered certificates will represent (i) regular interests in a REMIC, which
will be treated as debt instruments of a REMIC, and (ii) interests in certain
cap carryover amounts and the right to receive payments from and the obligation
to make payments to the Supplemental Interest Trust. Each interest in cap
carryover amounts and the right to receive payments from and the obligation to
make payments to the Supplemental Interest Trust will be treated as notional
principal contracts for federal income tax purposes.
For further information regarding the federal income tax consequences of
investing in the offered certificates, see "Federal Income Tax Consequences" in
this prospectus supplement and in the prospectus.
LEGAL INVESTMENT
You are encouraged to consult with counsel to see if you are permitted to buy
the offered certificates, since legal investment rules will vary depending on
the type of entity purchasing the offered certificates, whether that entity is
subject to regulatory authority, and if so, by whom. The Class A, Class M-1,
Class M-2, Class M-3 and Class M-4 Certificates will constitute "mortgage
related securities" for purposes of the Secondary Mortgage Market Enhancement
Act of 1984, as amended ("SMMEA") for so long as they are rated not lower than
the second highest rating category by one or more nationally recognized
statistical rating organizations and, as such, will be legal investments for
certain entities to the extent provided in SMMEA and applicable state laws.
The Class M Certificates (other than the Class M-1, Class M-2, Class M-3 and
Class M-4 Certificates) will not constitute "mortgaged related securities" for
purposes of SMMEA. See "Legal Investment" in this prospectus supplement and in
the prospectus.
ERISA CONSIDERATIONS
If you are a fiduciary of any employee benefit plan or other retirement
arrangement subject to the Employee Retirement Income Security Act of 1974, as
amended, or Section 4975 of the Internal Revenue Code of 1986 or any materially
similar provisions of applicable federal, state or local law, you are encouraged
to consult with counsel as to whether you can buy or hold an offered
certificate. Subject to the considerations and conditions described under "ERISA
Considerations" in this prospectus supplement, it is expected that the Class A
Certificates may be purchased by a pension or other employee benefit plan
subject to the Employee Retirement Income Security Act of 1974, as amended, or
Section 4975 of the Internal Revenue Code of 1986, as amended. Prior to the
termination of the supplemental interest trust, plans or persons using assets of
a plan may only purchase the Class A Certificates if the purchase and holding of
such certificates also meets the requirements of an investor-based class
exemption issued by the Department of Labor. A fiduciary of an employee benefit
plan must determine that the purchase of a certificate is consistent with its
fiduciary duties under applicable law and does not result in a prohibited
transaction under applicable law. The Class M Certificates may not be acquired
by Plans except under certain conditions. See "ERISA Considerations" in this
prospectus supplement and in the prospectus.
AFFILIATIONS
Bank of America, National Association, which is the sponsor, is the direct
parent of the depositor and is an affiliate of the underwriter. First Franklin
Financial Corporation, which is the originator, is an affiliate of the servicer.
There are no additional relationships, agreements or arrangements outside of
this transaction among the transaction parties that are material to an
understanding of the offered certificates.
S-14
RISK FACTORS
THE RISK FACTORS DISCUSSED BELOW AND UNDER THE HEADING "RISK FACTORS"
IN THE PROSPECTUS DESCRIBE THE MATERIAL RISKS OF AN INVESTMENT IN THE OFFERED
CERTIFICATES AND SHOULD BE CAREFULLY CONSIDERED BY ALL POTENTIAL INVESTORS.
HIGH LOAN-TO-VALUE RATIOS INCREASE RISK OF LOSS
Substantially all of the mortgage loans had loan-to-value ratios in
excess of 95.00%, but not more than 103.00% at origination. Mortgage loans with
high loan-to-value ratios leave the mortgagor with little to no equity in the
related mortgaged property. See the mortgage loan tables in Appendix A to this
prospectus supplement for information regarding the loan-to-value ratios of the
mortgage loans. 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 value at the time the mortgage loan
was originated. If there is a reduction in value of the mortgaged property, the
loan-to-value ratio may increase over what it was at the time of origination.
Such an increase may reduce the likelihood that liquidation proceeds or other
proceeds will be sufficient to pay off the mortgage loan fully. There can be no
assurance that the loan-to-value ratio of any mortgage loan determined at any
time after origination is less than or equal to its original loan-to-value
ratio. Additionally, the originator's determination of the value of a mortgaged
property used in the calculation of the 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.
THERE ARE RISKS INVOLVING UNPREDICTABILITY OF PREPAYMENTS AND THE EFFECT OF
PREPAYMENTS ON YIELDS
The rate of principal payments, the aggregate amount of distributions
and the yields to maturity of the offered certificates will be related to the
rate and timing of payments of principal on the applicable mortgage loans. The
rate of principal payments on the mortgage loans will in turn be affected by the
amortization schedules of the mortgage loans and by the rate of principal
prepayments (including for this purpose prepayments resulting from refinancings,
liquidations of the mortgage loans due to defaults, casualties or condemnations
and repurchases by the sponsor, the originator or servicer). Mortgagors may
prepay their mortgage loans in whole or in part at any time. We cannot predict
the rate at which mortgagors will repay their mortgage loans. A prepayment of a
mortgage loan generally will result in a prepayment of the certificates.
o If you purchase your certificates at a discount and principal is
repaid more slowly than you anticipate, then your yield may be
lower than you anticipate.
o If you purchase your certificates at a premium and principal is
repaid faster than you anticipate, then your yield may be lower
than you anticipate.
o The rate of prepayments on the mortgage loans will be sensitive to
prevailing interest rates. Generally, if prevailing interest rates
decline significantly below the interest rates on the fixed-rate
mortgage loans, those mortgage loans are more likely to prepay
than if prevailing rates remain above the interest rates on such
mortgage loans. Conversely, if prevailing interest rates rise
significantly, the prepayments on fixed-rate mortgage loans are
likely to decrease. The prepayment behavior of the adjustable-rate
mortgage loans and of the fixed-rate mortgage loans may respond to
different factors, or may respond differently to the same factors.
If at the time of their first adjustment, the interest rates on
any of the adjustable-rate mortgage loans would be subject to
adjustment to a rate higher than the then prevailing mortgage
interest rates available to the related borrowers, such borrowers
may prepay their adjustable-rate mortgage loans. Adjustable-rate
mortgage loans may also suffer an increase in defaults and
liquidations following upward adjustments of their interest rates,
especially following their initial adjustments.
o The rate of prepayments on pools of mortgage loans may vary
significantly over time and may be influenced by a variety of
economic, geographic and other factors, including changes in
mortgagors'
S-15
housing needs, job transfers, unemployment, mortgagors' net equity
in the mortgaged properties and servicing decisions.
o As of the cut-off date, certain of the mortgage loans required the
mortgagor to pay a charge if the mortgagor prepays the mortgage
loan during periods ranging, in substantially all cases, from one
year to three years after the mortgage loan was originated. See
the mortgage loan tables under "Summary of Prospectus Supplement"
in this prospectus supplement for the percentages of these
mortgage loans in the mortgage pool. A prepayment charge may
discourage a mortgagor from prepaying the mortgage loan during the
applicable period. Such prepayment charges will be distributed to
holders of the Class P Certificates and not to holders of the
offered certificates. The servicer is entitled to waive prepayment
charges, subject to certain conditions specified in the prospectus
under "Material Terms of the Pooling and Servicing Agreements and
Underlying Servicing Agreements--Collection and Other Servicing
Procedures."
o The originator and the sponsor may be required to purchase
mortgage loans from the trust in the event certain breaches of
representations and warranties have not been cured. Certain
parties have the right to purchase all of the mortgage loans and
REO properties in the trust and thereby effect the early
retirement of the certificates under the circumstances set forth
under "The Pooling and Servicing Agreement--Optional Termination"
in this prospectus supplement. In addition, the originator
generally shall be required to repurchase from the trust certain
mortgage loans for which the first scheduled monthly payment due
after their purchase by the sponsor becomes 30 or more days
delinquent. These purchases will have the same effect on the
holders of the offered certificates as a prepayment of the
mortgage loans.
o The servicer will generally enforce due-on-sale clauses contained
in the mortgage notes in connection with transfers of mortgaged
properties.
o If the rate of default and the amount of losses on the mortgage
loans are higher than you expect, then your yield may be lower
than you expect.
o If the level of overcollateralization falls below the targeted
overcollateralization amount for a distribution date, excess
interest will be paid to the certificates as principal. This will
have the effect of reducing the total certificate principal
balance of the certificates faster than the principal balance of
the mortgage loans until the required level of
overcollateralization is reached.
ADJUSTABLE RATE MORTGAGE LOAN BORROWERS MAY BE MORE LIKELY TO PREPAY
Mortgage interest rates on the adjustable-rate mortgage loans at any
time may not equal the prevailing mortgage interest rates for similar
adjustable-rate mortgage loans, and accordingly the prepayment rate may be lower
or higher than would otherwise be anticipated. Moreover, some mortgagors who
prefer the certainty provided by fixed-rate mortgage loans may nevertheless
obtain adjustable-rate mortgage loans at a time when they regard the mortgage
interest rates (and, therefore, the payments) on fixed-rate mortgage loans as
unacceptably high. These mortgagors may be induced to refinance adjustable-rate
mortgage loans when the mortgage interest rates and monthly payments on
comparable fixed-rate mortgage loans decline to levels which these mortgagors
regard as acceptable, even though these mortgage interest rates and monthly
payments may be significantly higher than the current mortgage interest rates
and monthly payments on the mortgagors' adjustable-rate mortgage loans. The
ability to refinance a mortgage loan will depend on a number of factors
prevailing at the time refinancing is desired, such as, among other things, real
estate values, the mortgagor's financial situation, prevailing mortgage interest
rates, the mortgagor's equity in the related mortgaged property, tax laws and
prevailing general economic conditions.
THERE IS A RISK THAT INTEREST PAYMENTS ON THE MORTGAGE LOANS MAY BE INSUFFICIENT
TO MAINTAIN OVERCOLLATERALIZATION
Because the weighted average of the interest rates on the mortgage
loans is expected to be higher than the weighted average of the certificate
interest rates on the certificates, the mortgage loans are expected to generate
S-16
more interest than is needed to pay interest owed on the certificates as well as
certain fees and expenses of the trust (including any Net Swap Payment owed to
the Swap Provider and any Swap Termination Payment, other than a Swap
Termination Payment resulting from a Swap Provider Trigger Event). After these
financial obligations of the trust are covered, the available excess interest
will be used to maintain overcollateralization. Any remaining interest will then
be used to compensate for losses that occur on the mortgage loans. We cannot
assure you, however, that enough excess interest will be generated to maintain
the overcollateralization level required by the rating agencies. The factors
described below, as well as the factors described in the next Risk Factor, will
affect the amount of excess interest that the mortgage loans will generate:
o When a mortgage loan is prepaid in full or repurchased, excess
interest will generally be reduced because the mortgage loan will
no longer be outstanding and generating interest or, in the case
of a partial prepayment, will be generating less interest.
o Every time a mortgage loan is liquidated or written off, excess
interest will be reduced because that mortgage loan will no longer
be outstanding and generating interest.
o If the rates of delinquencies, defaults or losses on the mortgage
loans are higher than expected, excess interest will be reduced by
the amount necessary to compensate for any shortfalls in cash
available on a distribution date to pay certificateholders.
o The certificate interest rates of the offered certificates are
based on one-month LIBOR while the adjustable-rate mortgage loans
have rates that are adjustable based on six-month LIBOR and the
fixed-rate mortgage loans have rates that do not adjust. As a
result, the certificate interest rates on the offered certificates
may increase relative to interest rates on the mortgage loans,
thus requiring that more of the interest generated by the mortgage
loans be applied to cover interest on the offered certificates.
EFFECTS OF MORTGAGE INTEREST RATES AND OTHER FACTORS ON THE CERTIFICATE INTEREST
RATES OF THE OFFERED CERTIFICATES
The yields to maturity on the offered certificates may be affected by
the inclusion of fixed-rate mortgage loans and the resetting of the mortgage
interest rates on the adjustable-rate mortgage loans on their related adjustment
dates due to the factors set forth below. The mortgage interest rates on the
fixed-rate mortgage loans are fixed and will not vary with any index and the
mortgage interest rates on the adjustable-rate mortgage loans are based on
six-month LIBOR and do not adjust for periods ranging from 1 year to 5 years
after the dates of their origination, while the certificate interest rates on
the offered certificates are based on one-month LIBOR, are subject to the pool
cap and are adjusted monthly. This mismatch of indices and adjustment frequency
may cause the one-month LIBOR-based certificate interest rates on the offered
certificates to increase relative to the mortgage interest rates on the mortgage
loans, which would require a greater portion of the interest generated by the
mortgage loans to be applied to cover interest accrued on the offered
certificates, and could result in the limitation of the certificate interest
rates on some or all of the offered certificates by the pool cap and could
therefore adversely affect the yield to maturity on such certificates. The pool
cap is equal to the weighted average of the interest rates on the mortgage loans
net of certain expenses of the trust (including any Net Swap Payment owed to the
Swap Provider and any Swap Termination Payment owed to the Swap Provider, other
than a Swap Termination Payment due to a Swap Termination Trigger Event). In
addition, you should note that the pool cap will decrease if the mortgage loans
with relatively high mortgage interest rates prepay at a faster rate than the
other mortgage loans with relatively low mortgage interest rates, which will
increase the likelihood that the pool cap will apply to limit the certificate
interest rates on one or more classes of the offered certificates.
If the certificate interest rate on any class of the offered
certificates is limited by a pool cap for any distribution date, the resulting
cap carryover amounts may be recovered by the holders of such classes of
certificates on that same distribution date or on future distribution dates, to
the extent that on that distribution date or future distribution dates there are
any available funds remaining after certain other distributions on the offered
certificates and the payment of certain fees and expenses of the trust
(including any Net Swap Payment owed to the Swap Provider and any Swap
Termination Payment owed to the Swap Provider, other than a Swap Termination
Payment due to a Swap Termination Trigger Event). See "Description of the
Certificates--Application of Monthly Excess
S-17
Cashflow Amounts" in this prospectus supplement. The ratings on the offered
certificates will not address the likelihood of any such recovery of cap
carryover amounts by holders of such certificates.
Amounts distributed on the Offered Certificates in respect of
shortfalls may be supplemented by the Interest Rate Swap Agreement (to the
extent that the floating payment by the Swap Provider exceeds the fixed payment
by the trust on any distribution date and such amount is available in the
priority described in this prospectus supplement). However, the amount received
from the Swap Provider under the Interest Rate Swap Agreement may be
insufficient to pay holders of the applicable certificates the full amount of
interest which they would have received absent the limitations of the pool cap.
THERE ARE RISKS RELATING TO ALTERNATIVES TO FORECLOSURE
Certain mortgage loans may become delinquent after the closing date.
The servicer may either foreclose on any such mortgage loan or work out an
agreement with the mortgagor if the delinquency is not cured, which may involve
waiving or modifying certain terms of the mortgage loan. If the servicer extends
the payment period or accepts a lesser amount than stated in the mortgage note
in satisfaction of the mortgage note, your yield may be reduced.
NATURE OF NON-PRIME MORTGAGE LOANS MAY INCREASE RISK OF LOSS
All of the mortgage loans are of non-prime credit quality; i.e., do not
meet the customary credit standards of Fannie Mae and Freddie Mac. The
originator makes non-prime mortgage loans to borrowers that typically have
limited access to traditional mortgage financing for a variety of reasons,
including impaired or limited past credit history, lower credit scores, high
loan-to-value ratios or high debt-to-income ratios. As a result of these
factors, delinquencies and liquidation proceedings are more likely with these
mortgage loans than with mortgage loans that satisfy customary credit standards.
In the event the mortgage loans in the mortgage pool do become delinquent or
subject to liquidation, you may face delays in receiving payment and may suffer
losses if the credit enhancements are insufficient to cover the delays and
losses.
THE INTEREST RATE SWAP AGREEMENT AND THE SWAP PROVIDER
Any amounts received by the supplemental interest trust trustee from
the Swap Provider under the Interest Rate Swap Agreement will be applied as
described in this prospectus supplement to pay interest shortfalls and basis
risk shortfalls, maintain overcollateralization and realized loss amortization
amounts. However, no amounts will be payable by the Swap Provider unless the
floating amount owed by the Swap Provider on a distribution date exceeds the
fixed amount owed to the Swap Provider on such distribution date. This will not
occur except in periods when one-month LIBOR (as determined pursuant to the
Interest Rate Swap Agreement) generally exceeds 5.046%. No assurance can be made
that any amounts will be received by the supplemental interest trust trustee
under the Interest Rate Swap Agreement, or that any such amounts that are
received will be sufficient to maintain required overcollateralization or to
cover interest shortfalls, basis risk shortfalls and realized loss amortization
amounts. Any net payment payable to the Swap Provider under the terms of the
Interest Rate Swap Agreement will reduce amounts available for distribution to
certificateholders, and may reduce the certificate interest rates of the
certificates. If the rate of prepayments on the mortgage loans is faster than
anticipated, the schedule on which payments due under the Interest Rate Swap
Agreement are calculated may exceed the aggregate principal balance of the
mortgage loans, thereby increasing the relative proportion of interest
collections on the mortgage loans that must be applied to make net payments to
the Swap Provider. The combination of a rapid rate of prepayment and low
prevailing interest rates could adversely affect the yields on the Offered
Certificates. In addition, any termination payment payable by the supplemental
interest trust trustee to the Swap Provider (other than a termination payment
resulting from a Swap Provider Trigger Event) in the event of early termination
of the Interest Rate Swap Agreement will reduce amounts available for
distribution to certificateholders.
Upon early termination of the Interest Rate Swap Agreement, the
supplemental interest trust or the Swap Provider may be liable to make a Swap
Termination Payment to the other party (regardless of which party caused the
termination). The Swap Termination Payment will be computed in accordance with
the procedures set forth in the Interest Rate Swap Agreement. In the event that
the supplemental interest trust is required to make a Swap Termination Payment,
that payment will be paid to the supplemental interest trust and then to the
Swap Account for
S-18
payment to the Swap Provider on the related distribution date, and on any
subsequent distribution dates until paid in full, generally prior to
distributions to certificateholders. This feature may result in losses on the
certificates. Due to the priority of the applications of the available funds,
the subordinated certificates will bear the effects of any shortfalls resulting
from a Net Swap Payment or Swap Termination Payment by the supplemental interest
trust before such effects are borne by the Class A Certificates and one or more
classes of the subordinated certificates may suffer a loss as a result of such
payment. Investors should note that the level of one-month LIBOR as of February
13, 2006 is approximately 4.570% which means the supplemental interest trust
will make a Net Swap Payment to the Swap Provider unless and until one-month
LIBOR equals approximately 5.046%.
To the extent that distributions on the subordinated certificates
depend in part on payments to be received by the supplemental interest trust
under the Interest Rate Swap Agreement, the ability of the supplemental interest
trust trustee to make such distributions on such certificates will be subject to
the credit risk of the Swap Provider to the Interest Rate Swap Agreement. In
addition, no assurance can be made that in the event of an early termination of
the Interest Rate Swap Agreement, the depositor will be able to obtain a
replacement interest rate swap agreement. See "Description of the Offered
Certificates--The Swap Provider" in this prospectus supplement.
SOME OF THE MORTGAGE LOANS HAVE AN INITIAL INTEREST ONLY PERIOD, WHICH MAY
RESULT IN INCREASED DELINQUENCIES AND LOSSES OR RATES OF PREPAYMENT
Some of the mortgage loans require the borrowers to make scheduled
payments of interest only for the first 60 months following origination. See the
mortgage loan tables under "Summary of Prospectus Supplement" in this prospectus
supplement for the percentages of these mortgage loans in the mortgage pool.
During this period, the payment due from the related mortgagor will be less than
that of a traditional mortgage loan. In addition, the principal balance of the
mortgage loan will not be reduced (except in the case of prepayments) because
there will be no scheduled monthly payments of principal during this period.
Accordingly, no principal payments will be distributed to the related
certificates from these mortgage loans during their interest only period except
in the case of a prepayment.
After the initial interest only period, payments on an interest only
mortgage loan will be recalculated to amortize fully its unpaid principal
balance over its remaining life and the mortgagor will be required to make
scheduled payments of both principal and interest. The required payment of
principal will increase the burden on the mortgagor and may increase the risk of
default under the related mortgage loan. In some cases, this increase in the
mortgagor's scheduled monthly payment will occur when the mortgagor's monthly
interest payment may also be increasing as a result of an increase in the
mortgage interest rate on the first adjustment date. In underwriting interest
only mortgage loans, the originator generally does not consider the ability of
mortgagors to make payments of principal at the end of the interest only period.
Higher scheduled monthly payments may induce the related mortgagors to refinance
their mortgage loans, which would result in higher prepayments. In addition, in
default situations losses may be greater on these mortgage loans because they do
not amortize during the initial period. Losses, to the extent not covered by
credit enhancement, will be allocated to the related certificates.
Mortgage loans with an initial interest only period are relatively new
in the secondary mortgage market. The performance of these mortgage loans may be
significantly different from mortgage loans that amortize from origination. In
particular, these mortgagors may be more likely to refinance their mortgage
loans, which may result in higher prepayment speeds than would otherwise be the
case.
BALLOON MORTGAGE LOANS INCREASE THE RISK OF LOSS
Balloon mortgage loans require a mortgagor to make a large scheduled
lump sum payment of principal at the end of the loan term. If the mortgagor is
unable to pay the lump sum or refinance such amount, you may suffer a loss. In
addition, the servicer will not advance the unpaid principal balance remaining
at maturity of a balloon loan. See the mortgage loan tables under "Summary of
Prospectus Supplement" in this prospectus supplement for the percentages of
these mortgage loans in the mortgage pool.
S-19
THERE ARE RISKS RELATING TO GEOGRAPHIC CONCENTRATION OF THE MORTGAGE LOANS
The chart presented under "Summary of Prospectus Supplement - The
Mortgage Pool" lists the states with the highest concentrations of mortgage
loans in the mortgage pool, based on the aggregate principal balance of the
mortgage loans in the mortgage pool as of the cut-off date.
California, Florida and several other states have experienced natural
disasters, such as earthquakes, fires, floods and hurricanes, which may not be
fully insured against and which may result in property damage and losses on the
mortgage loans.
In addition, the conditions below will have a disproportionate impact
on the mortgage loans in general:
o Economic conditions in states listed above which may or may not
affect real property values may affect the ability of mortgagors
to repay their loans on time.
o Declines in the residential real estate markets in the states
listed above may reduce the values of properties located in those
states, which would result in an increase in the loan-to-value
ratios.
o Any increase in the market value of properties located in the
states listed above would reduce the loan-to-value ratios and
could, therefore, make alternative sources of financing available
to the mortgagors at lower interest rates, which could result in
an increased rate of prepayment of the mortgage loans.
HURRICANE KATRINA, HURRICANE RITA AND HURRICANE WILMA MAY ADVERSELY AFFECT THE
MORTGAGE LOANS
Hurricane Katrina, Hurricane Rita and Hurricane Wilma caused
catastrophic damage to areas in the Gulf Coast region of the United States. The
sponsor will represent and warrant as of the closing date that each mortgaged
property is free of material damage and in good repair. In the event of a breach
of that representation and warranty that materially and adversely affects the
value of such mortgage loan, the originator or the sponsor 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.
The full economic impact of Hurricane Katrina, Hurricane Rita and
Hurricane Wilma is uncertain but may affect the ability of borrowers 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 such certificates.
RESIDENTIAL REAL ESTATE VALUES MAY FLUCTUATE AND ADVERSELY AFFECT YOUR
INVESTMENT
There can be no assurance that values of the mortgaged properties have
remained or will remain at their levels on the dates of origination of the
related mortgage loans. The value of any mortgaged property generally will
change over time from its value on the appraisal or sales date. If residential
real estate values generally or in a particular geographic area decline, the
loan-to-value ratios shown in the tables in Appendix A might not be a reliable
indicator of the rates of delinquencies, foreclosures and losses that could
occur on the mortgage loans. If the residential real estate market should
experience an overall decline in property values large enough to cause the
outstanding balances of the mortgage loans and any secondary financing on the
related mortgaged properties to equal or exceed the value of the mortgaged
properties, delinquencies, foreclosures and losses could be higher than those
now generally experienced in the mortgage lending industry or in the sponsor's
prior securitizations involving the depositor.
S-20
In addition, adverse economic conditions and other factors (which may
or may not affect real property values) may affect the mortgagors' timely
payment of scheduled payments of principal and interest on the mortgage loans
and, accordingly, the actual rates of delinquencies, foreclosures and losses
with respect to the mortgage pool. These other factors could include excessive
building resulting in an oversupply of housing in a particular area or a
decrease in employment reducing the demand for housing in an area. To the extent
that credit enhancements do not cover such losses, your yield may be adversely
impacted.
CREDITS SCORES MAY NOT ACCURATELY PREDICT THE LIKELIHOOD OF DEFAULT
The originator generally uses credit scores as part of its underwriting
process. The tables in Appendix A show credit scores for the mortgagors obtained
at the time of origination of their mortgage loans. A credit score purports only
to be a measurement of the relative degree of risk a borrower represents to a
lender, i.e., that a borrower with a higher score is statistically expected to
be less likely to default in payment than a borrower with a lower score. In
addition, it should be noted that credit scores were developed to indicate a
level of default probability over a two-year period, which does not correspond
to the life of most mortgage loans. Furthermore, credit scores were not
developed specifically for use in connection with mortgage loans, but for
consumer loans in general. Therefore, credit scores do not address particular
mortgage loan characteristics that influence the probability of repayment by the
borrower. None of the depositor, the sponsor or the originator makes any
representations or warranties as to any borrower's current credit score or the
actual performance of any mortgage loan or that a particular credit score should
be relied upon as a basis for an expectation that a borrower will repay its
mortgage loan according to its terms.
THE RECORDING OF THE MORTGAGES IN THE NAME OF MERS MAY AFFECT THE YIELD ON YOUR
CERTIFICATES
The mortgages or assignments of mortgage for some of the mortgage loans
have been recorded in the name of Mortgage Electronic Registration Systems,
Inc., or MERS, solely as nominee for the originator and its successors and
assigns, including the trust. Subsequent assignments of those mortgages are
registered electronically through the MERS system. However, if MERS discontinues
the MERS system and it becomes necessary to record an assignment of mortgage to
the trustee, any related expenses will be paid by the trust and will reduce the
amount available to make distributions on the certificates.
The recording of mortgages in the name of MERS is a relatively new
practice in the mortgage lending industry. Public recording officers and others
may have limited, if any, experience with lenders seeking to foreclose
mortgages, assignments of which are registered with MERS. Accordingly, delays
and additional costs in commencing, prosecuting and completing foreclosure
proceedings and conducting foreclosure sales of the mortgaged properties could
result. Those delays and the additional costs could in turn delay the
distribution of liquidation proceeds to certificateholders and increase the
amount of losses on the mortgage loans. In that regard, a Florida court recently
ruled that MERS lacked standing to pursue foreclosure proceedings on behalf of
the beneficial owners of several mortgage notes who were not named parties to
the proceedings.
THERE ARE RISKS IN HOLDING SUBORDINATED CERTIFICATES
The protections afforded the Class A Certificates in this transaction
create risks for the subordinated certificates. Prior to any purchase of any
subordinated certificates, consider the following factors that may adversely
impact your yield:
o Because the subordinated certificates receive interest and
principal distributions after the Class A Certificates receive
such distributions, there is a greater likelihood that the
subordinated certificates will not receive the distributions to
which they are entitled on any distribution date.
o If the servicer determines not to advance a delinquent payment on
a mortgage loan because such amount is not recoverable from a
mortgagor, there may be a shortfall in distributions on the
certificates which will impact the subordinated certificates.
S-21
o The portion of the shortfalls in the amount of interest
collections on mortgage loans that are attributable to prepayments
in full and are not covered by the servicer and shortfalls in
interest collections arising from the timing of partial principal
prepayments may result in a shortfall in distributions on the
certificates, which will disproportionately impact the
subordinated certificates.
o The subordinated certificates are not expected to receive
principal distributions until, at the earliest, March 2009 (unless
the Class A Certificates are reduced to zero prior to such date).
o Losses resulting from the liquidation of defaulted mortgage loans
will first reduce monthly excess cashflow and then reduce the
level of overcollateralization, if any, for the certificates.
Realized losses on the mortgage loans, to the extent they exceed
the amount of excess interest and overcollateralization following
distributions of principal on the related distribution date and
any Net Swap Payments received under the Interest Rate Swap
Agreement will be allocated to the subordinated certificates in
reverse order of payment priority. No principal or interest will
be distributable on the amount by which the certificate principal
balance of a class has been reduced by a realized loss allocated
to a subordinated certificate (except where a certificate
principal balance has been increased by a subsequent recovery). A
loss allocation results in a reduction in a certificate balance
without a corresponding distribution of cash to the holder. A
lower certificate balance will result in less interest accruing on
the certificate.
o The earlier in the transaction that a loss on a mortgage loan
occurs, the greater the impact on yield.
See "Description of the Certificates" and "Yield, Prepayment and
Maturity Considerations" in this prospectus supplement for more detail.
DECREMENT TABLES ARE BASED UPON ASSUMPTIONS AND MODELS
The decrement tables set forth in Appendix B have been prepared on the
basis of the modeling assumptions described under "Yield, Prepayment and
Maturity Considerations--Weighted Average Lives." There will likely be
discrepancies between the characteristics of the actual mortgage loans included
in the mortgage pool and the characteristics of the assumed mortgage loans used
in preparing the decrement tables. Any such discrepancy may have an effect upon
the percentages of original certificate principal balances outstanding set forth
in the decrement tables (and the weighted average lives of the offered
certificates). In addition, to the extent that the mortgage loans that actually
are included in the mortgage pool have characteristics that differ from those
assumed in preparing the decrement tables, the certificate principal balance of
a class of offered certificates could be reduced to zero earlier or later than
indicated by the decrement tables.
THE RIGHTS OF THE NIMS INSURER COULD ADVERSELY AFFECT THE OFFERED CERTIFICATES
After the closing date, a separate entity may be established to issue
net interest margin securities secured by all or a portion of the Class CE and
Class P Certificates. A NIMS Insurer may issue a financial guaranty insurance
policy that guarantees payments on those securities. If the net interest margin
securities are so insured, the NIMS Insurer will have a number of rights under
the pooling and servicing agreement that could adversely affect
certificateholders. Pursuant to the pooling and servicing agreement, unless the
NIMS Insurer fails to make a required payment under the policy insuring the net
interest margin securities or the NIMS Insurer is the subject of a bankruptcy
proceeding, the NIMS Insurer will be entitled to exercise, among others, the
following rights of the holders of the offered certificates, without their
consent, and the holders of the offered certificates will be able to exercise
such rights only with the prior written consent of the NIMS Insurer. Rights of
the NIMS Insurer under the pooling and servicing agreement may include, but are
not limited to, the following:
o the right to direct the trustee to terminate the rights and
obligations of the servicer under the pooling and servicing
agreement upon a default by the servicer;
o the right to remove the trustee or any co-trustee pursuant to the
pooling and servicing agreement for failure of such party to
perform its obligations thereunder;
S-22
o the right to direct the trustee to make investigations and take
actions pursuant to the pooling and servicing agreement; and
o the right to purchase all of the mortgage loans and REO properties
in the trust fund and thereby effect the early retirement of the
certificates under the circumstances set forth under "The Pooling
and Servicing Agreement--Optional Termination" in this prospectus
supplement.
In addition, unless the NIMS Insurer fails to make a required payment
under the policy insuring the net interest margin securities or the NIMS Insurer
is the subject of a bankruptcy proceeding, the NIMS Insurer's consent will be
required before, among other things,
o the appointment of any co-trustee;
o any otherwise permissible waivers of prepayment charges or
extensions of due dates for payment granted by the servicer with
respect to more than 5% of the number of mortgage loans; or
o any amendment to the pooling and servicing agreement.
Investors in the offered certificates should note that:
o any insurance policy issued by the NIMS Insurer will not cover,
and will not benefit in any manner whatsoever the offered
certificates;
o the rights granted to the NIMS Insurer are extensive;
o the interests of the NIMS Insurer may be inconsistent with, and
adverse to the interests of the holders of the offered
certificates and the NIMS Insurer has no obligation or duty to
consider the interests of the offered certificates in connection
with the exercise or nonexercise of the NIMS Insurer's rights; and
o the NIMS Insurer's exercise of its rights and consents may
negatively affect the offered certificates and the existence of
the NIMS Insurer's rights, whether or not exercised, may adversely
affect the liquidity of the offered certificates, relative to
other asset-backed certificates backed by comparable mortgage
loans and with comparable payment priorities and ratings.
UNITED STATES MILITARY OPERATIONS MAY INCREASE RISK OF SHORTFALLS IN INTEREST
As a result of military operations in Afghanistan and Iraq, the United
States has placed a substantial number of armed forces reservists and members of
the National Guard on active duty status. It is possible that the number of
reservists and members of the National Guard placed on active duty status may
remain at high levels for an extended time. To the extent that a member of the
military, or a member of the armed forces reserves or National Guard who is
called to active duty, is a mortgagor of a mortgage loan in the trust, the
interest rate limitation of the Servicemembers Civil Relief Act and any
comparable state law, will apply. Substantially all of the mortgage loans have
mortgage interest rates which exceed such limitation, if applicable. This may
result in interest shortfalls on the mortgage loans, which, in turn, will be
allocated ratably in reduction of accrued interest on all classes of
interest-bearing certificates, irrespective of the availability of excess cash
flow or other credit enhancement. None of the originator, the depositor, the
underwriter, the sponsor, the servicer or any other party has taken any action
to determine whether any of the mortgage loans would be affected by such
interest rate limitation. See "Description of the Certificates--Interest
Distributions" in this prospectus supplement and "Certain Legal Aspects of the
Mortgage Loans--Servicemembers Civil Relief Act" in the prospectus.
THE MORTGAGE POOL
The statistical information presented in this prospectus supplement
relates to the Mortgage Loans and related mortgaged properties as of the Cut-off
Date, as adjusted for scheduled principal payments due on or before
S-23
the Cut-off Date whether or not received (each, a "CUT-OFF DATE PRINCIPAL
BALANCE"). Prior to the Closing Date, mortgage loans may be removed and other
mortgage loans may be substituted for them. The Depositor believes that the
information set forth in this prospectus supplement with respect to the Mortgage
Loans will be representative of the characteristics of the mortgage pool as it
will be constituted on the Closing Date. Unless otherwise noted, all statistical
percentages or weighted averages set forth in this prospectus supplement are
measured as a percentage of the aggregate principal balance of the Mortgage
Loans as of the Cut-off Date.
GENERAL
The assets included in the Trust will consist primarily of a pool (the
"MORTGAGE POOL") of closed-end, fixed-rate and adjustable-rate non-prime
Mortgage Loans. The "PRINCIPAL BALANCE" of a Mortgage Loan, as of any date, is
equal to the principal balance of such Mortgage Loan at its origination, less
the sum of (i) all collections and other amounts credited against the principal
balance of any such Mortgage Loan, (ii) the principal portion of Advances, (iii)
any Deficient Valuation and (iv) any principal reduction resulting from a
Servicer Modification. The "POOL BALANCE" is equal to the aggregate of the
Principal Balances of the Mortgage Loans.
The Mortgage Pool will consist of fixed-rate Mortgage-Loans (the
"FIXED-RATE MORTGAGE LOANS") and adjustable-rate Mortgage Loans (the
"ADJUSTABLE-RATE MORTGAGE LOANS"). All of the Adjustable-Rate Mortgage Loans
have an initial fixed mortgage interest rate for one year, two years, three
years or five years.
Substantially all of the Mortgage Loans had loan-to-value ratios at
origination in excess of 95.00%. No Mortgage Loan had a loan-to-value ratio at
origination in excess of 103.00%. There can be no assurance that the
loan-to-value ratio of any Mortgage Loan determined at any time after
origination is less than or equal to its original loan-to-value ratio.
Additionally, the Originator's determination of the value of a Mortgaged
Property used in the calculation of the original 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 at origination. See "Risk
Factors--High loan-to-value ratios increase risk of loss."
The Mortgage Loans are secured by mortgages, deeds of trust or other
similar security instruments (each, a "MORTGAGE") which create a first lien on
one- to four-family residential properties consisting of one- to four-family
dwelling units and individual condominium units (each, a "MORTGAGED PROPERTY").
The Mortgage Loans have scheduled Monthly Payments due on the first day of the
month (the day such Monthly Payments are due with respect to each Mortgage Loan,
a "DUE DATE").
Each Mortgage Loan accrues interest at a per annum rate (the "MORTGAGE
INTEREST RATE") specified in the related Mortgage Note.
Certain of the Mortgage Loans will provide for interest only Monthly
Payments for the first 60 months of the term of such Mortgage Loans (each, an
"INTEREST ONLY MORTGAGE LOAN"). See "Summary of Prospectus Supplement--The
Mortgage Pool" for the percentages of Interest Only Mortgage Loans in the
Mortgage Pool. The Monthly Payments for the Interest Only Mortgage Loans will
include both accrued interest and principal on these Mortgage Loans beginning in
the 61st month of the term of these Mortgage Loans. As a result of this payment
structure, Monthly Payments beginning in the 61st month of the term of such
Mortgage Loans may be significantly larger than the first 60 Monthly Payments
required under the related Mortgage Notes.
Certain of the Mortgage Loans will not fully amortize by their
respective maturity dates (each, a "Balloon Loan"). The Monthly Payment for each
Balloon Loan is based on an amortization schedule ranging from 360 months to 480
months, except for the final payment (the "Balloon Payment") which is due and
payable on either the 180th month or the 360th month following origination of
such Mortgage Loan, depending on the terms of the related mortgage note. The
amount of the Balloon Payment on each Balloon Mortgage Loan is substantially in
excess of the amount of the scheduled Monthly Payment for such Balloon Loan.
Certain of the Mortgage Loans provide for payment by the mortgagor of a
prepayment charge in limited circumstances on certain prepayments. See "Summary
of Prospectus Supplement--The Mortgage Pool" for the
S-24
percentages of these Mortgage Loans in the Mortgage Pool. No such prepayment
charge will be distributed to the holders of the Offered Certificates.
All of the Adjustable-Rate Mortgage Loans provide for semi-annual
adjustment to the Mortgage Interest Rate thereon and for corresponding
adjustments to the Monthly Payment amount due thereon, in each case on each
adjustment date applicable thereto (each such date, an "ADJUSTMENT DATE"). On
each Adjustment Date for each Adjustable-Rate Mortgage Loan, the Mortgage
Interest Rate thereon will be adjusted to equal the sum of Six-Month LIBOR (the
"INDEX") and a fixed percentage amount (the "GROSS MARGIN"). The Mortgage
Interest Rate on each such Adjustable-Rate Mortgage Loan will not increase or
decrease by more than a percentage specified in the related Mortgage Note on the
first related Adjustment Date (the "INITIAL PERIODIC RATE CAP") and a percentage
(which may be the same as the Initial Periodic Rate Cap) on any Adjustment Date
thereafter (the "PERIODIC RATE CAP"). Each Mortgage Interest Rate on each
Adjustable-Rate Mortgage Loan will not exceed a specified maximum Mortgage
Interest Rate over the life of such Mortgage Loan (the "MAXIMUM MORTGAGE
INTEREST RATE") or be less than a specified minimum Mortgage Interest Rate over
the life of such Mortgage Loan (the "MINIMUM MORTGAGE INTEREST RATE").
Effective with the first Monthly Payment due on each Adjustable-Rate
Mortgage Loan after each related Adjustment Date, the Monthly Payment amount
will be adjusted to an amount that will amortize fully the outstanding Principal
Balance of the related Mortgage Loan over its remaining term, and pay interest
at the Mortgage Interest Rate as so adjusted. Due to the application of the
Periodic Rate Caps and the Maximum Mortgage Interest Rates, the Mortgage
Interest Rate on each such Mortgage Loan, as adjusted on any related Adjustment
Date, may be less than the sum of the Index and the related Gross Margin. See
"--The Index" in this prospectus supplement.
None of the Adjustable-Rate Mortgage Loans have Mortgage Interest Rates
that may be converted to fixed Mortgage Interest Rates at the option of the
related mortgagor. None of the Mortgage Loans provide for negative amortization.
None of the Mortgage Loans were Delinquent as of the Cut-off Date. A
Mortgage Loan is "DELINQUENT" if the scheduled monthly payment of principal and
interest on such Mortgage Loan which is payable by the related mortgagor under
the related Mortgage Note (the "MONTHLY PAYMENT") due on a due date is not paid
by the close of business on the next scheduled due date for such Mortgage Loan.
Thus, a Mortgage Loan for which the mortgagor failed to make the Monthly Payment
due on February 1, 2006 will be reported as Delinquent on March 2, 2006 if the
payment is not made by the close of business on March 1, 2006.
The Servicer will be required to make servicing advances on Delinquent
Mortgage Loans and make advances of delinquent payments of principal and
interest on Delinquent Mortgage Loans (other than a Balloon Payment), each to
the extent such advances are deemed recoverable, until such Mortgage Loans
become current or are liquidated.
The "LOAN-TO-VALUE RATIO" of a Mortgage Loan generally means the ratio,
expressed as a percentage of (i) the principal amount of the Mortgage Loan at
origination over (ii) the Value of the related Mortgaged Property. "VALUE" means
with respect to any Mortgaged Property, the lesser of: (i) an amount determined
by an appraisal done at origination of the Mortgage Loan; provided, however, the
amount may be reduced to reflect the results of a review of such appraisal in
accordance with the Originator's underwriting guidelines and (ii) the purchase
price paid for the related Mortgaged Property by the Mortgagor with the proceeds
of the Mortgage Loan; provided, however, that in the case of a refinanced
Mortgage Loan, the value of the Mortgaged Property is based solely upon clause
(i) above.
"CREDIT SCORES" are statistical credit scores obtained by many mortgage
lenders in connection with the loan application to help assess a borrower's
credit-worthiness. Credit Scores are generated by models developed by a third
party and are made available to lenders through three national credit bureaus.
The models were derived by analyzing data on consumers in order to establish
patterns which are believed to be indicative of the borrower's probability of
default. The Credit Score is based on a borrower's historical credit data,
including, among other things, payment history, delinquencies on accounts,
levels of outstanding indebtedness, length of credit history, types of credit,
and bankruptcy experience. Credit Scores generally range from approximately 300
to approximately
S-25
850, with higher scores indicating an individual with a more favorable credit
history compared to an individual with a lower score. The Credit Scores set
forth in the table in Appendix A were obtained at either the time of origination
of the Mortgage Loan or more recently. The Depositor makes no representations or
warranties as to the actual performance of any Mortgage Loan or that a
particular Credit Score should be relied upon as a basis for an expectation that
the borrower will repay the Mortgage Loan according to its terms.
The Depositor will purchase the Mortgage Loans from the Sponsor
pursuant to the Mortgage Loan Purchase Agreement (the "MORTGAGE LOAN PURCHASE
AGREEMENT"), dated as of the Cut-off Date, between the Sponsor and the
Depositor. Pursuant to the Pooling and Servicing Agreement, the Depositor will
cause the Mortgage Loans to be assigned to the Trustee for the benefit of the
Certificateholders. See "The Pooling and Servicing Agreement" in this prospectus
supplement.
The Mortgage Loans were selected by the Sponsor, with advice from the
Underwriter as to the characteristics of the Mortgage Loans that will optimize
marketability of the Certificates, from the mortgage loans purchased from the
Originator under the Originator Mortgage Loan Purchase Agreement, and were
chosen to meet the requirements imposed by the rating agencies to achieve the
credit support percentages listed under "Summary of Prospectus
Supplement--Credit Support."
Based on the representations made by the Originator, the Depositor
believes that each of the Mortgage Loans in the Mortgage Pool was originated or
acquired by the Originator and one or more of its affiliates generally in
accordance with the underwriting standards described under "Underwriting
Standards" in this prospectus supplement.
The Originator made certain representations and warranties regarding
the Mortgage Loans as of November 29, 2005, December 29, 2005 and January 31,
2006, as applicable, in the Flow Sale and Servicing Agreement, dated as of
November 1, 2005 (the "ORIGINATOR MORTGAGE LOAN PURCHASE AGREEMENT"), pursuant
to which the Originator and one or more of its affiliates sold the Mortgage
Loans to the Sponsor. These representations and warranties will be assigned by
the Sponsor to the Depositor and by the Depositor to the Trustee, for the
benefit of the Certificateholders. The Originator, subject to certain
limitations, will be obligated under the Originator Mortgage Loan Purchase
Agreement to repurchase or substitute a similar mortgage loan for any Mortgage
Loan as to which there exists deficient documentation or an uncured breach of
any such representation or warranty, if such breach of any such representation
or warranty materially and adversely affects the Certificateholders' interests
in such Mortgage Loan.
Pursuant to the terms of the Mortgage Loan Purchase Agreement, the
Sponsor will make to the Depositor (and the Depositor will assign to the Trustee
for the benefit of Certificateholders) only certain limited representations and
warranties as of the Closing Date, generally intended to address the accuracy of
the Mortgage Loan Schedule and the payment and delinquency status of each
Mortgage Loan. In the event of a breach of any such representation or warranty
that does not constitute a breach of any representation or warranty made by the
Originator as described above, the Sponsor will be obligated in the same manner
as the Originator to cure such breach or purchase or substitute the affected
Mortgage Loans, as described above.
To the extent that any fact, condition or event with respect to a
Mortgage Loan constitutes a breach of both a representation and warranty of the
Originator under the Originator Mortgage Loan Purchase Agreement with the
Sponsor and a breach of a representation and warranty of the Sponsor under the
Mortgage Loan Purchase Agreement between the Sponsor and the Depositor, then the
only right or remedy of the Trustee or any Certificateholder shall be the
Trustee's right to enforce the obligations of the Originator under the
Originator Mortgage Loan Purchase Agreement, and there shall be no remedy
against the Sponsor for such breaches (other than the Sponsor's obligation to
reimburse the Trust, if the Originator fails to do so, for any damages or costs
incurred by the Trust as a result of a breach of the representation as to
compliance with federal, state or local laws with respect to the origination of
the Mortgage Loans).
The Sponsor is selling the Mortgage Loans without recourse and will
have no obligation with respect to the Certificates in its capacity as seller
other than the cure, repurchase or substitution obligations with respect to its
limited representations and warranties described above and its reimbursement
obligation described under "The Pooling and Servicing Agreement--Assignment of
the Mortgage Loans" in this prospectus supplement.
S-26
See "Description of the Agreements--Material Terms of the Pooling and
Servicing Agreements and Underlying Servicing Agreements--Representations and
Warranties; Repurchases" in the prospectus.
THE INDEX
The Index for all the Adjustable-Rate Mortgage Loans is the average of
interbank offered rates for six-month U.S. dollar deposits in the London market
calculated as provided in the related note ("SIX-MONTH LIBOR"). If Six-Month
LIBOR becomes unpublished or is otherwise unavailable, the Servicer will select
an alternative index which is based upon comparable information.
TERMS OF THE MORTGAGE LOANS
The Mortgage Loans accrue interest on an actuarial basis over the
original terms thereof, calculated based on a 360-day year of twelve 30-day
months. When a full prepayment of principal is made on a Mortgage Loan during a
month, the mortgagor is charged interest only on the days of the month actually
elapsed up to the date of such prepayment, at a daily interest rate that is
applied to the principal amount of the loan so prepaid. When a partial
prepayment of principal is made on a Mortgage Loan during a month, the mortgagor
generally is not charged interest on the amount of the partial prepayment during
the month in which such prepayment is made.
THE ORIGINATOR
First Franklin Financial Corporation (the "Originator") sold the
Mortgage Loans to the Sponsor. The information contained below with regard to
the Originator and its affiliates has been provided by the Originator.
Founded in 1981, the Originator is a Delaware corporation headquartered
in San Jose, California. The Originator is a wholly owned operating subsidiary
of National City Bank of Indiana, ("National City Bank"), which is a
wholly-owned subsidiary of National City Corporation, a publicly traded
financial holding company. From 1981 to 2004, the Originator grew from a small
mortgage broker to a full service mortgage lender with a wide variety of
products. As of January 1, 2005, as a part of a restructuring of National City
Bank's residential mortgage operations, the Originator transferred its mortgage
origination functions to National City Bank. The Originator acquires first and
second mortgage loans from National City Bank and from third party mortgage
lenders. National City Bank originated approximately 99.49% of the mortgage
loans acquired by the Originator from January 1, 2005 through December 31, 2005.
As of December 31, 2005, the Originator's acquisition portfolio from
all third party originators totaled approximately $35,402,674 year-to-date.
UNDERWRITING STANDARDS
Since January 1, 2005, all of the mortgage loans that were acquired by
the Originator from National City Bank and third party mortgage lenders were
required to meet the underwriting criteria described below.
The Originator's acquisition underwriting standards are primarily
intended to assess the ability and willingness of the borrower to repay the debt
and to evaluate the adequacy of the mortgaged property as collateral for the
mortgage loan. The standards established by the Originator require that mortgage
loans be underwritten by National City Bank or to the Originator's standards
prior to their purchase from third party lenders with a view toward the resale
of the mortgage loans in the secondary mortgage market. In accordance with the
Originator's guidelines for acquisition, the lender must consider, among other
things, a mortgagor's credit history, repayment ability and debt service to
income ratio ("Debt Ratio"), as well as the value, type and use of the mortgaged
property. The non-prime mortgage loans generally bear higher rates of interest
than mortgage loans that are originated in accordance with Fannie Mae and
Freddie Mac standards, and may experience rates of delinquencies and
foreclosures that are higher, and that may be substantially higher, than those
experienced by portfolios of mortgage loans underwritten in a more traditional
manner. Unless prohibited by applicable law or otherwise waived by National City
Bank or a third party lender upon the payment by the related mortgagor of higher
origination fees and a higher mortgage rate, a majority of the mortgage loans
provide for the payment by the mortgagor of a prepayment
S-27
charge on certain full prepayments made within one to three years from the date
of origination of the related mortgage loan.
Substantially all of the non-prime mortgage loans that were acquired
from National City Bank were based on loan application packages submitted to
National City Bank by third party mortgage brokers which do not fund the
mortgage loans. These mortgage brokers must meet minimum standards set by
National City Bank and, once approved by National City Bank, the mortgage
brokers are eligible to submit loan application packages in compliance with the
terms of the mortgage broker agreement with the National City Bank.
Third party lenders must meet minimum standards set by the Originator,
based on acquisition guidelines that require an analysis of the following
information submitted with an application for approval: any applicable state
lending license (in good standing), satisfactory credit report only if no
federal income tax identification number, signed mortgage loan purchase
agreement, signed W-9 and signed lender authorization. Once approved as a third
party lender, these companies are eligible to submit loan packages for purchase
by the Originator in compliance with the terms of a signed mortgage loan
purchase agreement.
National City Bank and other approved lenders may originate mortgage
loans for acquisition by the Originator under an underwriting program called the
Direct Access Program. Within the Direct Access Program, there are four
documentation programs, the Full Documentation Program, the Limited Income
Verification Program (the "LIV"), the Stated Plus Program and the No Income
Verification Program (the "NIV"). In addition, under the Originator's Blended
Access Program, in the case of loans with two or more borrowers, if one of those
borrowers with more than 50% of the total qualifying income is underwritten
under a full documentation program, then the other borrower or borrowers may be
underwritten under a stated documentation program. All non-prime mortgage loans
are acquired by the Originator under the Direct Access Program. While each
underwriting program is intended to assess the risk of default, the Direct
Access Program makes use of credit bureau risk scores (the "Credit Score"). The
Credit Score is a statistical ranking of likely future credit performance
developed by Fair, Isaac & Company ("Fair, Isaac") and the three national credit
repositories Equifax, Trans Union and First American (formerly Experian, which
was formerly TRW). The Credit Scores available from the three national credit
repositories are calculated by the assignment of weightings to the most
predictive data collected by the credit repositories and range from 300 to 850.
Although the Credit Scores are based solely on the information at the particular
credit repository, such Credit Scores have been calibrated to indicate the same
level of credit risk regardless of which credit repository is used. The Credit
Score is used as an aid to, not a substitute for, the underwriter's judgment.
The Direct Access Program was developed to simplify the origination
process. In contrast to assignment of credit grades according to traditional
non-agency credit assessment methods, i.e., mortgage and other credit
delinquencies, Direct Access relies upon a borrower's Credit Score initially to
determine a borrower's likely future credit performance. The mortgage loan
originator is able to access Credit Scores at the initial phases of the loan
application process and use the score to determine a borrower's interest rate.
The Originator's acquisition guidelines require approval of the mortgage loan
using the Direct Access Program risk-based pricing matrix.
In accordance with the Originator's guidelines for acquisition, for
substantially all of the loans acquired under the Direct Access Program, the
Credit Score of the primary borrower (the borrower with at least 51.00% of total
income must be used to determine program eligibility. Credit Scores must be
obtained from at least two national credit repositories, with the lower of the
two scores being utilized in program eligibility determination. If Credit Scores
are obtained from three credit repositories, the middle of the three scores can
be utilized. In all cases, a borrower's complete credit history must be detailed
in the credit report that produces a given Credit Score or the borrower is not
eligible for the Direct Access Program. Generally, the minimum Credit Bureau
Risk Score allowed under the Direct Access Program is 540.
The Credit Score, along with the loan-to-value ratio, is an important
tool in assessing the creditworthiness of a Direct Access borrower. However,
these two factors are not the only considerations in underwriting a Direct
Access loan. National City Bank or the Originator, with respect to mortgage
loans originated by third party lenders, reviews each Direct Access loan to
determine whether the Originator's acquisition guidelines for income, assets,
employment and collateral are met.
S-28
National City Bank's underwriting guidelines require that all mortgage
loans are underwritten by the lender's underwriters having the appropriate
signature authority. Each underwriter is granted a level of authority
commensurate with their proven judgment, maturity and credit skills. On a case
by case basis, an underwriter may determine that, based upon compensating
factors, a prospective mortgagor not strictly qualifying under the underwriting
risk category guidelines described below warrants an underwriting exception.
Compensating factors may include, but are not limited to, low loan-to-value
ratio, low debt-to-income-ratio, substantial liquid assets, good credit history,
stable employment and time in residence at the applicant's current address. It
is expected that a substantial portion of the Mortgage Loans may represent such
underwriting exceptions.
In accordance with the Originator's guidelines for acquisition, the
lender's underwriters are required to verify the income of each applicant under
various documentation programs as follows: under the Full Documentation Program,
applicants are generally required to submit verification of stable income for
the periods of six months to two years preceding the application dependent on
credit score range; under the LIV Program, the borrower is qualified based on
the income stated on the application and applicants are generally required to
submit verification of adequate cash flow to meet credit obligations for the six
month period preceding the application; the Stated Plus Program allows income to
be stated, but requires borrowers to provide verification of liquid assets
equaling three months of income stated on the mortgage application; under the
NIV Program, applicants are qualified based on monthly income as stated on the
mortgage application and the underwriter will determine that the stated income
is reasonable and realistic when compared to borrower's employment type, assets
and credit history. For Direct Access first lien mortgage loans from
self-employed or 1099 borrowers with a credit score greater than or equal to 540
and not originated in conjunction with a second lien mortgage, bank statements
(for 12 months) are acceptable as full documentation. For Direct Access first
lien mortgage loans from self-employed or 1099 borrowers with credit scores
greater than or equal to 600, regardless of being originated with a
corresponding second lien mortgage, twelve months of bank statements are
acceptable as full documentation. In all cases, the income stated must be
reasonable and customary for the applicant's line of work. Although the income
is not verified under the LIV and NIV Programs, the lender should conduct a
preclosing audit to confirm that the business exists. Verification may be made
through phone contact to the place of business, obtaining a valid business
license, CPA/Enrolled Agent letter or through Dun and Bradstreet Information
Services.
The applicant generally must have a sufficiently established credit
history to qualify for the appropriate Credit Bureau Risk Score range under the
Direct Access Program. This credit history is substantiated by a two repository
merged report prepared by an independent credit report agency. The report
typically summarizes the applicant's entire credit history, and generally
includes a seven year public record search for each address where the applicant
has lived during the two years prior to the issuance of the credit report and
contains information relating to such matters as credit history with local and
national merchants and lenders, installment debt payments and any record of
defaults, bankruptcy, repossession, suits or judgments. In some instances,
borrowers with a minimal credit history are eligible for financing under the
Direct Access Program.
The Originator purchases loans secured by 1-4 unit residential
properties made to eligible borrowers with a vested fee simple (or in some cases
a leasehold) interest in the property. In accordance with the Originator's
guidelines for acquisition, the mortgage loans are required to comply with
applicable federal and state laws and regulations and generally require an
appraisal of the mortgaged property prepared in accordance with applicable law
and regulation; and if appropriate, a review appraisal. Generally, appraisals
are provided by appraisers approved by National City Bank or third party
lenders, as applicable. Review appraisals may only be provided by appraisers
approved by National City Bank or the third party lender. In some cases,
National City Bank or a third party lender may rely on a statistical appraisal
methodology provided by a third party.
Qualified independent appraisers must meet minimum standards of
licensing and provide errors and omissions insurance in states where it is
required to become approved to do business with National City Bank or a third
party lender. Each Uniform Residential Appraisal Report includes a market data
analysis based on recent sales of comparable homes in the area and, where deemed
appropriate, replacement cost analysis. The review appraisal may be an enhanced
desk, field review or an automated valuation report that confirms or supports
the original appraiser's value of the mortgaged premises. The review appraisal
may be waived by National City Bank's Standard Plus Delegated Underwriter or by
the Originator for mortgage loans acquired from third party lenders.
S-29
In accordance with the Originator's guidelines for acquisition,
National City Bank and third party lenders must require title insurance on all
mortgage loans secured by liens on real property. In addition, lenders must also
require that fire and extended coverage casualty insurance be maintained on the
secured property in an amount at least equal to the principal balance of the
related residential loan or the replacement cost of the property, whichever is
less.
The Originator conducts a number of quality control procedures, with
respect to National City Bank and third party lenders, including post funding
compliance audits as well as a full re-underwriting of a random selection of
loans to assure asset quality. Under the post-funding audits, a random sample of
loans are required to be reviewed to verify credit grading, documentation
compliance and data accuracy. Under the asset quality procedure, a random
selection of each month's acquisitions must be reviewed by the Originator. The
loan review is required to confirm the existence and accuracy of legal
documents, credit documentation, appraisal analysis and underwriting decision. A
report detailing audit findings and level of error is sent monthly to each
branch for response. The audit findings and branch responses must then be
reviewed by the Originator's senior management. Adverse findings are to be
tracked monthly and over a rolling six month period. This review procedure
allows the Originator to assess programs for potential guideline changes,
program enhancements, appraisal policies, areas of risk to be reduced or
eliminated and the need for additional staff training.
Under the Originator's mortgage loan acquisition programs, various risk
categories are used to grade the likelihood that the applicant will satisfy the
repayment conditions of the loan. These risk categories establish the maximum
permitted loan-to-value ratio and loan amount, given the occupancy status of the
mortgaged property and the applicant's credit history and debt-to-income-ratio.
In general, higher credit risk mortgage loans are graded in categories which
permit higher debt-to-income ratios and more (or more recent) major derogatory
credit items such as outstanding judgments or prior bankruptcies; however these
loan programs establish lower maximum loan-to-value ratios and lower maximum
loan amounts for loans graded in such categories.
"Equity Refinance" transactions are defined as those instances where
the borrower receives the lesser of 2% of the new loan amount or $2,000 cash in
hand. Funds used for debt consolidation are not included in this amount.
The acquisition guidelines for sale to the Originator under the Direct
Access Program generally have the following criteria for borrower eligibility
for the specified Credit Score range.
The debt-to-income-ratio generally may not exceed 50.49% for all credit
scores on full documentation and LIV loans. Loans meeting the residual income
requirements may have a maximum debt-to-income-ratio of 55.49%. The
debt-to-income-ratio for NIV loans may not exceed 50.49%.
Generally, the Originator's acquisition guidelines require that all
liens affecting title must be paid at closing. Collections, charge-offs,
judgments and liens not affecting title may remain open for combined
loan-to-value ratios less than or equal to 80%, provided certain criteria are
met. For instance, if the loan is a purchase or rate and term refinance, a
payoff of such amounts shall not be required if, the related loan is not being
originated together with a second lien loan, the balance of the items added to
the loan amount does not exceed the maximum allowed combined loan-to-value
ratio, the payment amounts are included in the debt calculation, and the
lender's loan has first lien priority.
THE SERVICER
NATIONAL CITY HOME LOAN SERVICES, INC.
National City Home Loan Services, Inc. (the "Servicer") will act as
servicer of the mortgage loans. The information contained in this prospectus
supplement with regard to the servicer has been provided the Servicer. The
Servicer will be required to service the mortgage loans in accordance with the
pooling and servicing agreement.
The Servicer is a Delaware corporation and a wholly owned operating
subsidiary of National City Bank, which is a subsidiary of National City
Corporation. The Servicer is a full-service, non-conforming mortgage
S-30
servicing company headquartered in Pittsburgh, Pennsylvania. The loan servicing
portfolio is serviced at offices located in Pittsburgh, Pennsylvania. The
Servicer has been servicing non-conforming mortgage loans for approximately 16
years under various corporate names: American Financial Corporation, Altegra
Credit Company and, since 2002, under the corporate name of National City Home
Loan Services, Inc. The Servicer currently ranks as the twelfth (12th) largest
U.S. non-conforming residential mortgage servicer.
Currently, substantially all of the Servicer's servicing portfolio
consists of non-prime mortgage loans and variable rate home equity lines of
credit, consisting of fixed-rate and adjustable-rate first and fixed rate second
lien balloon payment mortgage loans and variable rate home equity lines of
credit. Prior to January 1, 2005, the closed-end first and second mortgage loans
in the Servicer's servicing portfolio were originated or acquired by the
Originator and loans originated thereafter were generally acquired by the
Originator from National City Bank and other third party lenders. The home
equity lines of credit were originated by National City Bank and are currently
owned by other affiliates of National City Corporation. The following table
reflects the size and composition of Servicer's servicing portfolio of
closed-end non-prime mortgage loans as of the end of each indicated period.
NATIONAL CITY HOME LOAN SERVICES, INC.'S
NON-PRIME SERVICING PORTFOLIO
(DOLLARS IN THOUSANDS)
AGGREGATE AGGREGATE AGGREGATE
PRINCIPAL PRINCIPAL PRINCIPAL
BALANCE AS OF BALANCE AS OF BALANCE AS OF
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2003 2004 2005
-------------- -------------- --------------
$ 18,751,589 $ 23,049,992 $ 37,591,777
The Servicer began interim servicing for the Originator and its
investor base in August 2002. In December, 2004, the Servicer began retaining
servicing for the Originator's investors on a permanent basis. As of September
30, 2005, the Servicer serviced approximately 50,543 loans with an aggregate
unpaid principal balance of approximately $8 billion included in nine
outstanding securitizations. A significant percentage of the mortgage loans in
the Servicer's non-prime servicing portfolio are serviced for affiliates of the
Servicer.
The Servicer is rated "Above Average" as a residential nonprime
mortgage servicer and alternative residential mortgage servicer by Standard &
Poor's Ratings Services. The Servicer has an "RPS2-" rating as a primary
servicer of residential non-prime and Alt-A products and an "RSS3+" rating as a
special servicer from Fitch Ratings. The Servicer is also rated "SQ2+" as a
primary servicer of nonprime and second lien loans and "SQ2-" as a special
servicer by Moody's Investors Service, Inc.
SERVICER'S DELINQUENCY AND FORECLOSURE EXPERIENCE
The following table sets forth the delinquency and foreclosure
experience of the mortgage loans serviced by the Servicer at the end of the
indicated periods. The indicated periods of delinquency are based on the number
of days past due on a contractual basis. The Servicer's portfolio may differ
significantly from the mortgage loans in the mortgage loan pool in terms of
interest rates, principal balances, geographic distribution, types of
properties, lien priority, origination and underwriting criteria, prior servicer
performance and other possibly relevant characteristics. There can be no
assurance, and no representation is made, that the delinquency and foreclosure
experience with respect to the mortgage loans will be similar to that reflected
in the table below, nor is any representation made as to the rate at which
losses may be experienced on liquidation of defaulted mortgage loans. The actual
delinquency experience on the mortgage loans will depend, among other things,
upon the value of the real estate securing such mortgage loans and the ability
of the related borrower to make required payments. It should be noted that if
the residential real estate market should experience an overall decline in
property values, the actual rates of delinquencies and foreclosures could be
higher than those previously experienced by the Servicer. In addition, adverse
economic conditions may affect the timely payment by borrowers of scheduled
payments of principal and interest on the mortgage loans and, accordingly, the
actual rates of delinquencies and foreclosures with respect to the mortgage loan
pool. Finally, the statistics shown below represent the delinquency experience,
utilizing the MBA
S-31
methodology, for the Servicer's mortgage servicing portfolio only for the
periods presented, whereas the aggregate delinquency experience on the mortgage
loans will depend on the results obtained over the life of the mortgage loan
pool.
SERVICER LOAN DELINQUENCY EXPERIENCE
As of As of As of
DECEMBER 31, 2003 DECEMBER 31, 2004 DECEMBER 31, 2005
Total Servicing Total Servicing Total Servicing
Portfolio Portfolio Portfolio
----------------- ----------------- -----------------
($ in thousands) ($ in thousands) ($ in thousands)
Total Outstanding Balance: $ 18,751,589 $ 23,049,992 $ 37,591,777
----------------- ----------------- ----------------
Delinquency at:
30 Days*
Outstanding Principal Balance: $ 530,613 $ 595,677 $ 1,257,900
Delinquency % 2.83% 2.58% 3.35%
60 Days*
Outstanding Principal Balance $ 182,027 $ 205,202 $ 419,706
Delinquency % 0.97% 0.89% 1.12%
90+ Days*
Outstanding Principal Balance $ 102,237 $ 114,126 $ 230,205
Delinquency % 0.55% 0.50% 0.61%
Bankruptcy (1):
Outstanding Principal Balance $ 199,147 $ 173,945 $ 311,225
Delinquency % 1.06% 0.75% 0.83%
Foreclosure:
Outstanding Principal Balance $ 185,962 $ 168,194 $ 256,519
Delinquency % 0.99% 0.73% 0.68%
Real Estate Owned:
Outstanding Principal Balance $ 79,116 $ 58,733 $ 68,873
Delinquency % 0.42% 0.25% 0.18%
Total Seriously Delinquent including
real estate owned (2): $ 748,489 $ 720,201 $ 1,286,528
Total Seriously Delinquent excluding
real estate owned: $ 669,373 $ 661,467 $ 1,217,655
- ----------
(1) Bankruptcies include both non-performing and performing loans in which the
related borrower is in bankruptcy. Amounts included for contractually
current bankruptcies for the total servicing portfolio for December 31,
2003, December 31, 2004 and December 31, 2005 are $42,727, $50,831 and
$111,629 respectively.
(2) Seriously delinquent is defined as loans that are 60 or more days
delinquent, in foreclosure, in REO or held by a borrower who has declared
bankruptcy.
* Bankruptcies and Foreclosures have been removed from these categories.
S-32
The statistics shown above represent the recent experience of the
Servicer. There can be no assurance that the delinquency and foreclosure
experience of the mortgage loans included in the trust fund will be comparable.
In addition, these statistics are based on all of the one-to-four family
residential mortgage loans in the Servicer's servicing portfolio, including
mortgage loans with a variety of payment and other characteristics, including
geographic locations and underwriting standards. The actual delinquency and
foreclosure experience of the mortgage loans will depend, among other things,
upon (a) the value of real estate securing the mortgage loans and (b) the
ability of borrowers to make required payments.
Accordingly, there can be no assurance that the delinquency and
foreclosure experience of the trust fund's mortgage loans in the future will
correspond to the future delinquency and foreclosure experience of the
Servicer's one-to-four family conventional residential mortgage loan servicing
portfolio.
SERVICER'S POLICIES AND PROCEDURES
The Servicer has established standard policies for the servicing and
collection of mortgage loans. The Servicer's procedures for the servicing and
collection functions include the following:
o collecting, aggregating and remitting mortgage loan payments;
o accounting for principal and interest;
o holding escrow (impound) funds for payment of taxes and insurance;
o making inspections as required of the mortgaged properties;
o supervision of delinquent mortgage loans;
o loss mitigation efforts;
o foreclosure proceedings and, if applicable, the disposition of
mortgaged properties; and
o generally administering the mortgage loans, for which it receives
servicing fees.
The Servicer's collection operation is a high touch unit that utilizes
the early indicator scoring model, the Avaya autodialer (the "dialer"), and
manual calling campaigns. Individual ownership is key to the Servicer's
collection philosophy. The purpose of the dialer and the early indicator model
is to quickly and efficiently reduce the delinquency so that collectors can
manually work their individual portfolios. In managing the liquidation of
defaulted mortgage loans, the Servicer generally will have sole discretion to
take such action in maximizing recoveries to investors, including selling
defaulted mortgage loans and REO properties. The bankruptcy unit's primary
responsibilities are to protect the asset while a mortgage loan is going through
the bankruptcy process. This responsibility is fulfilled by ensuring that
borrowers make payments as required under the Bankruptcy Code. If this cannot be
accomplished, the Servicer will seek relief through the bankruptcy court,
including filing a motion for relief from the automatic stay, to enable the
Servicer to commence foreclosure, as necessary. After a loan has been charged
off, the Servicer's recovery team performs all aspects of the collection-related
activity, including, but not limited to, borrower contact, credit bureau
maintenance and tax reporting, which may result in recovery of the charged-off
amount.
Over the past three years, there has been no material change in the
Servicer's servicing policies and procedures.
PRIOR SECURITIZATIONS
During the three years preceding the date of this prospectus
supplement, the Servicer has not been notified and is not aware that any of the
residential mortgage loan securitization pools serviced by the Servicer have
experienced servicing events of default, termination triggers or early
amortization events because of servicing by the
S-33
Servicer, and the Servicer has not been terminated as a servicer in a
residential mortgage loan securitization due to a servicing default or
application of a servicing performance test or trigger. During such time, the
Servicer also neither has failed to make any required advance with respect to
any issuance of residential mortgage backed securities nor disclosed material
noncompliance with the servicing criteria applicable to any such securitization.
THE SPONSOR
The Sponsor, Bank of America, National Association ("BANK OF AMERICA")
is an indirect wholly-owned subsidiary of Bank of America Corporation.
See "The Pooling and Servicing Agreement" in this prospectus supplement
for more information regarding the Sponsor's material roles and duties in this
transaction and "The Sponsor" in the prospectus for more information about the
Sponsor and its securitization programs.
STATIC POOL INFORMATION
Information concerning the Sponsor's prior residential mortgage loan
securitizations involving non-prime mortgage loans issued by the Depositor is
available on the internet at www.bofa.com/abfc. The website will also provide
information about certain prior securitized pools of non-prime mortgage loans
originated by the Originator and serviced by the Servicer.
Without charge or registration, investors can view on the website the
following information for each of those securitizations:
o summary initial pool information; and
o delinquency, cumulative loss, and prepayment information as of
each distribution date for the five years preceding the date of
first use of this prospectus supplement with respect to the
Sponsor's prior securitized pools of non-prime mortgage loans and
for the two years preceding the date of first use of this
prospectus supplement with respect to certain of the Originator's
prior securitized pools of non-prime mortgage loans serviced by
the Servicer.
In the event any changes or updates are made to the information
regarding these securitizations available on the Sponsor's website, the
Depositor will provide a copy of the original information upon request to any
person who writes or calls the Depositor at 214 North Tryon Street, Charlotte,
North Carolina 28255, (704) 683-4190, Attention: Luna Nguyen.
The static pool data available on the Sponsor's website relating to any
of the Sponsor's mortgage loan securitizations or the Originator's prior
securitized pools of mortgage loans issued prior to January 1, 2006 is not
deemed to be part of this prospectus supplement, the accompanying base
prospectus or the Depositor's registration statement.
This static pool data may have been influenced in the past by factors
beyond the Sponsor's control, such as unusually robust housing prices, low
interest rates and changes in product type. Therefore, the performance of prior
residential mortgage loan securitizations may not be indicative of the future
performance of the Mortgage Loans.
S-34
THE DEPOSITOR
Asset Backed Funding Corporation is a direct wholly-owned subsidiary of
Banc of America Mortgage Capital Corporation and was incorporated in the State
of Delaware on July 23, 1997. It is not expected that the Depositor will have
any business operations other than offering mortgage pass-through certificates
and related activities. The Depositor will have limited obligations and rights
under the Pooling and Servicing Agreement after the Closing Date.
The Depositor maintains its principal executive office at 214 North
Tryon Street, Charlotte, North Carolina 28255. Its telephone number is (704)
386-2400.
THE ISSUING ENTITY
The Issuing Entity will be a New York common law trust (the "TRUST"),
formed on the Closing Date pursuant to the Pooling and Servicing Agreement. The
Mortgage Loans will be deposited by the Depositor into the Trust under the
Pooling and Servicing Agreement as described under "The Pooling and Servicing
Agreement--Assignment of the Mortgage Loans" in this prospectus supplement. The
Trust will have no officers or directors and no activities or continuing duties
other than to hold the assets underlying the Certificates and to issue the
Certificates. The fiscal year end of the Trust will be December 31 of each year.
The Trust will be administered by the Trustee pursuant to the terms of
the Pooling and Servicing Agreement as described under "--The Trustee" in this
prospectus supplement and under "Description of the Agreements--Material Terms
of the Pooling and Servicing Agreements and Underlying Servicing Agreements" in
the prospectus. The Trustee, on behalf of the Trust, is only permitted to take
the actions specifically provided in the Pooling and Servicing Agreement prior
to an Event of Default. After an Event of Default, the Trustee will take such
actions as a prudent person would be required to take under the same
circumstances. Under the Pooling and Servicing Agreement, the Trustee on behalf
of the Trust will not have the power to issue additional certificates
representing interests in the Trust, borrow money on behalf of the Trust or make
loans from the assets of the Trust to any person or entity.
The Issuing Entity, as a common law trust, may not be eligible to be a
debtor in a bankruptcy proceeding, unless it can be characterized as a "business
trust" for purposes of the federal bankruptcy laws. Bankruptcy courts consider
various factors in making a determination as to whether an entity is a business
trust, therefor it is not possible to predict with any certainty whether or not
the issuing entity would be considered a "business trust." In the event of the
insolvency or bankruptcy of the Sponsor, the Depositor or any other party to the
transaction, it is not anticipated that the trust fund would become a part of
the bankruptcy estate or subject to the bankruptcy control of a third party. See
"Risk Factors--Special Powers of the FDIC in the Event of Insolvency of the
Sponsor Could Delay or Reduce Distributions on the Certificates" and
"--Insolvency of the Depositor May Delay or Reduce Collections on Mortgage
Loans" in the prospectus.
THE TRUSTEE
Wells Fargo Bank, National Association ("WELLS FARGO BANK") will act as
Trustee under the Pooling and Servicing Agreement. Wells Fargo Bank is a
national banking association and a wholly-owned subsidiary of Wells Fargo &
Company. A diversified financial services company with approximately $397
billion in assets, 24 million customers and 143,000 employees, Wells Fargo &
Company is among the largest U.S. bank holding companies, providing banking,
insurance, trust, mortgage and consumer finance services throughout the United
States and internationally. Wells Fargo Bank provides retail and commercial
banking services and corporate trust, custody, securities lending, securities
transfer, cash management, investment management and other financial and
fiduciary services. The Depositor, the Sponsor, the Servicer, the Originator and
the Underwriter may maintain banking and other commercial relationships with
Wells Fargo Bank and its affiliates.
The Trustee's principal corporate trust offices are located at 9062 Old
Annapolis Road, Columbia, Maryland 21045-1951 and its office for certificate
transfer services is located at Sixth Street and Marquette Avenue, Minneapolis,
Minnesota 55479 (together, the "CORPORATE TRUST OFFICE").
S-35
Wells Fargo Bank has provided corporate trust services since 1934.
Wells Fargo Bank acts as a trustee for a variety of transactions and asset
types, including corporate and municipal bonds, mortgage-backed and asset-backed
securities and collateralized debt obligations. As of November 30, 2005, Wells
Fargo Bank was acting as trustee on more than 1,500 series of residential
mortgage-backed securities with an aggregate principal balance of approximately
$570,000,000,000.
Under the terms of the Pooling and Servicing Agreement, the Trustee
also is responsible for securities administration, which includes pool
performance calculations, distribution calculations and the preparation of
monthly distribution reports. As securities administrator, the Trustee is
responsible for the preparation and filing of tax returns on behalf of the Trust
and the preparation of monthly reports on Form 10-D (based on information
included in the monthly distribution date statements and other information
provided by other transaction parties), current reports on Form 8-K and annual
reports on Form 10-K that are required to be filed with the Commission on behalf
of the Trust and the Depositor will be required to sign any such monthly or
annual reports. Wells Fargo Bank has been engaged in the business of securities
administration since June 1995. As of November 30, 2005, it was acting as
securities administrator with respect to more than $700,000,000,000 of
outstanding residential mortgage-backed securities.
Wells Fargo Bank will act as custodian of the Mortgage Files pursuant
to the Pooling and Servicing Agreement. In that capacity, Wells Fargo Bank is
responsible for holding and safeguarding the mortgage notes and other contents
of the Mortgage Files on behalf of the Trustee and the Certificateholders. Wells
Fargo Bank maintains each mortgage file in a separate file folder marked with a
unique bar code to assure loan-level file integrity and to assist in inventory
management. Files are segregated by transaction or investor. Wells Fargo Bank
has been engaged in the mortgage document custody business for more than 25
years. Wells Fargo Bank maintains document custody facilities in its
Minneapolis, Minnesota headquarters and in three regional offices located in
Richfield, Minnesota, Irvine, California, and Salt Lake City, Utah. Wells Fargo
Bank maintains mortgage custody vaults in each of those locations with an
aggregate capacity of over eleven million files. As of November 30, 2005, Wells
Fargo Bank was acting as custodian on more than nine million files.
Wells Fargo Bank serves or has served within the past two years as loan
file custodian for various mortgage loans owned by the Sponsor or an affiliate
of the Sponsor and anticipates that one or more of those mortgage loans may be
included in the Trust. The terms of the custodial agreement under which those
services are provided by Wells Fargo Bank are customary for the mortgage-backed
securitization industry and provide for the delivery, receipt, review and
safekeeping of mortgage loan files.
See "Description of the Agreements--Material Terms of the Pooling and
Servicing Agreements and Underlying Servicing Agreements" in the prospectus for
more information about the Trustee and its obligations and rights (including its
right to indemnity and reimbursement in certain circumstances) under the Pooling
and Servicing Agreement.
THE CREDIT RISK MANAGER
Clayton Fixed Income Services Inc. (formerly known as The Murrayhill
Company), a Colorado corporation, will act as the Credit Risk Manager. In 1997,
the Credit Risk Manager created the business of independent, third-party
transaction oversight for the fixed income industry. The Credit Risk Manager's
credit risk management portfolio consists of more than $1 trillion in original
principal balance across more than 400 MBS transactions of various collateral
types, including prime, Alt-A, subprime, scratch and dent, manufactured housing,
and HELOCs. The Credit Risk Manager's credit risk management process enhances
transaction performance through loan-level exception management and transaction
oversight.
The Credit Risk Manager will not be responsible for performing any
servicing or administrative functions with respect to the Mortgage Loans, but
rather will perform certain advisory functions in accordance with the provisions
of the credit risk management agreement with the Servicer. These oversight
functions are provided on an exception management basis and aim to identify and
monitor problems in the areas of underwriting, collateral, reporting, and
servicing of the Mortgage Loans, and may include the monitoring and/or making of
recommendations to the Servicer regarding certain Mortgage Loans. The Credit
Risk Manager's advice is made in the form of recommendation only, and the Credit
Risk Manager does not have the right to direct the Servicer to take any specific
S-36
course of action. The Servicer may accept or reject a recommendation of the
Credit Risk Manager, in its sole discretion.
The Credit Risk Manager will enter into a consulting Agreement, dated
as of the Closing Date, with the Depositor to provide such consulting and
advisory services, including monthly prepayment analysis, mortgage insurance
claims analysis, realized loss analysis, delinquency review, bankruptcy,
repayment, REO and foreclosure analysis, delinquency trends, and periodic
servicer reviews.
The Credit Risk Manager will enter into a credit risk management
agreement, dated as of the Closing Date, with the Servicer. The credit risk
management agreement requires the Servicer to provide the Credit Risk Manager
certain information on the Mortgage Loans and/or access to its servicing
personnel.
The Credit Risk Manager will be entitled to receive the Credit Risk
Manager Fee until the termination of the Trust or until its removal by a vote of
at least 66 2/3% of the Certificateholders by Voting Rights.
THE POOLING AND SERVICING AGREEMENT
GENERAL
The Certificates will be issued pursuant to the Pooling and Servicing
Agreement, dated as of February 1, 2006 (the "POOLING AND SERVICING AGREEMENT"),
among the Depositor, the Servicer and the Trustee. The "TRUST FUND" created
under the Pooling and Servicing Agreement will consist of (i) all of the
Depositor's right, title and interest in the Mortgage Loans, the related
mortgage notes, mortgages and other related documents, (ii) all payments on or
collections in respect of the Mortgage Loans due after the Cut-off Date,
together with any proceeds thereof, (iii) any Mortgaged Properties acquired on
behalf of Certificateholders by foreclosure or by deed in lieu of foreclosure,
and any revenues received thereon, (iv) the Cap Carryover Reserve Account, (v)
the right to any Net Swap Payment and any Swap Termination Payment made by the
Swap Provider and deposited into the Swap Account, (vi) the rights of the
Trustee under all insurance policies required to be maintained pursuant to the
Pooling and Servicing Agreement and (vii) the rights of the Depositor under the
Originator Mortgage Loan Purchase Agreement and the Mortgage Loan Purchase
Agreement. The Offered Certificates will be transferable and exchangeable at the
corporate trust office of the Trustee. The prospectus contains important
additional information regarding the terms and conditions of the Pooling and
Servicing Agreement.
ASSIGNMENT OF THE MORTGAGE LOANS
On the Closing Date the Depositor will transfer to the Trust Fund all
of its right, title and interest in and to each Mortgage Loan, the related
mortgage notes, mortgages and other related documents (to the extent required to
be delivered to the Sponsor under the Originator Mortgage Loan Purchase
Agreement, collectively, the "RELATED DOCUMENTS"), including all scheduled
payments with respect to each such Mortgage Loan due after the Cut-off Date. The
Trustee, concurrently with such transfer, will deliver the Certificates to the
Depositor. Each Mortgage Loan transferred to the Trust Fund will be identified
on a schedule (the "MORTGAGE LOAN SCHEDULE") delivered to the Trustee pursuant
to the Pooling and Servicing Agreement. The Mortgage Loan Schedule will include
information such as the Principal Balance of each Mortgage Loan as of the
Cut-off Date, its Mortgage Interest Rate as well as other information.
The Pooling and Servicing Agreement will require that the Depositor
deliver or cause to be delivered to the Trustee on behalf of the
Certificateholders (or a custodian, as the Trustee's agent for such purpose) the
mortgage notes endorsed in blank and the Related Documents. In lieu of delivery
of original mortgages or mortgage notes, if such original is not available or
lost, the Depositor may deliver or cause to be delivered true and correct copies
thereof, or, with respect to a lost mortgage note, a lost note affidavit
executed by the Sponsor or the Originator.
Unless otherwise required by a Rating Agency, assignments of the
Mortgage Loans to the Trustee (or its nominee) will not be recorded in any
jurisdiction, but will be delivered to the Trustee in recordable form, so that
they can be recorded in the event recordation is necessary in connection with
the servicing of a Mortgage Loan. In addition, assignments of the Mortgage Loans
will not be recorded with respect to any Mortgage which has been
S-37
recorded in the name of Mortgage Electronic Registration Systems, Inc. ("MERS")
or its designee. With respect to any Mortgage which has been recorded in the
name of MERS or its designee, no mortgage assignment in favor of the Trustee
will be required to be prepared or delivered. Instead, the Servicer will be
required to take all actions as are necessary to cause the Trust to be shown as
the owner of the related Mortgage Loan on the records of MERS for purposes of
the system of recording transfers of beneficial ownerships of mortgages
maintained by MERS.
Within 60 days following the Closing Date, the Trustee will review (or
cause a custodian to review) the Mortgage Loans and the Related Documents
pursuant to the Pooling and Servicing Agreement to determine if the Related
Documents are in its possession, have not been mutilated, damaged or torn,
relate to such Mortgage Loans and that certain information set forth in the
Mortgage Loan Schedule (such as balance and loan identification number)
accurately reflects information set forth in the Mortgage File, and if any
Mortgage Loan or Related Document is found not to conform to these review
criteria and such defect has a material and adverse effect on the
Certificateholders and is not cured within 120 days following notification
thereof to the Sponsor (or within 90 days of the earlier of the Sponsor's
discovery or receipt of notification if such defect would cause the Mortgage
Loan not to be a "qualified mortgage" for REMIC purposes), the Sponsor will be
obligated to either (i) substitute for that 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 any of the
REMICs comprising the Trust Fund as a REMIC or result in a prohibited
transaction tax under the Code or (ii) purchase such Mortgage Loan at a price
(the "PURCHASE PRICE") equal to the outstanding Principal Balance of such
Mortgage Loan as of the date of purchase, plus all accrued and unpaid interest
thereon, computed at the Mortgage Interest Rate through the end of the calendar
month in which the purchase is effected, plus the amount of any unpaid servicing
fees (without duplication) and unreimbursed Advances and Servicing Advances made
by the Servicer. If, however, a Mortgage Loan is discovered to be defective in a
manner that would cause it to be a "defective obligation" within the meaning of
Treasury regulations relating to REMICs, the Sponsor will be obligated to cure
the defect or make the required purchase or substitution no later than 90 days
after the earlier of its discovery or receipt of notification of the defect. The
Purchase Price will be deposited in the Collection Account on or prior to the
next succeeding Determination Date after such obligation arises. The obligation
of the Sponsor to repurchase or substitute for a Defective Mortgage Loan is the
sole remedy regarding any defects in the Mortgage Loans and Related Documents
available to the Trustee or the Certificateholders.
In connection with the substitution of an Eligible Substitute Mortgage
Loan, the Originator or the Sponsor, as the case may be, will be required to
deposit in the Collection Account on or prior to the next succeeding
Determination Date after such obligation arises an amount (the "SUBSTITUTION
ADJUSTMENT") equal to the excess of the Purchase Price of the related Defective
Mortgage Loan over the Principal Balance (plus one month's interest on such
balance) of such Eligible Substitute Mortgage Loan.
An "ELIGIBLE SUBSTITUTE MORTGAGE LOAN" is a mortgage loan substituted
by the Originator or the Sponsor, as applicable, for a Defective Mortgage Loan
which generally 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 the Principal Balance of the Defective Mortgage Loan; (ii) be of the
same type (fixed-rate or adjustable-rate) and have a Mortgage Interest Rate not
less than the Mortgage Interest Rate of the Defective Mortgage Loan and not more
than 2% in excess of the Mortgage Interest Rate of such Defective Mortgage Loan
and, with respect to an Adjustable-Rate Mortgage Loan, have the same Index as
the Defective Mortgage Loan and have a Gross Margin equal to or greater than the
Defective Mortgage Loan; (iii) have a Credit Score not less than the Defective
Mortgage Loan; (iv) have a remaining term to maturity not more than one year
earlier and not later than the remaining term to maturity of the Defective
Mortgage Loan; (v) comply with each representation and warranty as to the
Mortgage Loans set forth in the Originator Mortgage Loan Purchase Agreement and
the Mortgage Loan Purchase Agreement (deemed to be made as of the date of
substitution); (vi) have a prepayment charge at least equal to that prepayment
charge, if any, on the Defective Mortgage Loan; and (vii) have a Loan-to-Value
Ratio not greater than that of the Defective Mortgage Loan.
Under the terms of the Originator Mortgage Loan Purchase Agreement, the
Originator made certain representations and warranties with respect to the
Mortgage Loans as of November 29, 2005, December 29, 2005 and January 31, 2006,
as applicable, which will be assigned by the Sponsor to the Depositor, and by
the Depositor to the Trustee for the benefit of the Certificateholders. Within
90 days following its discovery of a breach of any representation or warranty
that materially or adversely affects the interests of Certificateholders in a
Mortgage Loan,
S-38
or receipt of notice of such breach, the Originator will be obligated to cure
such breach or purchase the affected Mortgage Loan from the Trust for the
Purchase Price (or, in certain circumstances, to substitute an Eligible
Substitute Mortgage Loan). In addition to the foregoing, if the breach involves
the Originator's representation that the Mortgage Loan complies with any and all
requirements of federal, state or local law with respect to the origination of
such Mortgage Loan, including, without limitation, usury, truth in lending, real
estate settlement procedures, consumer credit protection, equal credit
opportunity, predatory and abusive lending laws or disclosure laws applicable to
the Mortgage Loans, the Originator will be obligated to reimburse the Trust for
all costs or damages incurred by the Trust as a result of the violation of such
representation (such amount, the "REIMBURSEMENT AMOUNT").
Pursuant to the terms of the Mortgage Loan Purchase Agreement, the
Sponsor will make to the Depositor (and the Depositor will assign to the Trustee
for the benefit of the Certificateholders) only certain limited representations
and warranties as of the Closing Date such as: (i) the accuracy of the Mortgage
Loan Schedule; (ii) the payment and delinquency status of each Mortgage Loan;
(iii) at the time of transfer to the Depositor, the Sponsor has transferred or
assigned all of its right, title and interest in each Mortgage Loan and the
Related Documents, free of any lien; (iv) each Mortgage Loan complies with any
and all requirements of any federal, state or local law with respect to the
origination of such Mortgage Loan including, without limitation, usury, truth in
lending, real estate settlement procedures, consumer credit protection, equal
credit opportunity, predatory and abusive lending laws or disclosure laws
applicable to the Mortgage Loans; and (v) each Mortgaged Property securing the
Mortgage Loans is in good repair and is undamaged so as not to affect adversely
the value of the Mortgaged Property as security for the Mortgage Loan or the use
for which the premises was intended. In the event of a breach of any such
representation or warranty that does not constitute a breach of any
representation or warranty made by the Originator as described above, the
Sponsor will be obligated in the same matter as the Originator to cure such
breach or purchase the affected Mortgage Loans, as described above. In addition
to the foregoing, if a breach of the representation set forth in clause (iv)
occurs, the Sponsor will be obligated to remit to the Trust any Reimbursement
Amount which the Originator fails to pay.
To the extent that any fact, condition or event with respect to a
Mortgage Loan constitutes a breach of both a representation and warranty of the
Originator under the Originator Mortgage Loan Purchase Agreement, and a breach
of a representation and warranty of the Sponsor under the Mortgage Loan Purchase
Agreement, then the only right or remedy of the Trustee or any Certificateholder
will be the Trustee's right to enforce the obligations of the Originator under
the Originator Mortgage Loan Purchase Agreement, and there will be no remedy
against the Sponsor for such breaches (other than the Sponsor's obligation to
remit to the Trust any Reimbursement Amount which the Originator fails to pay).
Mortgage Loans required to be transferred to the Originator or the
Sponsor as described in the preceding paragraphs are referred to as "DEFECTIVE
MORTGAGE LOANS."
PAYMENTS ON MORTGAGE LOANS; DEPOSITS TO COLLECTION ACCOUNT AND DISTRIBUTION
ACCOUNT
The Servicer will establish and maintain or cause to be maintained a
separate trust account (the "COLLECTION ACCOUNT") for the benefit of the holders
of the Certificates. The Collection Account will be an Eligible Account (as
defined below). Upon receipt by the Servicer of amounts in respect of the
Mortgage Loans (excluding amounts representing the Servicing Fee or other
servicing compensation, reimbursement for Advances and Servicing Advances,
insurance proceeds to be applied to the restoration or repair of a Mortgaged
Property or similar items), the Servicer will be required to deposit such
amounts in the Collection Account. Amounts so deposited may be invested in
certain investments acceptable to the Rating Agencies maturing no later than one
Business Day prior to the date on which the amount on deposit therein is
required to be deposited in the Distribution Account. A "BUSINESS DAY" is any
day other than a Saturday, a Sunday or a day on which banking institutions in
the State of New York or in the state in which the corporate trust office of the
Trustee or the servicing operations of the Servicer is located are authorized or
obligated by law or executive order to be closed. The Trustee will establish an
account (the "DISTRIBUTION ACCOUNT") into which the Trustee will deposit, upon
receipt on the servicer remittance date preceding each Distribution Date,
amounts withdrawn from the Collection Account and remitted to it by the Servicer
for distribution to Certificateholders on such Distribution Date. The
Distribution Account will be an Eligible Account. Amounts on deposit in the
Distribution Account may be invested in eligible investments maturing on or
S-39
before the Business Day prior to the related Distribution Date unless invested
in investments managed or advised by the Trustee or an affiliate, in which case
the eligible investments may mature on the related Distribution Date.
An "ELIGIBLE ACCOUNT" is a segregated account that is (i) an account or
accounts maintained with a federal or state chartered depository institution or
trust company the short-term unsecured debt obligations of which (or, in the
case of a depository institution or trust company that is the principal
subsidiary of a holding company, the short-term unsecured debt obligations of
such holding company) are rated "A-1" (or the equivalent) by each of S&P, Fitch
and Moody's (collectively, the "RATING AGENCIES") at the time any amounts are
held on deposit therein, (ii) an account or accounts the deposits in which are
fully insured by the Federal Deposit Insurance Corporation (to the limits
established by such corporation), the uninsured deposits in which account are
otherwise secured such that, as evidenced by an opinion of counsel delivered to
the Trustee and to each Rating Agency, the Certificateholders will have a claim
with respect to the funds in such account or a perfected first priority security
interest against such collateral (which shall be limited to eligible
investments) securing such funds that is superior to claims of any other
depositors or creditors of the depository institution with which such account is
maintained, (iii) a trust account or accounts maintained with the trust
department of a federal or state chartered depository institution, national
banking association or trust company acting in its fiduciary capacity or (iv)
otherwise acceptable to each Rating Agency without reduction or withdrawal of
their then current ratings of the Certificates as evidenced by a letter from
each Rating Agency to the Trustee. Eligible investments are specified in the
Pooling and Servicing Agreement and are limited to investments which meet the
criteria of the Rating Agencies from time to time as being consistent with their
then current ratings of the Offered Certificates.
ADVANCES
Subject to the following limitations, the Servicer will be obligated to
advance or cause to be advanced on each servicer remittance date from its own
funds, or funds in the Collection Account that are not included in the Available
Funds for such Distribution Date, or a combination of both, an amount equal to
the aggregate of all payments of principal and interest, net of the Servicing
Fee, that were due during the related Collection Period on the Mortgage Loans,
other than Balloon Payments, and that were not received by the related
Determination Date (any such advance, an "ADVANCE").
Advances with respect to Mortgage Loans are required to be made only to
the extent the Servicer deems them to be recoverable from related late
collections, insurance proceeds, condemnation proceeds or liquidation proceeds.
The purpose of making such Advances is to maintain a regular cash flow to the
Certificateholders, rather than to guarantee or insure against losses. The
Servicer will not be required, however, to make any Advances with respect to
reductions in the amount of the Monthly Payments on the Mortgage Loans due to
bankruptcy proceedings or the application of the Servicemembers Civil Relief Act
(the "RELIEF ACT") or similar state laws. Subject to the recoverability standard
above, the Servicer's obligation to make Advances as to any Mortgage Loan will
continue until such Mortgage Loan is paid in full by the mortgagor or disposed
of by the Trust.
All Advances will be reimbursable to the Servicer from late
collections, insurance proceeds, condemnation proceeds and liquidation proceeds
from the Mortgage Loan as to which such unreimbursed Advance was made. In
addition, any Advances previously made in respect of any Mortgage Loan that the
Servicer deems to be nonrecoverable from related late collections, insurance
proceeds, condemnation proceeds or liquidation proceeds may be reimbursed to the
Servicer out of general funds in the Collection Account prior to the
distributions on the Certificates. In addition, the Servicer may withdraw from
the Collection Account funds that were not included in Available Funds for the
preceding Distribution Date to reimburse itself for Advances previously made. In
the event the Servicer fails in its obligation to make any such Advance, the
Trustee, in its capacity as successor servicer, or a successor servicer
appointed by the Trustee, will be obligated to make any such Advance, to the
extent required in the Pooling and Servicing Agreement.
In the course of performing its servicing obligations, the Servicer
will pay all reasonable and customary "out-of-pocket" costs and expenses
incurred in the performance of its servicing obligations, including, but not
limited to, the cost of (i) the preservation, restoration, inspection 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."
S-40
The Servicer's right to reimbursement for Servicing Advances is limited
to late collections on the related Mortgage Loan, including liquidation
proceeds, released mortgaged property proceeds, insurance proceeds, condemnation
proceeds and such other amounts the Servicer may collect from the related
mortgagor or otherwise relating to the Mortgage Loan in respect of which such
unreimbursed amounts are owed, unless such amounts are deemed to be
nonrecoverable by the Servicer, in which event reimbursement will be made to the
Servicer from general funds in the Collection Account.
The Pooling and Servicing Agreement may provide that the Servicer, with
the consent of the parties to the Pooling and Servicing Agreement, may enter
into a facility with any person which provides that such person (an "ADVANCING
PERSON") may fund Advances and/or Servicing Advances, although no facility may
reduce or otherwise affect the Servicer's obligation to fund such Advances
and/or Servicing Advances. Any Advances and/or Servicing Advances made by an
Advancing Person will be reimbursed to the Advancing Person in the same manner
as reimbursements would be made to the Servicer.
COMPENSATION AND PAYMENT OF EXPENSES OF THE SERVICER, THE TRUSTEE AND THE CREDIT
RISK MANAGER
The principal compensation to the Servicer will be a fee (the
"SERVICING FEE") payable monthly by the Trust equal to 1/12th of 0.500% (the
"SERVICING FEE RATE") in respect of its servicing activities for the
Certificates. The Servicing Fee will accrue on the aggregate Principal Balance
of the Mortgage Loans as of the first day of each month.
The principal compensation to be paid to the Trustee in respect of its
obligations under the Pooling and Servicing Agreement will be all investment
earnings on funds on deposit in the Distribution Account.
The Credit Risk Manager will be entitled to receive a fee (the "CREDIT
RISK MANAGER FEE") until the termination of the Trust Fund or until its removal
by a vote of at least 66-2/3% of the Certificateholders by Voting Rights. This
fee will be paid monthly by the Trust equal to 1/12th of 0.015% (the "CREDIT
RISK MANAGER FEE RATE"). The Credit Risk Manager Fee will accrue on the
aggregate Principal Balance of the Mortgage Loans as of the first day of each
month.
The Servicing Fee for the Mortgage Loans will be retained by the
Servicer out of the interest payments on the Mortgage Loans, prior to any
distributions to Certificateholders. The Credit Risk Manager Fee will be paid
from the Interest Remittance Amount (as described under "Description of the
Certificates--Interest Distributions") to the Credit Risk Manager for its
services prior to any distributions to Certificateholders.
In the event the Trustee succeeds to the role of Servicer, it will be
entitled to the same Servicing Fee as the predecessor servicer and if the
Trustee appoints a successor servicer under the Pooling and Servicing Agreement,
the Trustee may make such arrangements for the compensation of such successor
out of the payments on the Mortgage Loans serviced by the predecessor Servicer
as it and such successor shall agree, not to exceed the Servicing Fee Rate. As
additional servicing compensation, the Servicer is entitled to retain all
service-related fees, including assumption fees, modification fees, extension
fees, bad check fees, late payment charges and Prepayment Interest Excess, to
the extent collected from mortgagors, together with any interest or other income
earned on funds held in the Collection Account and any escrow accounts. The
Servicer is obligated to offset any Prepayment Interest Shortfall resulting from
a principal prepayment in full on the Mortgage Loans on any Distribution Date
(payments made by the Servicer in satisfaction of such obligation, "COMPENSATING
INTEREST") by an amount not in excess of the sum of its Servicing Fee and any
Prepayment Interest Excess for such Distribution Date. The Servicer is generally
obligated to pay expenses incurred by it in connection with its responsibilities
under the Pooling and Servicing Agreement, unless these expenses constitute
Servicing Advances as described above under "--Advances." These expenses,
including the fees of any subservicer hired by the Servicer, will be paid by the
Servicer out of its own funds, without reimbursement.
"PREPAYMENT INTEREST EXCESS" with respect to any Distribution Date will
be for each Mortgage Loan that was the subject of a principal prepayment in full
during the portion of the related Prepayment Period beginning on the first day
of the calendar month in which such Distribution Date occurs through the
Determination Date of the calendar month in which such Distribution Date occurs,
an amount equal to interest (to the extent received) at the applicable Mortgage
Interest Rate (net of the Servicing Fee Rate) on the amount of such principal
prepayment for
S-41
the number of days commencing on the first day of the calendar month in which
such Distribution Date occurs and ending on the date on which such prepayment is
so applied.
With respect to any Determination Date and each Mortgage Loan as to
which a principal prepayment in full was applied during the portion of the
related Prepayment Period occurring in the prior calendar month or as to which a
partial prepayment received during the portion of the related Prepayment Period
occurring in the prior calendar month is applied during such prior calendar
month, the "PREPAYMENT INTEREST SHORTFALL" is an amount equal to the interest at
the Mortgage Interest Rate for such Mortgage Loan (net of the Servicing Fee
Rate) on the amount of such principal prepayment for the number of days
commencing on the date on which the principal prepayment is applied and ending
on the last day of the calendar month in which applied.
The Trustee is obligated to pay routine ongoing expenses incurred by it
in connection with its responsibilities under the Pooling and Servicing
Agreement. Those amounts will be paid by the Trustee out of its own funds,
without reimbursement.
The Depositor, the Servicer and the Trustee are entitled to
indemnification and reimbursement of certain expenses from the Trust under the
Pooling and Servicing Agreement as discussed in the prospectus under the
headings "The Depositor," "Description of the Agreements--Material Terms of the
Pooling and Servicing Agreements and Underlying Servicing Agreements--Certain
Matters Regarding Servicers and the Master Servicer" and "--Certain Matters
Regarding the Trustee."
OPTIONAL TERMINATION
The NIMS Insurer, if there is a NIMS Insurer, or if there is no NIMS
Insurer, the majority holder of the Class CE Certificates or, if (i) such holder
is the Sponsor or is affiliated with the Sponsor or (ii) there is no majority
holder of the Class CE Certificates, the Servicer, will have the right to
purchase all of the Mortgage Loans and REO Properties in the Trust Fund and
thereby effect the early retirement of the Certificates, on any Distribution
Date on which the aggregate Principal Balance of such Mortgage Loans and REO
Properties is 10% or less of the aggregate Principal Balance of the Mortgage
Loans as of the Cut-off Date. The first Distribution Date on which such option
could be exercised is referred to herein as the "OPTIONAL TERMINATION DATE." In
the event that the option is exercised, the purchase will be made at a price
(the "TERMINATION PRICE") generally equal to the sum of (x) par plus accrued
interest for each Mortgage Loan at the related Mortgage Interest Rate to but not
including the first day of the month in which such purchase price is distributed
plus the amount of any unpaid Servicing Fees, any unreimbursed Advances and
Servicing Advances made by the Servicer and any amounts due to the Trustee and
(y) any Swap Termination Payment owed to the Swap Provider not due to a Swap
Provider Trigger Event pursuant to the Interest Rate Swap Agreement. If any of
the parties listed above is subject to regulation by the OCC, the FDIC, the
Federal Reserve or the Office of Thrift Supervision, however, such entity may
not exercise this option unless the aggregate fair market value of the Mortgage
Loans and REO Properties is greater than or equal to the Termination Price. In
addition, no option may be exercised until any due and unpaid Reimbursement
Amounts have been paid to the Trust. Proceeds from such purchase will be
included in Available Funds and will be distributed to the holders of the
Certificates in accordance with the Pooling and Servicing Agreement. Any such
purchase of Mortgage Loans and REO Properties will result in the early
retirement of the Certificates. Any such optional termination will be permitted
only pursuant to a "qualified liquidation" as defined in Section 860F of the
Code.
In connection with the issuance of any net interest margin securities
secured by all or a portion of the Class CE and Class P Certificates, a party
may agree to refrain from exercising this option while those securities are
outstanding.
EVENTS OF SERVICING TERMINATION
Events of servicing termination will consist, among other things, of:
(i) any failure by the Servicer to deposit in the Collection Account the
required amounts or remit to the Trustee for deposit in the Distribution Account
any payment which continues unremedied for one Business Day after the first date
on which (x) the Servicer has knowledge of such failure or (y) written notice of
such failure is given to the Servicer; (ii) any failure of the Servicer to make
any Advance with respect to a Mortgage Loan or to cover any Prepayment Interest
Shortfalls on Mortgage Loans, as described herein, which failure continues
unremedied for one Business Day after the first
S-42
date on which (x) the Servicer has knowledge of such failure or (y) written
notice of such failure is given to the Servicer; (iii) any failure by the
Servicer to observe or perform in any material respect any other of its
covenants or agreements in the Pooling and Servicing Agreement, which continues
unremedied for 30 days after the first date on which (x) the Servicer has
knowledge of such failure or (y) written notice of such failure is given to the
Servicer; or (iv) insolvency, readjustment of debt, marshalling of assets and
liabilities or similar proceedings, and certain actions by or on behalf of the
Servicer indicating its insolvency or inability to pay its obligations.
RIGHTS UPON EVENT OF SERVICING TERMINATION
So long as an event of servicing termination (as defined in the Pooling
and Servicing Agreement) remains unremedied, the Trustee may, and at the
direction of the holders of the Certificates evidencing not less than 51% of the
Voting Rights is required to, terminate all of the rights and obligations of the
Servicer in its capacity as servicer with respect to the Mortgage Loans, as
provided in the Pooling and Servicing Agreement, whereupon the Trustee will
succeed to (or appoint a successor servicer to assume) all of the
responsibilities and duties of the Servicer pursuant to the Pooling and
Servicing Agreement, including the obligation to make any required Advances and
Servicing Advances. No assurance can be given that termination of the rights and
obligations of the Servicer under the Pooling and Servicing Agreement would not
adversely affect the servicing of the related Mortgage Loans, including the
delinquency experience of such Mortgage Loans.
VOTING RIGHTS
With respect to any date of determination, the percentage of all the
Voting Rights allocated among holders of the Certificates (other than the Class
CE, Class P and Class R Certificates) will be 98% and will be allocated among
the classes of such Certificates in the proportion that the aggregate
Certificate Principal Balance of all the Certificates of such class then
outstanding bear to the aggregate Certificate Principal Balance of all
Certificates then outstanding. With respect to any date of determination, 1% of
all the Voting Rights will be allocated to the holders of each of the Class CE
and Class P Certificates. The Voting Rights allocated to a class of Certificates
will be allocated among all holders of each such class in proportion to the
outstanding certificate balances (or percentage interest) of such Certificates.
The Class R Certificate will not have any Voting Rights.
No holder of an Offered Certificate, solely by virtue of such holder's
status as a holder of an Offered Certificate, will have any right under the
Pooling and Servicing Agreement to institute any proceeding with respect
thereto, unless such holder previously has given to the Trustee written notice
of default and unless the holders of Certificates having not less than 51% of
the Voting Rights evidenced by the Certificates so agree and have offered
indemnity satisfactory to the Trustee.
AMENDMENT
The Pooling and Servicing Agreement may be amended by the Depositor,
the Servicer and the Trustee, without the consent of the holders of the
Certificates, for any of the purposes set forth under "Description of the
Agreements--Material Terms of the Pooling and Servicing Agreements and
Underlying Servicing Agreements--Amendment" in the Prospectus or to provide for
the rights of a NIMS Insurer, if any, as described under "-- Rights of the NIMS
Insurer under the Pooling and Servicing Agreement." In addition, the Pooling and
Servicing Agreement may be amended by the Depositor, the Servicer and the
Trustee and the holders of a majority in interest of any class of Certificates
affected thereby for the purpose of adding any provisions to or changing in any
manner or eliminating any of the provisions of the Pooling and Servicing
Agreement or of modifying in any manner the rights of the holders of any class
of Certificates; provided, however, that no such amendment may (i) reduce in any
manner the amount of, or delay the timing of, distributions required to be made
on any class of Certificates without the consent of the holders of such
Certificates; (ii) adversely affect in any material respect the interests of the
holders of any class of Certificates in a manner other than as described in
clause (i) above, without the consent of the holders of such class evidencing
percentage interests aggregating not less than 51% of the Voting Rights
represented by such class; (iii) reduce the aforesaid percentage of aggregate
outstanding principal amounts of Certificates, the holders of which are required
to consent to any such amendment, without the consent of the holders of all such
Certificates; or (iv) cause any of the REMICs created thereunder to be
disqualified as a REMIC or result in a prohibited transaction or contribution
tax under the Code on any REMIC created thereunder unless an indemnification is
provided for such tax.
S-43
RIGHTS OF THE NIMS INSURER UNDER THE POOLING AND SERVICING AGREEMENT
After the Closing Date, a separate trust may be established to issue
net interest margin securities secured by all or a portion of the Class CE and
Class P Certificates. Those net interest margin securities may or may not have
the benefit of a financial guaranty insurance policy. If a policy is obtained,
the NIMS Insurer that issues that policy will be a third party beneficiary of
the Pooling and Servicing Agreement and will have a number of rights under the
Pooling and Servicing Agreement, including the following:
o the right to consent to the Servicer's exercise of its discretion
to waive assumption fees, late payment or other charges in
connection with a Mortgage Loan or to arrange for the extension of
Due Dates for payments due on a mortgage note for no more than 125
days, if the waivers or extensions relate to more than 5% of the
Mortgage Loans as of the Cut-off Date;
o the right to direct the Trustee to terminate all of the rights and
obligations of the Servicer under the Pooling and Servicing
Agreement relating to the Trust Fund and the assets of the Trust
Fund following the occurrence of an event of servicing termination
under the Pooling and Servicing Agreement;
o the right to approve or reject the appointment of any successor
servicer other than the Trustee, if the Servicer is required to be
replaced and the Trustee is unwilling or unable to act as
successor servicer;
o the right to remove the Trustee or any co-trustee pursuant to the
Pooling and Servicing Agreement;
o the right to direct the Trustee to make investigations and take
actions pursuant to the Pooling and Servicing Agreement;
o the right to consent to any amendment to the Pooling and Servicing
Agreement; and
o the right to purchase all of the Mortgage Loans and REO Properties
in the Trust Fund and thereby effect the early retirement of the
Certificates under the circumstances set forth under "The Pooling
and Servicing Agreement--Optional Termination" in this prospectus
supplement.
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Certificates will consist of (i) the fourteen classes of Offered
Certificates listed in the table beginning on page S-3 of this prospectus
supplement and (ii) the Class CE, Class P and Class R Certificates.
The Offered Certificates will be issuable in the forms and
denominations set forth in the table beginning on page S-3. The Offered
Certificates are not intended to be and should not be directly or indirectly
held or beneficially owned in amounts lower than the minimum denominations in
the table.
ALLOCATION OF AVAILABLE FUNDS
Distributions to holders of each class of Offered Certificates will be
made on each Distribution Date from Available Funds. "AVAILABLE FUNDS" will be
equal to the sum of the following amounts with respect to the Mortgage Loans,
net of amounts reimbursable or payable to the Servicer, including amounts in
respect of indemnification of the Servicer, the Servicing Fee and any accrued
and unpaid Servicing Fee and amounts payable to the Trustee and Credit Risk
Manager in respect of certain expenses and indemnification and any amounts
payable to the Swap Provider (including any Net Swap Payment and any Swap
Termination Payment owed to the Swap Provider but excluding any Swap Termination
Payment owed to the Swap Provider resulting from a Swap Provider Trigger Event):
(i) the aggregate amount of Monthly Payments on the Mortgage Loans due during
the related Collection Period and received by the Servicer on or prior to the
related Determination Date, (ii) certain unscheduled payments in respect of the
Mortgage Loans, including prepayments (but excluding any prepayment charges and
Prepayment Interest Excess), insurance proceeds, Subsequent Recoveries,
condemnation proceeds and liquidation
S-44
proceeds, net of certain expenses, received during the related Prepayment
Period, (iii) payments from the Servicer in connection with Advances and
Compensating Interest for such Distribution Date, (iv) the Purchase Price for
any repurchased Mortgage Loan deposited to the Collection Account during the
related Prepayment Period, (v) any Substitution Adjustments deposited in the
Collection Account during the related Prepayment Period, (vi) any Reimbursement
Amount deposited to the Collection Account during the related Prepayment Period
and (vii) on the Distribution Date on which the Trust is to be terminated in
accordance with the Pooling and Servicing Agreement, the Termination Price.
INTEREST DISTRIBUTIONS
On each Distribution Date, based upon the information provided to it in
a remittance report prepared by the Servicer, the Trustee will distribute the
Interest Remittance Amount in the following order of priority to the extent
available:
first, to the Credit Risk Manager, the Credit Risk Manager Fee;
second, concurrently, to the Class A Certificates, pro rata, the
Accrued Certificate Interest thereon for such Distribution Date;
third, concurrently, to the Class A Certificates, pro rata, the
Interest Carry Forward Amount thereon for such Distribution Date;
fourth, to the Class M-1 Certificates, the Accrued Certificate Interest
thereon for such Distribution Date;
fifth, to the Class M-2 Certificates, the Accrued Certificate Interest
thereon for such Distribution Date;
sixth, to the Class M-3 Certificates, the Accrued Certificate Interest
thereon for such Distribution Date;
seventh, to the Class M-4 Certificates, the Accrued Certificate
Interest thereon for such Distribution Date;
eighth, to the Class M-5 Certificates, the Accrued Certificate Interest
thereon for such Distribution Date;
ninth, to the Class M-6 Certificates, the Accrued Certificate Interest
thereon for such Distribution Date;
tenth, to the Class M-7 Certificates, the Accrued Certificate Interest
thereon for such Distribution Date;
eleventh, to the Class M-8 Certificates, the Accrued Certificate
Interest thereon for such Distribution Date;
twelfth, to the Class M-9 Certificates, the Accrued Certificate
Interest thereon for such Distribution Date;
thirteenth, to the Class M-10 Certificates, the Accrued Certificate
Interest thereon for such Distribution Date; and
fourteenth, the amount, if any, of the Interest Remittance Amount
remaining after application with respect to the priorities set forth above which
is defined below as the "Monthly Excess Interest Amount" for such Distribution
Date, will be applied as described below under "--Application of Monthly Excess
Cashflow Amounts."
On any Distribution Date, any shortfalls resulting from Prepayment
Interest Shortfalls not covered by Compensating Interest payments made by the
Servicer or from the application of the Relief Act or similar state laws will be
allocated as a reduction to the Accrued Certificate Interest for the Offered
Certificates on a pro rata basis based on the respective amounts of interest
accrued on those Certificates for that Distribution Date. The holders of the
Offered Certificates will not be entitled to reimbursement on future
Distribution Dates of any such Prepayment Interest Shortfalls or Relief Act
shortfalls following their allocation to such Certificates.
S-45
"ACCRUED CERTIFICATE INTEREST" for each Class of Offered Certificates
and each Distribution Date means an amount equal to the interest accrued during
the related Interest Accrual Period on the Certificate Principal Balance of such
class of Certificates, minus each class's Interest Percentage of Prepayment
Interest Shortfalls (not covered by Compensating Interest) and shortfalls caused
by the Relief Act or similar state laws for such Distribution Date.
The "INTEREST ACCRUAL PERIOD" for any Distribution Date and each class
of Offered Certificates will be the period from and including the preceding
Distribution Date, or in the case of the first Distribution Date, from the
Closing Date, through and including the day prior to the current Distribution
Date, and calculations of interest will be made on the basis of the actual
number of days in the Interest Accrual Period and on a 360-day year.
The "INTEREST CARRY FORWARD AMOUNT" means for any class of Offered
Certificates and any Distribution Date, the sum of (a) the excess, if any, of
the Accrued Certificate Interest and any Interest Carry Forward Amount for the
prior Distribution Date, over the amount in respect of interest actually
distributed on such class on such prior Distribution Date and (b) interest on
such excess at the applicable Certificate Interest Rate on the basis of the
actual number of days elapsed since the prior Distribution Date.
The "INTEREST PERCENTAGE" is, with respect to any class of Offered
Certificates and any Distribution Date, the ratio (expressed as a decimal
carried to six places) of the Accrued Certificate Interest for such class to the
Accrued Certificate Interest for all classes of Offered Certificates, in each
case for that Distribution Date and without regard to shortfalls caused by the
Relief Act or similar state laws.
The "INTEREST REMITTANCE AMOUNT" means as of any Distribution Date, (A)
the sum, without duplication, of (i) all interest collected or advanced with
respect to the related Collection Period on the Mortgage Loans received by the
Servicer on or prior to the Determination Date for such Distribution Date (less
the Servicing Fee for such Mortgage Loans, certain amounts available for
reimbursement of Advances and Servicing Advances with respect to such Mortgage
Loans as described above under "The Pooling and Servicing Agreement--Advances"
and certain other reimbursable expenses or indemnification payments pursuant to
the Pooling and Servicing Agreement), (ii) all Compensating Interest paid by the
Servicer on such Distribution Date with respect to the Mortgage Loans, (iii) the
portion of any payment in connection with any principal prepayment (other than
any Prepayment Interest Excess), substitution, Purchase Price, Termination
Price, liquidation proceeds (net of certain expenses) or insurance proceeds
relating to interest with respect to the Mortgage Loans received during the
related Prepayment Period and (iv) any Reimbursement Amount relating to the
Mortgage Loans received during the related Prepayment Period less (B) any
amounts payable to the Swap Provider (including any Net Swap Payment and any
Swap Termination Payment owed to the Swap Provider but excluding any Swap
Termination Payment owed to the Swap Provider resulting from a Swap Provider
Trigger Event).
PRINCIPAL DISTRIBUTIONS
For any Distribution Date (a) before the Stepdown Date or (b) as to
which a Trigger Event is in effect, the Principal Distribution Amount will be
allocated among and distributed in reduction of the Certificate Principal
Balances of the Certificates in the following order of priority:
first, to the Class A-1 Certificates, until the Certificate Principal
Balance thereof has been reduced to zero;
second, to the Class A-2 Certificates, until the Certificate Principal
Balance thereof has been reduced to zero;
third, to the Class A-3 Certificates, until the Certificate Principal
Balance thereof has been reduced to zero;
fourth, to the Class A-4 Certificates, until the Certificate Principal
Balance thereof has been reduced to zero;
fifth, to the Class M-1 Certificates, until the Certificate Principal
Balance thereof has been reduced to zero;
sixth, to the Class M-2 Certificates, until the Certificate Principal
Balance thereof has been reduced to zero;
S-46
seventh, to the Class M-3 Certificates, until the Certificate Principal
Balance thereof has been reduced to zero;
eighth, to the Class M-4 Certificates, until the Certificate Principal
Balance thereof has been reduced to zero;
ninth, to the Class M-5 Certificates, until the Certificate Principal
Balance thereof has been reduced to zero;
tenth, to the Class M-6 Certificates, until the Certificate Principal
Balance thereof has been reduced to zero;
eleventh, to the Class M-7 Certificates, until the Certificate
Principal Balance thereof has been reduced to zero;
twelfth, to the Class M-8 Certificates, until the Certificate Principal
Balance thereof has been reduced to zero;
thirteenth, to the Class M-9 Certificates, until the Certificate
Principal Balance thereof has been reduced to zero;
fourteenth, to the Class M-10 Certificates, until the Certificate
Principal Balance thereof has been reduced to zero; and
fifteenth, any remaining Principal Distribution Amount will be
distributed as part of the Monthly Excess Cashflow Amount as described below
under "--Application of Monthly Excess Cashflow Amounts."
For any Distribution Date (a) on or after the Stepdown Date and (b) as
long as a Trigger Event is not in effect, the Principal Distribution Amount will
be allocated among and distributed in reduction of the Certificate Principal
Balances of the Certificates in the following order of priority:
first, to the Class A-1 Certificates, up to the Senior Principal
Distribution Amount, until the Certificate Principal Balance thereof has been
reduced to zero;
second, to the Class A-2 Certificates, up to the Senior Principal
Distribution Amount remaining after priority first above, until the Certificate
Principal Balance thereof has been reduced to zero;
third, to the Class A-3 Certificates, up to the Senior Principal
Distribution Amount remaining after priority first and second above, until the
Certificate Principal Balance thereof has been reduced to zero;
fourth, to the Class A-4 Certificates, up to the Senior Principal
Distribution Amount remaining after priority first, second, and third above,
until the Certificate Principal Balance thereof has been reduced to zero;
fifth, to the Class M-1 Certificates, up to the Class M-1 Principal
Distribution Amount, until the Certificate Principal Balance thereof has been
reduced to zero;
sixth, to the Class M-2 Certificates, up to the Class M-2 Principal
Distribution Amount, until the Certificate Principal Balance thereof has been
reduced to zero;
seventh, to the Class M-3 Certificates, up to the Class M-3 Principal
Distribution Amount, until the Certificate Principal Balance thereof has been
reduced to zero;
eighth, to the Class M-4 Certificates, up to the Class M-4 Principal
Distribution Amount, until the Certificate Principal Balance thereof has been
reduced to zero;
ninth, to the Class M-5 Certificates, up to the Class M-5 Principal
Distribution Amount, until the Certificate Principal Balance thereof has been
reduced to zero;
S-47
tenth, to the Class M-6 Certificates, up to the Class M-6 Principal
Distribution Amount, until the Certificate Principal Balance thereof has been
reduced to zero;
eleventh, to the Class M-7 Certificates, up to the Class M-7 Principal
Distribution Amount, until the Certificate Principal Balance thereof has been
reduced to zero;
twelfth, to the Class M-8 Certificates, up to the Class M-8 Principal
Distribution Amount, until the Certificate Principal Balance thereof has been
reduced to zero;
thirteenth, to the Class M-9 Certificates, up to the Class M-9
Principal Distribution Amount, until the Certificate Principal Balance thereof
has been reduced to zero;
fourteenth, to the Class M-10 Certificates, up to the Class M-10
Principal Distribution Amount, until the Certificate Principal Balance thereof
has been reduced to zero;
fifteenth, any remaining Principal Distribution Amount will be
distributed as part of the Monthly Excess Cashflow Amount as described below
under "--Application of Monthly Excess Cashflow Amounts."
On or after the Subordination Depletion Date, all principal
distributions to the Class A Certificates will be distributed concurrently, to
the Class A-1, Class A-2, Class A-3 and Class A-4 Certificates, on a pro rata
basis, based on the Certificate Principal Balance of each such Class of
Certificates until the Certificate Principal Balances of such Certificates is
reduced to zero.
For purposes of the foregoing, the following terms will have the
respective meanings set forth below.
"60+ DAY DELINQUENT LOAN" means each Mortgage Loan (including each
Mortgage Loan in foreclosure and each Mortgage Loan for which the mortgagor has
filed for bankruptcy after the Closing Date) with respect to which any portion
of a Monthly Payment is, as of the last day of the prior Collection Period, two
months or more past due and each Mortgage Loan relating to an REO Property.
The "CERTIFICATE PRINCIPAL BALANCE" with respect to any class of
Offered Certificates and any Distribution Date, will equal the principal balance
of that class on the date of the initial issuance of the Certificates as
reduced, but not below zero, by:
o all amounts distributed on previous Distribution Dates on that
class on account of principal; and
o any Applied Realized Loss Amounts allocated to that class for
previous Distribution Dates;
and increased by:
o any Subsequent Recoveries allocated to that class for previous
Distribution Dates.
"CLASS M-1 PRINCIPAL DISTRIBUTION AMOUNT" means as of any Distribution
Date on or after the Stepdown Date and as long as a Trigger Event is not in
effect, the excess of (x) the sum of (i) the sum of the Certificate Principal
Balances of the Class A Certificates (after taking into account the payment of
the Senior Principal Distribution Amount on such Distribution Date) and (ii) the
Certificate Principal Balance of the Class M-1 Certificates immediately prior to
such Distribution Date over (y) the lesser of (a) the product of (i)
approximately 55.70% and (ii) the Pool Balance as of the last day of the related
Collection Period after giving effect to principal prepayments in the related
Prepayment Period and (b) the amount by which the Pool Balance as of the last
day of the related Collection Period after giving effect to principal
prepayments in the related Prepayment Period exceeds the product of (i) 0.50%
and (ii) the Pool Balance on the Cut-off Date.
"CLASS M-2 PRINCIPAL DISTRIBUTION AMOUNT" means as of any Distribution
Date on or after the Stepdown Date and as long as a Trigger Event is not in
effect, the excess of (x) the sum of (i) the sum of the Certificate Principal
Balances of the Class A Certificates (after taking into account the payment of
the Senior Principal
S-48
Distribution Amount on such Distribution Date), (ii) the Certificate Principal
Balance of the Class M-1 Certificates (after taking into account the payment of
the Class M-1 Principal Distribution Amount on such Distribution Date) and (iii)
the Certificate Principal Balance of the Class M-2 Certificates immediately
prior to such Distribution Date over (y) the lesser of (a) the product of (i)
approximately 64.70% and (ii) the Pool Balance as of the last day of the related
Collection Period after giving effect to principal prepayments in the related
Prepayment Period and (b) the amount by which the Pool Balance as of the last
day of the related Collection Period after giving effect to principal
prepayments in the related Prepayment Period exceeds the product of (i) 0.50%
and (ii) the Pool Balance on the Cut-off Date.
"CLASS M-3 PRINCIPAL DISTRIBUTION AMOUNT" means as of any Distribution
Date on or after the Stepdown Date and as long as a Trigger Event is not in
effect, the excess of (x) the sum of (i) the sum of the Certificate Principal
Balances of the Class A Certificates (after taking into account the payment of
the Senior Principal Distribution Amount on such Distribution Date), (ii) the
Certificate Principal Balance of the Class M-1 Certificates (after taking into
account the payment of the Class M-1 Principal Distribution Amount on such
Distribution Date), (iii) the Certificate Principal Balance of the Class M-2
Certificates (after taking into account the payment of the Class M-2 Principal
Distribution Amount on such Distribution Date) and (iv) the Certificate
Principal Balance of the Class M-3 Certificates immediately prior to such
Distribution Date over (y) the lesser of (a) the product of (i) approximately
69.10% and (ii) the Pool Balance as of the last day of the related Collection
Period after giving effect to principal prepayments in the related Prepayment
Period and (b) the amount by which the Pool Balance as of the last day of the
related Collection Period after giving effect to principal prepayments in the
related Prepayment Period exceeds the product of (i) 0.50% and (ii) the Pool
Balance on the Cut-off Date.
"CLASS M-4 PRINCIPAL DISTRIBUTION AMOUNT" means as of any Distribution
Date on or after the Stepdown Date and as long as a Trigger Event is not in
effect, the excess of (x) the sum of (i) the sum of the Certificate Principal
Balances of the Class A Certificates (after taking into account the payment of
the Senior Principal Distribution Amount on such Distribution Date), (ii) the
Certificate Principal Balance of the Class M-1 Certificates (after taking into
account the payment of the Class M-1 Principal Distribution Amount on such
Distribution Date), (iii) the Certificate Principal Balance of the Class M-2
Certificates (after taking into account the payment of the Class M-2 Principal
Distribution Amount on such Distribution Date), (iv) the Certificate Principal
Balance of the Class M-3 Certificates (after taking into account the payment of
the Class M-3 Principal Distribution Amount on such Distribution Date) and (v)
the Certificate Principal Balance of the Class M-4 Certificates immediately
prior to such Distribution Date over (y) the lesser of (a) the product of (i)
approximately 72.30% and (ii) the Pool Balance as of the last day of the related
Collection Period after giving effect to principal prepayments in the related
Prepayment Period and (b) the amount by which the Pool Balance as of the last
day of the related Collection Period after giving effect to principal
prepayments in the related Prepayment Period exceeds the product of (i) 0.50%
and (ii) the Pool Balance on the Cut-off Date.
"CLASS M-5 PRINCIPAL DISTRIBUTION AMOUNT" means as of any Distribution
Date on or after the Stepdown Date and as long as a Trigger Event is not in
effect, the excess of (x) the sum of (i) the sum of the Certificate Principal
Balances of the Class A Certificates (after taking into account the payment of
the Senior Principal Distribution Amount on such Distribution Date), (ii) the
Certificate Principal Balance of the Class M-1 Certificates (after taking into
account the payment of the Class M-1 Principal Distribution Amount on such
Distribution Date), (iii) the Certificate Principal Balance of the Class M-2
Certificates (after taking into account the payment of the Class M-2 Principal
Distribution Amount on such Distribution Date), (iv) the Certificate Principal
Balance of the Class M-3 Certificates (after taking into account the payment of
the Class M-3 Principal Distribution Amount on such Distribution Date), (v) the
Certificate Principal Balance of the Class M-4 Certificates (after taking into
account the payment of the Class M-4 Principal Distribution Amount on such
Distribution Date)and (vi) the Certificate Principal Balance of the Class M-5
Certificates immediately prior to such Distribution Date over (y) the lesser of
(a) the product of (i) approximately 76.10% and (ii) the Pool Balance as of the
last day of the related Collection Period after giving effect to principal
prepayments in the related Prepayment Period and (b) the amount by which the
Pool Balance as of the last day of the related Collection Period after giving
effect to principal prepayments in the related Prepayment Period exceeds the
product of (i) 0.50% and (ii) the Pool Balance on the Cut-off Date.
"CLASS M-6 PRINCIPAL DISTRIBUTION AMOUNT" means as of any Distribution
Date on or after the Stepdown Date and as long as a Trigger Event is not in
effect, the excess of (x) the sum of (i) the sum of the Certificate Principal
Balances of the Class A Certificates (after taking into account the payment of
the Senior Principal
S-49
Distribution Amount on such Distribution Date), (ii) the Certificate Principal
Balance of the Class M-1 Certificates (after taking into account the payment of
the Class M-1 Principal Distribution Amount on such Distribution Date), (iii)
the Certificate Principal Balance of the Class M-2 Certificates (after taking
into account the payment of the Class M-2 Principal Distribution Amount on such
Distribution Date), (iv) the Certificate Principal Balance of the Class M-3
Certificates (after taking into account the payment of the Class M-3 Principal
Distribution Amount on such Distribution Date), (v) the Certificate Principal
Balance of the Class M-4 Certificates (after taking into account the payment of
the Class M-4 Principal Distribution Amount on such Distribution Date), (vi) the
Certificate Principal Balance of the Class M-5 Certificates (after taking into
account the payment of the Class M-5 Principal Distribution Amount on such
Distribution Date) and (vii) the Certificate Principal Balance of the Class M-6
Certificates immediately prior to such Distribution Date over (y) the lesser of
(a) the product of (i) approximately 78.90% and (ii) the Pool Balance as of the
last day of the related Collection Period after giving effect to principal
prepayments in the related Prepayment Period and (b) the amount by which the
Pool Balance as of the last day of the related Collection Period after giving
effect to principal prepayments in the related Prepayment Period exceeds the
product of (i) 0.50% and (ii) the Pool Balance on the Cut-off Date.
"CLASS M-7 PRINCIPAL DISTRIBUTION AMOUNT" means as of any Distribution
Date on or after the Stepdown Date and as long as a Trigger Event is not in
effect, the excess of (x) the sum of (i) the sum of the Certificate Principal
Balances of the Class A Certificates (after taking into account the payment of
the Senior Principal Distribution Amount on such Distribution Date), (ii) the
Certificate Principal Balance of the Class M-1 Certificates (after taking into
account the payment of the Class M-1 Principal Distribution Amount on such
Distribution Date), (iii) the Certificate Principal Balance of the Class M-2
Certificates (after taking into account the payment of the Class M-2 Principal
Distribution Amount on such Distribution Date), (iv) the Certificate Principal
Balance of the Class M-3 Certificates (after taking into account the payment of
the Class M-3 Principal Distribution Amount on such Distribution Date), (v) the
Certificate Principal Balance of the Class M-4 Certificates (after taking into
account the payment of the Class M-4 Principal Distribution Amount on such
Distribution Date), (vi) the Certificate Principal Balance of the Class M-5
Certificates (after taking into account the payment of the Class M-5 Principal
Distribution Amount on such Distribution Date), (vii) the Certificate Principal
Balance of the Class M-6 Certificates (after taking into account the payment of
the Class M-6 Principal Distribution Amount on such Distribution Date) and
(viii) the Certificate Principal Balance of the Class M-7 Certificates
immediately prior to such Distribution Date over (y) the lesser of (a) the
product of (i) approximately 83.00% and (ii) the Pool Balance as of the last day
of the related Collection Period after giving effect to principal prepayments in
the related Prepayment Period and (b) the amount by which the Pool Balance as of
the last day of the related Collection Period after giving effect to principal
prepayments in the related Prepayment Period exceeds the product of (i) 0.50%
and (ii) the Pool Balance on the Cut-off Date.
"CLASS M-8 PRINCIPAL DISTRIBUTION AMOUNT" means as of any Distribution
Date on or after the Stepdown Date and as long as a Trigger Event is not in
effect, the excess of (x) the sum of (i) the sum of the Certificate Principal
Balances of the Class A Certificates (after taking into account the payment of
the Senior Principal Distribution Amount on such Distribution Date), (ii) the
Certificate Principal Balance of the Class M-1 Certificates (after taking into
account the payment of the Class M-1 Principal Distribution Amount on such
Distribution Date), (iii) the Certificate Principal Balance of the Class M-2
Certificates (after taking into account the payment of the Class M-2 Principal
Distribution Amount on such Distribution Date), (iv) the Certificate Principal
Balance of the Class M-3 Certificates (after taking into account the payment of
the Class M-3 Principal Distribution Amount on such Distribution Date), (v) the
Certificate Principal Balance of the Class M-4 Certificates (after taking into
account the payment of the Class M-4 Principal Distribution Amount on such
Distribution Date), (vi) the Certificate Principal Balance of the Class M-5
Certificates (after taking into account the payment of the Class M-5 Principal
Distribution Amount on such Distribution Date), (vii) the Certificate Principal
Balance of the Class M-6 Certificates (after taking into account the payment of
the Class M-6 Principal Distribution Amount on such Distribution Date), (viii)
the Certificate Principal Balance of the Class M-7 Certificates (after taking
into account the payment of the Class M-7 Principal Distribution Amount on such
Distribution Date) and (ix) the Certificate Principal Balance of the Class M-8
Certificates immediately prior to such Distribution Date over (y) the lesser of
(a) the product of (i) approximately 86.30% and (ii) the Pool Balance as of the
last day of the related Collection Period after giving effect to principal
prepayments in the related Prepayment Period and (b) the amount by which the
Pool Balance as of the last day of the related Collection Period after giving
effect to principal prepayments in the related Prepayment Period exceeds the
product of (i) 0.50% and (ii) the Pool Balance on the Cut-off Date.
S-50
"CLASS M-9 PRINCIPAL DISTRIBUTION AMOUNT" means as of any Distribution
Date on or after the Stepdown Date and as long as a Trigger Event is not in
effect, the excess of (x) the sum of (i) the sum of the Certificate Principal
Balances of the Class A Certificates (after taking into account the payment of
the Senior Principal Distribution Amount on such Distribution Date), (ii) the
Certificate Principal Balance of the Class M-1 Certificates (after taking into
account the payment of the Class M-1 Principal Distribution Amount on such
Distribution Date), (iii) the Certificate Principal Balance of the Class M-2
Certificates (after taking into account the payment of the Class M-2 Principal
Distribution Amount on such Distribution Date), (iv) the Certificate Principal
Balance of the Class M-3 Certificates (after taking into account the payment of
the Class M-3 Principal Distribution Amount on such Distribution Date), (v) the
Certificate Principal Balance of the Class M-4 Certificates (after taking into
account the payment of the Class M-4 Principal Distribution Amount on such
Distribution Date), (vi) the Certificate Principal Balance of the Class M-5
Certificates (after taking into account the payment of the Class M-5 Principal
Distribution Amount on such Distribution Date), (vii) the Certificate Principal
Balance of the Class M-6 Certificates (after taking into account the payment of
the Class M-6 Principal Distribution Amount on such Distribution Date), (viii)
the Certificate Principal Balance of the Class M-7 Certificates (after taking
into account the payment of the Class M-7 Principal Distribution Amount on such
Distribution Date), (ix) the Certificate Principal Balance of the Class M-8
Certificates (after taking into account the payment of the Class M-8 Principal
Distribution Amount on such Distribution Date) and (x) the Certificate Principal
Balance of the Class M-9 Certificates immediately prior to such Distribution
Date over (y) the lesser of (a) the product of (i) approximately 88.60% and (ii)
the Pool Balance as of the last day of the related Collection Period after
giving effect to principal prepayments in the related Prepayment Period and (b)
the amount by which the Pool Balance as of the last day of the related
Collection Period after giving effect to principal prepayments in the related
Prepayment Period exceeds the product of (i) 0.50% and (ii) the Pool Balance on
the Cut-off Date.
"CLASS M-10 PRINCIPAL DISTRIBUTION AMOUNT" means as of any Distribution
Date on or after the Stepdown Date and as long as a Trigger Event is not in
effect, the excess of (x) the sum of (i) the sum of the Certificate Principal
Balances of the Class A Certificates (after taking into account the payment of
the Senior Principal Distribution Amount on such Distribution Date), (ii) the
Certificate Principal Balance of the Class M-1 Certificates (after taking into
account the payment of the Class M-1 Principal Distribution Amount on such
Distribution Date), (iii) the Certificate Principal Balance of the Class M-2
Certificates (after taking into account the payment of the Class M-2 Principal
Distribution Amount on such Distribution Date), (iv) the Certificate Principal
Balance of the Class M-3 Certificates (after taking into account the payment of
the Class M-3 Principal Distribution Amount on such Distribution Date), (v) the
Certificate Principal Balance of the Class M-4 Certificates (after taking into
account the payment of the Class M-4 Principal Distribution Amount on such
Distribution Date), (vi) the Certificate Principal Balance of the Class M-5
Certificates (after taking into account the payment of the Class M-5 Principal
Distribution Amount on such Distribution Date), (vii) the Certificate Principal
Balance of the Class M-6 Certificates (after taking into account the payment of
the Class M-6 Principal Distribution Amount on such Distribution Date), (viii)
the Certificate Principal Balance of the Class M-7 Certificates (after taking
into account the payment of the Class M-7 Principal Distribution Amount on such
Distribution Date), (ix) the Certificate Principal Balance of the Class M-8
Certificates (after taking into account the payment of the Class M-8 Principal
Distribution Amount on such Distribution Date), (x) the Certificate Principal
Balance of the Class M-9 Certificates (after taking into account the payment of
the Class M-9 Principal Distribution Amount on such Distribution Date) and (xi)
the Certificate Principal Balance of the Class M-10 Certificates immediately
prior to such Distribution Date over (y) the lesser of (a) the product of (i)
approximately 92.00% and (ii) the Pool Balance as of the last day of the related
Collection Period after giving effect to principal prepayments in the related
Prepayment Period and (b) the amount by which the Pool Balance as of the last
day of the related Collection Period after giving effect to principal
prepayments in the related Prepayment Period exceeds the product of (i) 0.50%
and (ii) the Pool Balance on the Cut-off Date.
"EXTRA PRINCIPAL DISTRIBUTION AMOUNT" means as of any Distribution
Date, the lesser of (x) the Monthly Excess Interest Amount for that Distribution
Date and (y) the Overcollateralization Deficiency for that Distribution Date.
"OVERCOLLATERALIZATION AMOUNT" means as of any Distribution Date the
excess, if any, of (x) the Pool Balance as of the last day of the related
Collection Period after giving effect to principal prepayments in the related
Prepayment Period over (y) the aggregate Certificate Principal Balance of all
classes of Certificates other than the Class CE Certificate (after taking into
account all distributions of principal on that Distribution Date and the
increase of any Certificate Principal Balance as a result of Subsequent
Recoveries).
S-51
"OVERCOLLATERALIZATION DEFICIENCY" means as of any Distribution Date,
the excess, if any, of (x) the Targeted Overcollateralization Amount over (y)
the Overcollateralization Amount for that Distribution Date, calculated for this
purpose after taking into account the reduction on that Distribution Date of the
Certificate Principal Balances of all classes of Certificates resulting from the
distribution of the Principal Distribution Amount (but not the Extra Principal
Distribution Amount) on that Distribution Date, but prior to taking into account
any Applied Realized Loss Amounts on that Distribution Date.
"OVERCOLLATERALIZATION RELEASE AMOUNT" means with respect to any
Distribution Date on or after the Stepdown Date on which a Trigger Event is not
in effect, the lesser of (x) the Principal Remittance Amount for that
Distribution Date and (y) the excess, if any, of (i) the Overcollateralization
Amount for that Distribution Date, assuming that 100% of the Principal
Remittance Amount is applied as a principal payment on the Certificates on that
Distribution Date over (ii) the Targeted Overcollateralization Amount. With
respect to any Distribution Date on which a Trigger Event is in effect, the
Overcollateralization Release Amount will be zero.
"PRINCIPAL DISTRIBUTION AMOUNT" means as of any Distribution Date, the
sum of (i) the Principal Remittance Amount (minus the Overcollateralization
Release Amount, if any) and (ii) the Extra Principal Distribution Amount, if
any.
"PRINCIPAL REMITTANCE AMOUNT" means with respect to any Distribution
Date, (A) the amount equal to the sum (less certain amounts available for
reimbursement of Advances and Servicing Advances as described above under "The
Pooling and Servicing Agreement--Advances" and certain other reimbursable
expenses or indemnification payments pursuant to the Pooling and Servicing
Agreement) of the following amounts (without duplication) with respect to the
Mortgage Loans: (i) each payment of principal on a Mortgage Loan due during the
immediately preceding Collection Period and received by the Servicer on or prior
to the Determination Date for that Distribution Date, including any Advances
with respect thereto, (ii) all full and partial principal prepayments received
by the Servicer during the related Prepayment Period, (iii) the insurance
proceeds, Subsequent Recoveries and liquidation proceeds (net of certain
expenses) allocable to principal actually collected by the Servicer during the
related Prepayment Period, (iv) the portion of the Purchase Price allocable to
principal of all repurchased Defective Mortgage Loans with respect to that
Prepayment Period, (v) any Substitution Adjustments received during the related
Prepayment Period and (vi) on the Distribution Date on which the Trust is to be
terminated in accordance with the Pooling and Servicing Agreement, that portion
of the Termination Price in respect of principal less (B) to the extent any
amounts payable to the Swap Provider (including any Net Swap Payment and any
Swap Termination Payment owed to the Swap Provider but excluding any Swap
Termination Payment owed to the Swap Provider resulting from a Swap Provider
Trigger Event) exceed the Interest Remittance Amount for such Distribution Date
(without giving effect to clause (B) of the definition of Interest Remittance
Amount), the amount of such excess.
"SENIOR ENHANCEMENT PERCENTAGE" for any Distribution Date is the
percentage obtained by dividing (x) the sum of (i) the aggregate Certificate
Principal Balance of the Class M Certificates before taking into account the
distribution of the Principal Distribution Amount on such Distribution Date and
(ii) the Overcollateralization Amount after taking into account the distribution
of the Principal Distribution Amount as of the prior Distribution Date by (y)
the Pool Balance as of the last day of the related Collection Period after
giving effect to principal prepayments in the related Prepayment Period.
"SENIOR PRINCIPAL DISTRIBUTION AMOUNT" means as of any Distribution
Date (i) before the Stepdown Date or as to which a Trigger Event is in effect,
the Principal Distribution Amount and (ii) on or after the Stepdown Date and as
long as a Trigger Event is not in effect, the excess of (a) the Certificate
Principal Balance of the Class A Certificates immediately prior to that
Distribution Date over (b) the lesser of (x) the product of (1) approximately
45.10% and (2) the aggregate Principal Balance of the Mortgage Loans as of the
last day of the related Collection Period after giving effect to principal
prepayments in the related Prepayment Period and (y) the amount by which the
aggregate Principal Balance of the Mortgage Loans as of the last day of the
related Collection Period after giving effect to principal prepayments in the
related Prepayment Period exceeds the product of (1) 0.50% and (2) the aggregate
Principal Balance of the Mortgage Loans on the Cut-off Date.
"STEPDOWN DATE" means the earlier to occur of (i) the Distribution Date
following the Distribution Date on which the aggregate Certificate Principal
Balance of the Class A Certificates is reduced to zero and (ii) the later to
S-52
occur of (x) the Distribution Date in March 2009 and (y) the Distribution Date
on which the Senior Enhancement Percentage is greater than or equal to 54.90%.
"SUBORDINATION DEPLETION DATE" means the Distribution Date on which the
aggregate Certificate Principal Balance of the Class M Certificates is reduced
to zero.
"SUBSEQUENT RECOVERY" means any amount (net of reimbursable expenses)
received on a Mortgage Loan subsequent to such Mortgage Loan being determined to
be a Liquidated Mortgage Loan that resulted in a Realized Loss in a prior month.
If Subsequent Recoveries are received, they will be included as part of the
Principal Remittance Amount for the following Distribution Date relating to the
Prepayment Period in which received and distributed in accordance with the
priorities described above. In addition, after giving effect to all
distributions on a Distribution Date, the Unpaid Realized Loss Amount for the
class of Subordinated Certificates then outstanding with the highest
distribution priority will be decreased by the amount of Subsequent Recoveries
until reduced to zero (with any remaining Subsequent Recoveries applied to
reduce the Unpaid Realized Loss Amount of the class with the next highest
distribution priority), and the Certificate Principal Balance of such class or
classes of Subordinated Certificates will be increased by the same amount.
"TARGETED OVERCOLLATERALIZATION AMOUNT" means as of any Distribution
Date, (x) prior to the Stepdown Date, approximately 4.00% of the Pool Balance of
the Mortgage Loans on the Cut-off Date and (y) on and after the Stepdown Date,
(i) if a Trigger Event has not occurred, the greater of (a) approximately 8.00%
of the Pool Balance as of the last day of the related Collection Period after
giving effect to principal prepayments in the related Prepayment Period and (b)
0.50% of the Pool Balance of the Mortgage Loans on the Cut-off Date and (ii) if
a Trigger Event has occurred, the Targeted Overcollateralization Amount for the
immediately preceding Distribution Date.
A "TRIGGER EVENT" has occurred on a Distribution Date if (i) the
three-month rolling average of 60+ Day Delinquent Loans equals or exceeds 29.14%
of the Senior Enhancement Percentage or (ii) the aggregate amount of Realized
Losses incurred since the Cut-off Date through the last day of the related
Collection Period (reduced by the aggregate amount of Subsequent Recoveries
received since the Cut-off Date through the last day of the related Collection
Period) divided by the Pool Balance of the Mortgage Loans on the Cut-off Date
exceeds the applicable percentages set forth below with respect to that
Distribution Date:
DISTRIBUTION DATE OCCURRING IN PERCENTAGE
-------------------------------- -------------------------------------------------------
March 2008 through February 2009 1.60% for the first month, plus an additional 1/12th of
2.05% for each month thereafter
March 2009 through February 2010 3.65% for the first month, plus an additional 1/12th of
2.05% for each month thereafter
March 2010 through February 2011 5.70% for the first month, plus an additional 1/12th of
1.65% for each month thereafter
March 2011 through February 2012 7.35% for the first month, plus an additional 1/12th of
0.85% for each month thereafter
March 2012 through February 2013 8.20% for the first month, plus an additional 1/12th of
0.05% for each month thereafter
March 2013 and thereafter 8.25%
S-53
ALLOCATION OF LOSSES
A "REALIZED LOSS" is:
o as to any Liquidated Mortgage Loan, its unpaid Principal Balance
less the net proceeds from the liquidation of, and any insurance
proceeds from, that Mortgage Loan and the related Mortgaged
Property which are applied to the Principal Balance of that
Mortgage Loan.
o as to any Mortgage Loan, a Deficient Valuation.
o as to any Mortgage Loan, a reduction in its Principal Balance
resulting from a Servicer Modification.
A "LIQUIDATED MORTGAGE LOAN" is any defaulted Mortgage Loan as to which
the Servicer has determined that all amounts which it expects to recover from or
on account of the Mortgage Loan have been recovered.
A Realized Loss may result from the personal bankruptcy of a mortgagor
if the bankruptcy court establishes the value of the Mortgaged Property at an
amount less than the then outstanding Principal Balance of the Mortgage Loan
secured by that Mortgaged Property and reduces the secured debt to such value.
In such case, the Trust, as the holder of the Mortgage Loan, would become an
unsecured creditor to the extent of the difference between the outstanding
Principal Balance of the Mortgage Loan and the reduced secured debt (the
difference, a "DEFICIENT VALUATION").
If a Mortgage Loan is in default, or if default is reasonably
foreseeable, the Servicer may permit a modification of the Mortgage Loan to
reduce its Principal Balance and/or extend its term to a term not longer than
the latest maturity date of any other Mortgage Loan (any such modification, a
"SERVICER MODIFICATION"). Any such principal reduction will constitute a
Realized Loss at the time of the reduction. An extension of the term will not
result in a Realized Loss unless coupled with a principal reduction.
Realized Losses will, in effect, be absorbed first by the Class CE
Certificates, through the application of the Monthly Excess Interest Amount to
fund the deficiency, as well as through a reduction in the Overcollateralization
Amount.
If, after giving effect to the distribution of the Principal
Distribution Amount on any Distribution Date and the increase of any Certificate
Principal Balances as a result of Subsequent Recoveries, the aggregate
Certificate Principal Balance of the Certificates exceeds the Pool Balance as of
the end of the related Collection Period after giving effect to principal
prepayments in the related Prepayment Period, the resulting excess (the "APPLIED
REALIZED LOSS AMOUNT") will be allocated sequentially to the Class M-10, Class
M-9, Class M-8, Class M-7, Class M-6, Class M-5, Class M-4, Class M-3, Class M-2
and Class M-1 Certificates, until their respective Certificate Principal
Balances are reduced to zero. The Certificate Principal Balances of the Class A
Certificates will not be reduced by any Applied Realized Loss Amounts; however,
under certain loss scenarios, there will not be enough interest and principal on
the Mortgage Loans to pay the Class A Certificates all interest and principal
amounts to which they are entitled. Any reduction of a Certificate Principal
Balance will not be reversed or reinstated (except in the case of Subsequent
Recoveries). However, on future Distribution Dates, Certificateholders of the
related class may receive amounts reimbursing them for prior reductions in the
related Certificate Principal Balances as described below or from the Swap
Account, according to the priorities set forth under "--Interest Rate Swap
Agreement, the Swap Provider and the Swap Account" below. These subsequent
payments will be applied sequentially to the Class M-1, Class M-2, Class M-3,
Class M-4, Class M-5, Class M-6, Class M-7, Class M-8, Class M-9 and Class M-10
Certificates.
APPLICATION OF MONTHLY EXCESS CASHFLOW AMOUNTS
The weighted average Net Mortgage Interest Rate for the Mortgage Loans
is generally expected to be higher than the weighted average of the Certificate
Interest Rates on the Certificates, thus generating certain excess interest
collections which, in the absence of losses, will not be necessary to fund
interest distributions on the
S-54
Certificates. This excess interest for a Collection Period, together with
interest on the Overcollateralization Amount itself, is the "MONTHLY EXCESS
INTEREST AMOUNT."
The "NET MORTGAGE INTEREST RATE" for each Mortgage Loan is the
applicable Mortgage Interest Rate less the sum of (i) the Servicing Fee Rate and
(ii) the Credit Risk Manager Fee Rate.
If Realized Losses occur that are not covered by the Monthly Excess
Cashflow Amount, these Realized Losses will result in an Overcollateralization
Deficiency (since they will reduce the Pool Balance without giving rise to a
corresponding reduction of the aggregate Certificate Principal Balance of the
Certificates). The cashflow priorities in this situation increase the Extra
Principal Distribution Amount (subject to the availability of any Monthly Excess
Cashflow Amount in subsequent months) for the purpose of re-establishing the
Overcollateralization Amount at the then-required Targeted Overcollateralization
Amount.
On and after the Stepdown Date and assuming that a Trigger Event is not
in effect, the Targeted Overcollateralization Amount may be permitted to
decrease or "stepdown." If the Targeted Overcollateralization Amount is
permitted to stepdown on a Distribution Date, the cashflow priorities of this
transaction permit a portion of the Principal Remittance Amount for that
Distribution Date not to be passed through as a distribution of principal on the
Certificates on that Distribution Date. This has the effect of decelerating the
amortization of the Certificates relative to the Pool Balance, thereby reducing
the actual level of the Overcollateralization Amount to the new, lower Targeted
Overcollateralization Amount. This portion of the Principal Remittance Amount
not distributed as principal on the Certificates therefore releases a limited
portion of the overcollateralization from the Trust Fund.
On any Distribution Date, the sum of the Monthly Excess Interest
Amount, the Overcollateralization Release Amount and any portion of the
Principal Distribution Amount (without duplication) remaining after principal
distributions on the Certificates is the "MONTHLY EXCESS CASHFLOW AMOUNT," which
is required to be applied in the following order of priority (the "MONTHLY
EXCESS CASHFLOW ALLOCATION") on that Distribution Date:
(i) to the Class A Certificates, pro rata, any remaining
Accrued Certificate Interest for such classes for that Distribution
Date;
(ii) to the Class A Certificates, pro rata, any Interest
Carry Forward Amounts for such classes for that Distribution Date;
(iii) to the Class M-1 Certificates, any remaining Accrued
Certificate Interest for such class for that Distribution Date;
(iv) to the Class M-1 Certificates, any Interest Carry
Forward Amount for such class for that Distribution Date;
(v) to the Class M-1 Certificates, any Class M-1 Realized
Loss Amortization Amount for that Distribution Date;
(vi) to the Class M-2 Certificates, any remaining Accrued
Certificate Interest for such class for that Distribution Date;
(vii) to the Class M-2 Certificates, any Interest Carry
Forward Amount for such class for that Distribution Date;
(viii) to the Class M-2 Certificates, any Class M-2 Realized
Loss Amortization Amount for that Distribution Date;
(ix) to the Class M-3 Certificates, any remaining Accrued
Certificate Interest for such class for that Distribution Date;
S-55
(x) to the Class M-3 Certificates, any Interest Carry
Forward Amount for such class for that Distribution Date;
(xi) to the Class M-3 Certificates, any Class M-3 Realized
Loss Amortization Amount for that Distribution Date;
(xii) to the Class M-4 Certificates, any remaining Accrued
Certificate Interest for such class for that Distribution Date;
(xiii) to the Class M-4 Certificates, any Interest Carry
Forward Amount for such class for that Distribution Date;
(xiv) to the Class M-4 Certificates, any Class M-4 Realized
Loss Amortization Amount for that Distribution Date;
(xv) to the Class M-5 Certificates, any remaining Accrued
Certificate Interest for such class for that Distribution Date;
(xvi) to the Class M-5 Certificates, any Interest Carry
Forward Amount for such class for that Distribution Date;
(xvii) to the Class M-5 Certificates, any Class M-5 Realized
Loss Amortization Amount for that Distribution Date;
(xviii) to the Class M-6 Certificates, any remaining Accrued
Certificate Interest for such class for that Distribution Date;
(xix) to the Class M-6 Certificates, any Interest Carry
Forward Amount for such class for that Distribution Date;
(xx) to the Class M-6 Certificates, any Class M-6 Realized
Loss Amortization Amount for that Distribution Date;
(xxi) to the Class M-7 Certificates, any remaining Accrued
Certificate Interest for such class for that Distribution Date;
(xxii) to the Class M-7 Certificates, any Interest Carry
Forward Amount for such class for that Distribution Date;
(xxiii) to the Class M-7 Certificates, any Class M-7 Realized
Loss Amortization Amount for that Distribution Date;
(xxiv) to the Class M-8 Certificates, any remaining Accrued
Certificate Interest for such class for that Distribution Date;
(xxv) to the Class M-8 Certificates, any Interest Carry
Forward Amount for such class for that Distribution Date;
(xxvi) to the Class M-8 Certificates, any Class M-8 Realized
Loss Amortization Amount for that Distribution Date;
(xxvii) to the Class M-9 Certificates, any remaining Accrued
Certificate Interest for such class for that Distribution Date;
S-56
(xxviii) to the Class M-9 Certificates, any Interest Carry
Forward Amount for such class for that Distribution Date;
(xxix) to the Class M-9 Certificates, any Class M-9 Realized
Loss Amortization Amount for that Distribution Date;
(xxx) to the Class M-10 Certificates, any remaining Accrued
Certificate Interest for such class for that Distribution Date;
(xxxi) to the Class M-10 Certificates, any Interest Carry
Forward Amount for such class for that Distribution Date;
(xxxii) to the Class M-10 Certificates, any Class M-10
Realized Loss Amortization Amount for that Distribution Date;
(xxxiii) from amounts otherwise distributable to the Class CE
Certificates, to the Cap Carryover Reserve Account and from the Reserve
Account, first, to the Class A-1, Class A-2, Class A-3 and Class A-4
Certificates, pro rata, and then sequentially, to the Class M-1, Class
M-2, Class M-3, Class M-4, Class M-5, Class M-6, Class M-7, Class M-8,
Class M-9 and Class M-10, any Cap Carryover Amount for such class;
(xxxiv) from amounts otherwise distributable to the Class CE
Certificates, to the Supplemental Interest Trust for the Swap Provider,
any Swap Termination Payments resulting from a Swap Provider Trigger
Event; and
(xxxv) to the Class CE, Class P and Class R Certificates, in
the amounts specified in the Pooling and Servicing Agreement.
For purposes of the foregoing, the following terms will have the
respective meanings set forth below.
"CLASS M-1 REALIZED LOSS AMORTIZATION AMOUNT" means as to the Class M-1
Certificates and as of any Distribution Date, the lesser of (x) the Unpaid
Realized Loss Amount for the Class M-1 Certificates as of that Distribution Date
and (y) the excess of (i) the Monthly Excess Cashflow Amount over (ii) the sum
of the amounts described in clauses (i) through (iv) of the Monthly Excess
Cashflow Allocation for that Distribution Date.
"CLASS M-2 REALIZED LOSS AMORTIZATION AMOUNT" means as to the Class M-2
Certificates and as of any Distribution Date, the lesser of (x) the Unpaid
Realized Loss Amount for the Class M-2 Certificates as of that Distribution Date
and (y) the excess of (i) the Monthly Excess Cashflow Amount over (ii) the sum
of the amounts described in clauses (i) through (vii) of the Monthly Excess
Cashflow Allocation for that Distribution Date.
"CLASS M-3 REALIZED LOSS AMORTIZATION AMOUNT" means as to the Class M-3
Certificates and as of any Distribution Date, the lesser of (x) the Unpaid
Realized Loss Amount for the Class M-3 Certificates as of that Distribution Date
and (y) the excess of (i) the Monthly Excess Cashflow Amount over (ii) the sum
of the amounts described in clauses (i) through (x) of the Monthly Excess
Cashflow Allocation for that Distribution Date.
"CLASS M-4 REALIZED LOSS AMORTIZATION AMOUNT" means as to the Class M-4
Certificates and as of any Distribution Date, the lesser of (x) the Unpaid
Realized Loss Amount for the Class M-4 Certificates as of that Distribution Date
and (y) the excess of (i) the Monthly Excess Cashflow Amount over (ii) the sum
of the amounts described in clauses (i) through (xiii) of the Monthly Excess
Cashflow Allocation for that Distribution Date.
"CLASS M-5 REALIZED LOSS AMORTIZATION AMOUNT" means as to the Class M-5
Certificates and as of any Distribution Date, the lesser of (x) the Unpaid
Realized Loss Amount for the Class M-5 Certificates as of that Distribution Date
and (y) the excess of (i) the Monthly Excess Cashflow Amount over (ii) the sum
of the amounts described in clauses (i) through (xvi) of the Monthly Excess
Cashflow Allocation for that Distribution Date.
S-57
"CLASS M-6 REALIZED LOSS AMORTIZATION AMOUNT" means as to the Class M-6
Certificates and as of any Distribution Date, the lesser of (x) the Unpaid
Realized Loss Amount for the Class M-6 Certificates as of that Distribution Date
and (y) the excess of (i) the Monthly Excess Cashflow Amount over (ii) the sum
of the amounts described in clauses (i) through (xix) of the Monthly Excess
Cashflow Allocation for that Distribution Date.
"CLASS M-7 REALIZED LOSS AMORTIZATION AMOUNT" means as to the Class M-7
Certificates and as of any Distribution Date, the lesser of (x) the Unpaid
Realized Loss Amount for the Class M-7 Certificates as of that Distribution Date
and (y) the excess of (i) the Monthly Excess Cashflow Amount over (ii) the sum
of the amounts described in clauses (i) through (xxii) of the Monthly Excess
Cashflow Allocation for that Distribution Date.
"CLASS M-8 REALIZED LOSS AMORTIZATION AMOUNT" means as to the Class M-8
Certificates and as of any Distribution Date, the lesser of (x) the Unpaid
Realized Loss Amount for the Class M-8 Certificates as of that Distribution Date
and (y) the excess of (i) the Monthly Excess Cashflow Amount over (ii) the sum
of the amounts described in clauses (i) through (xxv) of the Monthly Excess
Cashflow Allocation for that Distribution Date.
"CLASS M-9 REALIZED LOSS AMORTIZATION AMOUNT" means as to the Class M-9
Certificates and as of any Distribution Date, the lesser of (x) the Unpaid
Realized Loss Amount for the Class M-9 Certificates as of that Distribution Date
and (y) the excess of (i) the Monthly Excess Cashflow Amount over (ii) the sum
of the amounts described in clauses (i) through (xxviii) of the Monthly Excess
Cashflow Allocation for that Distribution Date.
"CLASS M-10 REALIZED LOSS AMORTIZATION AMOUNT" means as to the Class
M-10 Certificates and as of any Distribution Date, the lesser of (x) the Unpaid
Realized Loss Amount for the Class M-10 Certificates as of that Distribution
Date and (y) the excess of (i) the Monthly Excess Cashflow Amount over (ii) the
sum of the amounts described in clauses (i) through (xxxi) of the Monthly Excess
Cashflow Allocation for that Distribution Date.
"REALIZED LOSS AMORTIZATION AMOUNT" means each of the Class M-1
Realized Loss Amortization Amount, the Class M-2 Realized Loss Amortization
Amount, the Class M-3 Realized Loss Amortization Amount, the Class M-4 Realized
Loss Amortization Amount, the Class M-5 Realized Loss Amortization Amount, the
Class M-6 Realized Loss Amortization Amount, the Class M-7 Realized Loss
Amortization Amount, the Class M-8 Realized Loss Amortization Amount, the Class
M-9 Realized Loss Amortization Amount and the Class M-10 Realized Loss
Amortization Amount.
"UNPAID REALIZED LOSS AMOUNT" means for any class of Class M
Certificates and as to any Distribution Date, the excess of (x) the cumulative
amount of related Applied Realized Loss Amounts allocated to that class for all
prior Distribution Dates, as described under "--Allocation of Losses" above,
over (y) the sum of (a) the cumulative amount of any Subsequent Recoveries
allocated to that class and (b) the cumulative amount of related Realized Loss
Amortization Amounts for that class for all prior Distribution Dates.
CERTIFICATE INTEREST RATES
Interest for each Distribution Date on or prior to the Optional
Termination Date will accrue on the Offered Certificates during the related
Interest Accrual Period at a per annum rate (the "CERTIFICATE INTEREST RATE")
equal to the least of (i) One-Month LIBOR plus the applicable certificate margin
set forth in the table beginning on page S-3, (ii) the Pool Maximum Rate Cap
(the lesser of (i) and (ii), for each such class, the "PASS-THROUGH RATE") and
(iii) the Pool Cap for such Distribution Date. During each Interest Accrual
Period relating to the Distribution Dates after the Optional Termination Date,
each of the certificate margins will be "stepped-up" to the applicable margin
set forth in the table beginning on page S-3 if the optional termination right
is not exercised.
The "POOL CAP" for any Distribution Date and for the Certificates will
be a per annum rate (subject to adjustment based on the actual number of days
elapsed in the related Interest Accrual Period) equal to the weighted average of
the Net Mortgage Interest Rates for the Mortgage Loans, weighted on the basis of
the Principal Balances of the Mortgage Loans as of the first day of the related
Collection Period less (y) the Net Swap Payment or Swap Termination Payment, if
any, made to the Swap Provider (only if such Swap Termination Payment is not due
to a Swap Provider Trigger Event) expressed as a percentage, equal to a
fraction, the numerator of which is equal to the Net Swap Payment or Swap
Termination Payment made to the Swap Provider by the Trust multiplied by 12, and
the
S-58
denominator of which is equal to the Principal Balances of the Mortgage Loans as
of the first day of the related Collection Period.
The Pool Cap is sometimes referred to in this prospectus supplement as
a "CAP."
The "POOL MAXIMUM RATE CAP" for any Distribution Date and for the
Certificates will be a per annum rate (subject to adjustment based on the actual
number of days elapsed in the related Interest Accrual Period) equal to the
weighted average of the Net Maximum Mortgage Interest Rates for the Mortgage
Loans, weighted on the basis of the Principal Balances of the Mortgage Loans as
of the first day of the related Collection Period less (x) the Net Swap Payment
or Swap Termination Payment, if any, made to the Swap Provider (only if such
Swap Termination Payment is not due to a Swap Provider Trigger Event) expressed
as a percentage, equal to a fraction, the numerator of which is equal to the Net
Swap Payment or Swap Termination Payment made to the Swap Provider by the Trust
multiplied by 12, and the denominator of which is equal to the Principal
Balances of the Mortgage Loans as of the first day of the related Collection
Period plus (y) a percentage, equal to a fraction, the numerator of which is
equal to any Net Swap Payment made by the Swap Provider multiplied by 12, and
the denominator of which is equal to the Principal Balances of the Mortgage
Loans as of the first day of the related Collection Period.
The "NET MAXIMUM MORTGAGE INTEREST RATE" for each Adjustable-Rate
Mortgage Loan is the applicable Maximum Mortgage Interest Rate and for each
Fixed-Rate Mortgage Loan is the Mortgage Interest Rate for such Mortgage Loan,
in each case less the sum of (i) the Servicing Fee Rate and (ii) the Credit Risk
Manager Fee Rate.
If on any Distribution Date, the Accrued Certificate Interest for any
Certificate is based on the Cap, the excess of (i) the amount of interest such
Certificate would have been entitled to receive on such Distribution Date based
on its Pass-Through Rate over (ii) the amount of interest such Certificate
received on such Distribution Date based on the Cap, together with the unpaid
portion of any such excess from prior Distribution Dates (and interest accrued
thereon at the then applicable Pass-Through Rate on such Certificate) will be
the "CAP CARRYOVER AMOUNT." Any Cap Carryover Amount will be distributed on the
same or future Distribution Dates from amounts that would otherwise be
distributed on the Class CE Certificates. On the Closing Date, the Trustee will
establish the Cap Carryover Reserve Account ("CAP CARRYOVER RESERVE ACCOUNT")
pursuant to the Pooling and Servicing Agreement from which distributions in
respect of Cap Carryover Amounts on the Offered Certificates will be made.
Distributions in respect of Cap Carryover Amounts may also be made from the Swap
Account. The Cap Carryover Reserve Account will be an asset of the trust but not
of any REMIC.
INTEREST RATE SWAP AGREEMENT, THE SWAP PROVIDER AND THE SWAP ACCOUNT
The Interest Rate Swap Agreement
On or before the Closing Date, the Trustee (in its capacity as trustee
(the "Supplemental Interest Trust Trustee") of the supplemental interest trust,
a separate trust created under the Pooling and Servicing Agreement) will enter
into an Interest Rate Swap Agreement with the Swap Provider. On each
Distribution Date, the Supplemental Interest Trust Trustee, pursuant to the
Pooling and Servicing Agreement (as further described below), will deposit into
the Swap Account certain amounts, if any, received from the Swap Provider from
which distributions in respect of Interest Carry Forward Amounts, Cap Carryover
Amounts, amounts necessary to maintain the Targeted Overcollateralization Amount
and Realized Loss Amortization Amounts on the Class M Certificates will be made.
The Swap Account will be an asset of the Supplemental Interest Trust but not of
any REMIC.
Under the Interest Rate Swap Agreement, on or before each Distribution
Date, the Supplemental Interest Trust will be obligated to pay to the Swap
Provider from amounts available therefor pursuant to the Pooling and Servicing
Agreement, a fixed amount equal to the product of (x) 5.046%, (y) the Notional
Amount for that Distribution Date and (z) a fraction, the numerator of which is
30 (or, for the first Distribution Date, the number of days elapsed from the
closing date to but excluding the first Distribution Date on a 30/360 basis),
and the denominator of which is 360, and the Swap Provider will be obligated to
pay to the Supplemental Interest Trust Trustee a floating amount equal to the
product of (x) one-month LIBOR (as determined pursuant to the Interest Rate Swap
Agreement), (y) the Notional Amount for that Distribution Date, and (z) a
fraction, the numerator of which is the actual number of days elapsed from the
previous Distribution Date to but excluding the current Distribution Date (or,
for the first Distribution Date, the actual number of days elapsed from the
Closing Date to but excluding the first Distribution
S-59
Date), and the denominator of which is 360. A net payment will be required to be
made on or before each Distribution Date (each such net payment, a "Net Swap
Payment") (a) by the Supplemental Interest Trust to the Swap Provider, to the
extent that the fixed amount exceeds the corresponding floating amount, or (b)
by the Swap Provider to the Supplemental Interest Trust to the extent that the
floating amount exceeds the corresponding fixed amount.
The initial Notional Amount will be approximately $463,392,457. The
Interest Rate Swap Agreement will terminate immediately after the April 2010
Distribution Date unless terminated earlier upon the occurrence of a Swap
Default or a Termination Event.
The respective obligations of the Swap Provider and the Supplemental
Interest Trust Trustee to pay specified amounts due under the Interest Rate Swap
Agreement will be subject to the following conditions precedent: (1) no Swap
Default or event that with the giving of notice or lapse of time or both would
become a Swap Default, in each case, in respect of the other party, shall have
occurred and be continuing with respect to the Interest Rate Swap Agreement and
(2) no "Early Termination Date" (as defined in the ISDA Master Agreement) has
occurred or been effectively designated with respect to the Interest Rate Swap
Agreement.
Upon the occurrence of any Swap Default under the Interest Rate Swap
Agreement, the non-defaulting party will have the right to designate an Early
Termination Date. With respect to Termination Events, an Early Termination Date
may be designated by one or both of the parties (as specified in the Interest
Rate Swap Agreement), all as set forth in the Interest Rate Swap Agreement.
Upon any Swap Early Termination, the Supplemental Interest Trust or the
Swap Provider may be liable to make a Swap Termination Payment to the other
(regardless of which of the parties has caused the termination). The Swap
Termination Payment will be based on the value of the Interest Rate Swap
Agreement computed in accordance with the procedures set forth in the Interest
Rate Swap Agreement taking into account the present value of the unpaid amounts
that would have been owed to and by the Swap Provider under the remaining
scheduled term of the Interest Rate Swap Agreement. In the event that the
Supplemental Interest Trust is required to make a Swap Termination Payment, that
payment will be paid from the Supplemental Interest Trust on the related
Distribution Date and on any subsequent Distribution Dates until paid in full,
generally prior to distributions to certificateholders.
Upon a Swap Early Termination, the Supplemental Interest Trust Trustee,
at the direction of the Depositor and with the consent of the NIMS Insurer, if
any, will seek a replacement swap provider to enter into a replacement interest
rate swap agreement or similar agreement. To the extent the Supplemental
Interest Trust receives a Swap Termination Payment from the Swap Provider, the
Supplemental Interest Trust will apply, as set forth in the Pooling and
Servicing Agreement, all or such portion of such Swap Termination Payment as may
be required to the payment of amounts due to a replacement swap provider under a
replacement interest rate swap agreement or similar agreement. Furthermore, to
the extent the Supplemental Interest Trust is required to pay a Swap Termination
Payment to the Swap Provider, the Supplemental Interest Trust will apply all or
a portion of such amount received from a replacement swap provider upon entering
into a replacement interest rate swap agreement or similar agreement to the Swap
Termination Payment amount owing to the Swap Provider.
Upon the occurrence of a Downgrade Provision, the Swap Provider will be
required to (1) post collateral securing its obligations under the Interest Rate
Swap Agreement, (2) obtain a substitute Swap Provider or credit support provider
or (3) establish any other arrangement acceptable to the Rating Agencies, the
Supplemental Interest Trust Trustee and the NIMS Insurer, if any (such consent
by such Supplemental Interest Trust Trustee and the NIMS Insurer not to be
unreasonably withheld), unless the Rating Agencies confirm their then current
ratings on the Certificates.
For purposes of the foregoing, the following terms will have the
respective meanings set forth below.
The "DOWNGRADE PROVISION" of the Interest Rate Swap Agreement will be
triggered if the Swap Provider's short-term or long-term credit ratings fall
below the levels specified in the Interest Rate Swap Agreement.
"EVENTS OF DEFAULT" under the Interest Rate Swap Agreement (each a
"Swap Default") include the following standard events of default under the 1992
Master Agreement (Multicurrency-Cross Border) as published by the
S-60
International Swaps and Derivative Association, Inc. (the "ISDA Master
Agreement"), as modified by the Interest Rate Swap Agreement:
o "Failure to Pay or Deliver,"
o "Bankruptcy" and
o "Merger without Assumption",
as described in Sections 5(a)(i), 5(a)(vii) and 5(a)(viii) of the ISDA Master
Agreement.
The "SWAP ACCOUNT" means a segregated trust account in which payments
owed to or received from the Swap Provider will be deposited.
A "SWAP DEFAULT" means an Event of Default under the Interest Rate Swap
Agreement.
A "SWAP EARLY TERMINATION" means the occurrence of an Early Termination
Date under the Interest Rate Swap Agreement.
The "SWAP PROVIDER" means The Bank of New York.
A "SWAP PROVIDER TRIGGER EVENT" means a Swap Termination Payment that
is triggered upon: (i) an Event of Default under the Interest Rate Swap
Agreement with respect to which the Swap Provider is a Defaulting Party (as
defined in the Interest Rate Swap Agreement) or (ii) a Termination Event under
the Interest Rate Swap Agreement with respect to which the Swap Provider is the
sole Affected Party (as defined in the Interest Rate Swap Agreement).
The "SWAP TERMINATION PAYMENT" means the amount, if any, owed by the
trust or the Swap Provider upon a Swap Early Termination.
A "TERMINATION EVENT" under the Interest Rate Swap Agreement consists
of the following standard events under the ISDA Master Agreement and the
Additional Termination Events described below:
o "Illegality" (which generally relates to changes in law causing it
to become unlawful for either party to perform its obligations
under the Interest Rate Swap Agreement),
o "Tax Event" (which generally relates to either party to the
Interest Rate Swap Agreement, as a result of changes in law,
receiving a payment under the Interest Rate Swap Agreement from
which an amount has been deducted or withheld for or on account of
taxes or making an additional payment of any such amount) and
o "Tax Event Upon Merger" (which generally relates to either party
to the Interest Rate Swap Agreement, as a result of a merger or
similar transaction, receiving a payment under the Interest Rate
Swap Agreement from which an amount has been deducted or withheld
for or on account of taxes or making an additional payment of any
such amount),
as described in Sections 5(b)(i), 5(b)(ii) and 5(b)(iii) of the ISDA Master
Agreement. In addition, there are "Additional Termination Events" (as defined in
the Interest Rate Swap Agreement), including if the trust should terminate, if
the Pooling and Servicing Agreement is amended or modified without the prior
written consent of the Swap Provider where written consent is required or if,
pursuant to the terms of the Pooling and Servicing Agreement, the majority
holder of the Class CE Certificates or the NIMS Insurer exercises the option to
purchase the Mortgage Loans and any failure to comply with the Downgrade
Provisions.
The Supplemental Interest Trust will not be required to make any
gross-up payments to the Swap Provider on account of any tax withholding.
S-61
We believe that the maximum probable exposure to the Swap Provider
under the Interest Rate Swap Agreement is less than 10% of the Pool Balance as
of the Cut-off Date.
The Swap Provider
The Bank of New York is headquartered in New York, NY and is the
principal subsidiary of The Bank of New York Company, Inc. The Bank of New York,
founded in 1784, is the oldest bank in the United States. The senior debt of The
Bank of New York is rated Aa2 by Moody's, and AA- by both S&P and Fitch.
The Bank of New York Company, Inc. provides a complete range of banking
and other financial services to corporations and individuals worldwide through
its core competencies: securities servicing, treasury management, investment
management, and individual & regional banking services. The Bank of New York's
extensive global client base includes a broad range of leading financial
institutions, corporations, government entities, endowments and foundations.
The Swap Account
The Interest Rate Swap Agreement will be administered by the
Supplemental Interest Trust Trustee pursuant to the Pooling and Servicing
Agreement. Any Net Swap Payments made by the Swap Provider will be distributed
in accordance with the Pooling and Servicing Agreement. The Supplemental
Interest Trust Trustee will be required to deposit into the Swap Account an
amount equal to any remaining Accrued Certificate Interest, Interest Carry
Forward Amounts, Cap Carryover Amounts, Realized Loss Amortization Amounts and
amounts necessary to maintain the Targeted Overcollateralization Amount, up to
the Net Swap Payment received by the Supplemental Interest Trust Trustee from
the Swap Provider and only up to the amount of realized losses. Any excess
amounts received by the Supplemental Interest Trust Trustee will be paid to the
Seller or its designee.
Net Swap Payments and Swap Termination Payments (other than any Swap
Termination Payment resulting from a Swap Provider Trigger Event) payable by the
Supplemental Interest Trust will be deducted from Available Funds before
distributions to certificateholders and will first be deposited into the
Supplemental Interest Trust and then the Swap Account before payment to the Swap
Provider.
On each Distribution Date, to the extent required, following the
distribution of the Monthly Excess Cashflow as described in "--Application of
Monthly Excess Cashflow Amounts" in this prospectus supplement and withdrawals
from the Cap Carryover Reserve Account as described in "--Certificate Interest
Rates," the Supplemental Interest Trust Trustee will withdraw from amounts in
the Swap Account to distribute to the Offered Certificates in the following
order of priority:
first, to the Swap Provider, any Net Swap Payment owed to the Swap
Provider pursuant to the Swap Agreement for such Distribution Date;
second, to the Swap Provider, any Swap Termination Payment owed to the
Swap Provider not resulting from a Swap Provider Trigger Event pursuant to the
Swap Agreement;
third, concurrently, to each class of Class A Certificates, the related
Accrued Certificate Interest and Interest Carry Forward Amount remaining
undistributed after the distributions of the Interest Remittance Amount, on a
pro rata basis based on such respective remaining Accrued Certificate Interest
and Interest Carry Forward Amount;
fourth, sequentially, to the Class M-1, Class M-2, Class M-3, Class
M-4, Class M-5, Class M-6, Class M-7, Class M-8, Class M-9 and Class M-10
Certificates, in that order, the related Accrued Certificate Interest and
Interest Carry Forward Amount, to the extent remaining undistributed after the
distributions of the Interest Remittance Amount and the Monthly Excess Cashflow;
fifth, to the holders of the class or classes of Certificates then
entitled to receive distributions in respect of principal, in an amount
necessary to maintain the applicable Targeted Overcollateralization Amount after
taking into account distributions made from the Monthly Excess Interest Amount
(but only to the extent of cumulative Realized Losses);
S-62
sixth, concurrently, to each class of Class A Certificates, the related
Cap Carryover Amount, to the extent remaining undistributed after distributions
are made from the Cap Carryover Reserve Account, on a pro rata basis based on
such respective Cap Carryover Amounts remaining;
seventh, sequentially, to the Class M-1, Class M-2, Class M-3, Class
M-4, Class M-5, Class M-6, Class M-7, Class M-8, Class M-9 and Class M-10
Certificates, in that order, the related Cap Carryover Amount, to the extent
remaining undistributed after distributions are made from the Cap Carryover
Reserve Account;
eighth, sequentially, to the Class M-1, Class M-2, Class M-3, Class
M-4, Class M-5, Class M-6, Class M-7, Class M-8, Class M-9 and Class M-10
Certificates, to the extent of any remaining related Realized Loss Amortization
Amount for such class; and
ninth, to the Class CE Certificates, any remaining amounts.
THE SUPPLEMENTAL INTEREST TRUST
Wells Fargo Bank, N.A. will be the Supplemental Interest Trust Trustee.
The Supplemental Interest Trust Trustee will perform all of the obligations of
the trustee under the Interest Rate Swap Agreement. With regard to the
Supplemental Interest Trust, the Supplemental Interest Trust Trustee will only
be obligated to make payments to the Trust under the Interest Rate Swap
Agreement to the extent that the Supplemental Interest Trust receives the
related funds from the Swap Provider, and will only be obligated to make
payments to the Swap Provider under the Interest Rate Swap Agreement to the
extent that the Supplemental Interest Trust receives the related funds from the
Trust. The Supplemental Interest Trust Trustee will be entitled to reimbursement
or indemnification by the Trust for any loss, liability or expense arising out
of or in connection with the Supplemental Interest Trust as set forth in the
Pooling and Servicing Agreement except any such loss, liability or expense as
may arise from its bad faith, willful misconduct or negligence.
Any resignation or removal of Wells Fargo Bank, N.A. as Trustee of the
Trust will also result in the resignation or removal, as applicable, of Wells
Fargo Bank, N.A. as the trustee of the Supplemental Interest Trust.
CALCULATION OF ONE-MONTH LIBOR
One-Month LIBOR for the first Distribution Date will be determined on
the second business day preceding the Closing Date and for each subsequent
Distribution Date will be determined on the second business day prior to the
immediately preceding Distribution Date (each such date, a "LIBOR DETERMINATION
DATE"). With respect to each Distribution Date, "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
related LIBOR Determination Date. "TELERATE PAGE 3750" means the display
designated as page 3750 on the Reuters Telerate (or such other page as may
replace page 3750 on that service for the purpose of displaying London interbank
offered rates of major banks). If such rate does not appear on that page (or
such other page as may replace that page on that service, or if such service is
no longer offered, another service for displaying One-Month LIBOR or comparable
rates as may be selected by the Trustee), 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) as of 11:00 A.M., London time, on the related
LIBOR Determination Date to prime banks in the London interbank market for a
period of one month in amounts approximately equal to the aggregate Certificate
Principal Balance of the Offered Certificates. The Trustee will request the
principal London office of each of the reference banks to provide a quotation of
its rate. If at least two quotations are provided, the rate will be the
arithmetic mean of the quotations. If on such date fewer than two quotations are
provided as requested, the rate will be the arithmetic mean of the rates quoted
by one or more major banks in New York City, selected by the Trustee, as of
11:00 A.M., New York City time, on such date for loans in United States dollars
to leading European banks for a period of one month in amounts approximately
equal to the aggregate Certificate Principal Balance of the Offered
Certificates. If no quotations can be obtained, the rate will be One-Month LIBOR
for the prior Distribution Date.
S-63
The establishment of One-Month LIBOR on each LIBOR Determination Date
by the Trustee and the Trustee's calculation of the rate of interest applicable
to the Offered Certificates for the related Interest Accrual Period shall (in
the absence of manifest error) be final and binding.
YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS
The yields to maturity and weighted average lives of the Offered
Certificates will depend upon, among other things, the price at which such
Offered Certificates are purchased, the amount and timing of principal payments
on the Mortgage Loans, the allocation of Available Funds to various classes of
Offered Certificates, the amount and timing of mortgagor delinquencies and
defaults on the applicable Mortgage Loans, the rate of liquidations and Realized
Losses and the allocation of Realized Losses to various classes of Offered
Certificates.
The rate of payment of principal, the aggregate amount of distributions
and the yield to maturity of the Offered Certificates will be affected by the
rate of defaults resulting in Realized Losses and by the severity and timing of
these losses. If a purchaser of an Offered Certificate calculates its
anticipated yield based on an assumed rate of default and amount of Realized
Losses that is lower than the default rate and amount of losses actually
incurred, its actual yield to maturity will be lower than the yield calculated.
The timing of Realized Losses will also affect an investor's actual yield to
maturity, even if the average rate of defaults and severity of losses are
consistent with an investor's expectations. In general, the earlier a loss
occurs, the greater the effect on an investor's yield to maturity. There can be
no assurance as to the delinquency, foreclosure or loss experience of the
Mortgage Loans. The Mortgage Loans may have a greater than normal risk of future
defaults and delinquencies, as compared to newly originated, high quality one-
to four-family residential mortgage loans of comparable size and geographic
concentration because the Mortgage Loans are of non-prime credit quality. See
"Risk Factors--Non-Prime Mortgage Loans May Experience Greater Rates of
Delinquency and Foreclosure" in this prospectus supplement.
The rate of principal payments, the aggregate amount of distributions
and the yields to maturity of the Offered Certificates will be related to the
rate and timing of payments of principal on the Mortgage Loans. The rate of
principal payments on the Mortgage Loans will in turn be affected by the
amortization schedules of the Mortgage Loans and by the rate of principal
prepayments (including for this purpose prepayments resulting from refinancing,
liquidations of the Mortgage Loans due to defaults, casualties or condemnations
and repurchases by the Sponsor, the Originator or Servicer). Because certain of
the Mortgage Loans contain prepayment charges, the rate of principal payments
may be less than the rate of principal payments for mortgage loans which did not
have prepayment charges. The Mortgage Loans are subject to the "due-on-sale"
provisions in the related Mortgage Notes and each Adjustable-Rate Mortgage Loan
generally provides that the Mortgage Loan is assumable by a creditworthy
purchaser of the related Mortgaged Property. See "Yield Considerations" in the
prospectus.
Unscheduled payments of principal (whether resulting from prepayments,
liquidations, casualties, condemnations, repurchases due to breaches of
representations and warranties, or purchase in connection with optional
termination) will result in distributions on the related Offered Certificates of
principal amounts which would otherwise be distributed over the remaining terms
of the Mortgage Loans. Since the rate of payment of principal on the Mortgage
Loans will depend on future events and a variety of other factors, no assurance
can be given as to such rate or the rate of principal prepayments. The extent to
which the yield to maturity of a class of Offered Certificates may vary from the
anticipated yield will depend upon the degree to which such class of Offered
Certificates is purchased at a discount or premium, and the degree to which the
timing of payments thereon is sensitive to prepayments, liquidations and
purchases of the applicable Mortgage Loans. Further, an investor should consider
the risk that, in the case of any Offered Certificate purchased at a discount, a
slower than anticipated rate of principal payments (including prepayments) on
the applicable Mortgage Loans could result in an actual yield to such investor
that is lower than the anticipated yield and, in the case of any Offered
Certificate purchased at a premium, a faster than anticipated rate of principal
payments on the applicable Mortgage Loans could result in an actual yield to
such investor that is lower than the anticipated yield.
The rate of principal payments (including prepayments) on pools of
mortgage loans may vary significantly over time and may be influenced by a
variety of economic, geographic and other factors, including changes in
mortgagors' housing needs, job transfers, unemployment, mortgagors' net equity
in the mortgaged properties and servicing decisions. In general, if prevailing
interest rates were to fall significantly below the Mortgage Interest Rates on
the Mortgage Loans, such Mortgage Loans could be subject to higher prepayment
rates than if prevailing
S-64
interest rates were to remain at or above the Mortgage Interest Rates on such
Mortgage Loans. Conversely, if prevailing interest rates were to rise
significantly, the rate of prepayments on such Mortgage Loans would generally be
expected to decrease. As is the case with the Fixed-Rate Mortgage Loans, the
Adjustable-Rate Mortgage Loans may be subject to a greater rate of principal
prepayments in a low interest rate environment. For example, if prevailing
interest rates were to fall, mortgagors with adjustable-rate mortgage loans may
be inclined to refinance their adjustable-rate mortgage loans with a fixed-rate
loan to "lock in" a lower interest rate. The existence of the applicable
Periodic Rate Cap and Maximum Mortgage Interest Rate also may affect the
likelihood of prepayments resulting from refinancings. No assurances can be
given as to the rate of prepayments on the Mortgage Loans in stable or changing
interest rate environments. In addition, the delinquency and loss experience of
the Adjustable-Rate Mortgage Loans may differ from that on the Fixed-Rate
Mortgage Loans because the amount of the Monthly Payments on the Adjustable-Rate
Mortgage Loans are subject to adjustment on each Adjustment Date. Further, a
majority of the Adjustable-Rate Mortgage Loans will not have their initial
Adjustment Date for one to five years after their origination. The
Adjustable-Rate Mortgage Loans may be subject to greater rates of prepayments as
they approach their initial Adjustment Dates even if market interest rates are
only slightly higher or lower than the Mortgage Interest Rates on such
Adjustable-Rate Mortgage Loans as borrowers seek to avoid changes in their
Monthly Payments.
The interest-only feature of the Interest Only Mortgage Loans may
reduce the perceived benefits of refinancing to take advantage of lower market
interest rates or to avoid adjustments in the Mortgage Rates. However, as a
Mortgage Loan with such a feature nears the end of its interest-only period, the
borrower may be more likely to refinance the Mortgage Loans, even if market
interest rates are only slightly less than the Mortgage Rate in order to avoid
the increase in the monthly payments needed to amortize the Mortgage Loan over
its remaining life.
The weighted average life and yield to maturity of each class of
Certificates will also be influenced by the amount of Monthly Excess Cashflow
Amounts generated by the Mortgage Loans and applied in reduction of the
Certificate Principal Balances of such Certificates. The level of Monthly Excess
Cashflow Amounts available on any Distribution Date to be applied in reduction
of the Certificate Principal Balances of the Certificates will be influenced by,
among other factors, (i) the overcollateralization level of the Mortgage Loans
at such time (i.e., the extent to which interest on the Mortgage Loans is
accruing on a higher Principal Balance than the aggregate Certificate Principal
Balance of the Certificates); (ii) the delinquency and default experience of the
Mortgage Loans; and (iii) the level of the Index for the Adjustable-Rate
Mortgage Loans. To the extent that greater amounts of Monthly Excess Cashflow
Amounts are distributed in reduction of the Certificate Principal Balance of a
class of Certificates, the weighted average life thereof can be expected to
shorten. No assurance can be given as to the amount of Monthly Excess Cashflow
Amounts distributed at any time or in the aggregate.
The Class M Certificates are not expected to receive any principal
distributions until at least the Distribution Date in March 2009 (unless the
aggregate Certificate Principal Balance of the Class A Certificates is reduced
to zero prior thereto). As a result, the weighted average lives of the Class M
Certificates will be longer than would have been the case if principal
distributions were to be made on a pro rata basis. The longer weighted average
lives may increase the risk that an Applied Realized Loss Amount will be
allocated to one or more classes of Class M Certificates.
The Originator generally shall be required to repurchase from the Trust
certain mortgage loans for which the first scheduled monthly payment due after
their purchase by the sponsor becomes 30 or more days delinquent. Such
repurchase obligation shall have the same effect on the holders of the Offered
Certificates as a prepayment on the Mortgage Loans. See "Risk Factors--There are
risks involving unpredictability of prepayments and the effect of prepayments on
yields" in this prospectus supplement.
WEIGHTED AVERAGE LIVES
The timing of changes in the rate of principal prepayments on the
Mortgage Loans may significantly affect an investor's actual yield to maturity,
even if the average rate of principal prepayments is consistent with such
investor's expectation. In general, the earlier a principal prepayment on the
Mortgage Loans occurs, the greater the effect of such principal prepayment on an
investor's yield to maturity. The effect on an investor's yield of principal
prepayments occurring at a rate higher (or lower) than the rate anticipated by
the investor during the period
S-65
immediately following the issuance of the Offered Certificates may not be offset
by a subsequent like decrease (or increase) in the rate of principal
prepayments.
The projected weighted average life of any class of Offered
Certificates is the average amount of time that will elapse from the Closing
Date, until each dollar of principal is scheduled to be repaid to the investors
in such class of Offered Certificates. Because it is expected that there will be
prepayments and defaults on the Mortgage Loans, the actual weighted average
lives of the classes of Offered Certificates are expected to vary substantially
from the weighted average remaining terms to stated maturity of the Mortgage
Loans as set forth in the tables in this prospectus supplement under "Summary of
Prospectus Supplement."
Prepayments on mortgage loans are commonly measured relative to a
prepayment model or standard. The prepayment models used in this prospectus
supplement (the "PREPAYMENT ASSUMPTIONS") are based on an assumed rate of
prepayment each month of the then unpaid principal balance of two hypothetical
pools of mortgage loans similar to the Mortgage Loans.
For the Fixed-Rate Mortgage Loans, the Prepayment Assumption is the
"FIXED-RATE PREPAYMENT CURVE" or "FRM PPC," which assumes a prepayment rate of
2.30% CPR per annum of the then-outstanding principal balance of a hypothetical
pool of fixed-rate mortgage loans in the first month of the life of such
mortgage loans and an additional 2.30% per annum in each month thereafter until
23.00% CPR is reached in the tenth month. Beginning in the tenth month and in
each month thereafter during the life of such mortgage loans, FRM PPC assumes a
constant prepayment rate of 23.00% CPR per annum each month.
For the Adjustable-Rate Mortgage Loans, the Prepayment Assumption is
the "ADJUSTABLE-RATE PREPAYMENT CURVE" or "ARM PPC," which assumes a prepayment
rate of approximately 4.00% CPR per annum of the then-outstanding principal
balance of a hypothetical pool of adjustable-rate mortgage loans in the first
month of the life of such mortgage loans and an additional approximate 1.348%
per annum in each month thereafter until 35.00% CPR is reached in the
twenty-fourth month. Beginning in the twenty-fourth month and in each month
thereafter during the life of such mortgage loans, ARM PPC assumes a constant
prepayment rate of 35.00% CPR per annum each month.
"CPR" represents a constant assumed rate of principal prepayment each
month relative to the then-outstanding principal balance of a pool of mortgage
loans for the life of such mortgage loans. No Prepayment Assumption purports to
be a historical description of prepayment experience or a prediction of the
anticipated rate of prepayment of any pool of mortgage loans, including the
Mortgage Loans.
The decrement tables set forth in Appendix B were prepared on the basis
of the assumptions in the following paragraph and the table set forth in
Appendix C. There may be certain differences between the loan characteristics
included in such assumptions and the characteristics of the actual Mortgage
Loans. Any such discrepancy may have an effect upon the percentages of original
Certificate Principal Balances outstanding and weighted average lives of the
Offered Certificates set forth in the decrement tables. In addition, since the
actual Mortgage Loans in the Trust Fund will have characteristics that differ
from those assumed in preparing the table in Appendix C, the distributions of
principal of the Offered Certificates may be made earlier or later than
indicated in the tables.
The percentages and weighted average lives in the decrement tables were
determined using the following assumptions collectively (the "STRUCTURING
ASSUMPTIONS"): (i) the Mortgage Loans have the characteristics set forth in the
table in Appendix C, (ii) the closing date for the Offered Certificates occurs
on February 28, 2006 and the Offered Certificates are sold to investors on such
date, (iii) distributions on the Certificates are made on the 25th day of each
month regardless of the day on which the Distribution Date actually occurs,
commencing in March 2006, in accordance with the allocation of Available Funds
set forth above under "Description of the Certificates," (iv) the Mortgage Loans
prepay in accordance with the Prepayment Assumptions indicated, (v) there are no
Prepayment Interest Shortfalls, (vi) neither the Sponsor nor the Originator is
required to substitute or repurchase any of the Mortgage Loans pursuant to the
Originator Mortgage Loan Purchase Agreement, the Mortgage Loan Purchase
Agreement or the Pooling and Servicing Agreement and no optional termination is
exercised (except with respect to the entries identified by the row heading
"Weighted Avg. Life to Optional Termination Date" in the tables in Appendix B),
(vii) the Targeted Overcollateralization Amount is set initially as specified
herein and thereafter
S-66
decreases as described in the definition thereof, (viii) scheduled payments for
all Mortgage Loans are received on the Due Date commencing in March 2006, the
principal portion of such payments is computed prior to giving effect to
prepayments received in such month and there are no losses or delinquencies with
respect to such Mortgage Loans, (ix) such prepayments are received on the last
day of each month commencing in February 2006, (x) the Servicing Fee Rate is
0.50% per annum and the Credit Risk Manager Fee Rate is 0.015% per annum, (xi)
One-Month LIBOR is at all times equal to 4.570%, (xii) the Certificate Interest
Rates for the Offered Certificates are as set forth in the table beginning on
page S-3, (xiii) the Mortgage Interest Rate for each Adjustable-Rate Mortgage
Loan adjusts semi-annually on its next Adjustment Date (and on subsequent
Adjustment Dates, if necessary) to equal the sum of (a) the assumed level of the
Index and (b) the respective Gross Margin (this sum subject to the applicable
Periodic Rate Caps, Minimum Mortgage Interest Rates and Maximum Mortgage
Interest Rates), (xiv) with respect to the Adjustable-Rate Mortgage Loans,
Six-Month LIBOR is equal to 4.910%, (xv) the Class P Certificates have a zero
Certificate Principal Balance and (xvi) the Net Swap Payment is calculated as
described under "Description of the Certificates--Interest Rate Swap Agreement,
the Swap Provider and the Swap Account" and no Swap Termination Payment is made.
Nothing contained in the foregoing assumptions should be construed as a
representation that the Mortgage Loans will not experience delinquencies or
losses.
Based on the foregoing assumptions and the assumed mortgage loan
characteristics set forth in the table in Appendix C, the decrement tables
indicate the projected weighted average lives of each class of Offered
Certificates and set forth the percentages of the original Certificate Principal
Balance of each such class that would be outstanding after each of the dates
shown at the indicated percentages of the applicable Prepayment Assumption.
FINAL SCHEDULED DISTRIBUTION DATES
The Final Scheduled Distribution Date of each class of Offered
Certificates is set in the table beginning on page S-3. The Final Scheduled
Distribution Date for such Certificates has been calculated on the basis of the
Structuring Assumptions and the assumption that there are no prepayments. Since
the rate of distributions in reduction of the Certificate Principal Balance of
each class of Offered Certificates will depend on the rate of payment (including
prepayments) of the Mortgage Loans, the Certificate Principal Balance of any
such class could be reduced to zero significantly earlier or later than the
Final Scheduled Distribution Date. The rate of payments on the Mortgage Loans
will depend on their particular characteristics, as well as on prevailing
interest rates from time to time and other economic factors, and no assurance
can be given as to the actual payment experience of the Mortgage Loans.
USE OF PROCEEDS
The Depositor will apply the net proceeds of the sale of the Offered
Certificates to the purchase of the Mortgage Loans from the Sponsor.
FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The Pooling and Servicing Agreement provides that designated portions
of the Issuing Entity (exclusive of arrangements intended to protect against
basis risk for certain of the certificates, the Interest Rate Swap Agreement,
the Swap Account, the Supplemental Interest Trust and the Cap Carryover Reserve
Account) will comprise multiple REMICs organized in a tiered REMIC structure.
Each REMIC will designate a single class of interests as the residual interest
in that REMIC. Elections will be made to treat each REMIC as a REMIC for federal
income tax purposes. Each class of Offered Certificates (exclusive of the right
to receive payments from the Cap Carryover Reserve Account and the Supplemental
Interest Trust or the obligation to make payments to the Supplemental Interest
Trust), the Class CE, and the Class P Certificates will represent beneficial
ownership of REMIC regular interests.
Upon the issuance of the Offered Certificates, Hunton & Williams LLP
will deliver its opinion to the effect that, assuming compliance with the
Pooling and Servicing Agreement, for federal income tax purposes, each of the
S-67
lower-tier REMICs and the upper-tier REMIC will qualify as a REMIC within the
meaning of Section 860D of the Internal Revenue Code of 1986, as amended (the
"CODE").
TAXATION OF REGULAR INTERESTS
For federal income tax reporting purposes, the regular interest portion
of the classes of Offered Certificates may be treated as having been issued with
original issue discount ("OID"). The Prepayment Assumption that will be used in
determining the rate of accrual of original issue discount, premium and market
discount, if any, for federal income tax purposes will be based on the
assumption that subsequent to the date of any determination the Mortgage Loans
will prepay at a constant rate of 100% ARM PPC with respect to the
Adjustable-Rate Mortgage Loans and 100% FRM PPC with respect to the Fixed-Rate
Mortgage Loans. No representation is made that the Mortgage Loans will prepay at
such rate or at any other rate. See "Federal Income Tax
Consequences--REMICs--Taxation of Owners of Regular Securities--Original Issue
Discount" in the Prospectus.
The IRS has issued regulations (the "OID REGULATIONS") under Sections
1271 to 1275 of the Code generally addressing the treatment of debt instruments
issued with original issue discount. Purchasers of the Offered Certificates
should be aware that the OID Regulations do not adequately address certain
issues relevant to, or are not applicable to, securities such as the Offered
Certificates. Because of the uncertainty concerning the application of Section
1272(a)(6) of the Code to such Certificates, and because the rules of the OID
Regulations are limited in their application in ways that could preclude their
application to such Certificates even in the absence of Section 1272(a)(6) of
the Code, the IRS could assert that the Offered Certificates should be treated
as issued with original issue discount or should be governed by the rules
applicable to debt instruments having contingent payments or by some other
manner not yet set forth in regulations. Prospective purchasers of the Offered
Certificates are advised to consult their tax advisors concerning the tax
treatment of such Certificates.
The Offered Certificates will represent beneficial ownership of (i)
REMIC and (ii) the right to receive payments from the Cap Carryover Reserve
Account and the right to receive payments from the Supplemental Interest Trust
in respect of the Cap Carryover Amount and the obligation to make payments to
the Supplemental Interest Trust (the "NOTIONAL PRINCIPAL CONTRACT ARRANGEMENT").
Holders of the Offered Certificates must allocate their basis between their
regular interest and their Notional Principal Contract Arrangement component as
set forth below under "-- Taxation of Notional Principal Contract Arrangement."
The Cap Carryover Reserve Account, the Interest Rate Swap Agreement, the Swap
Account and the Supplemental Interest Trust are not assets of any REMIC created
in this transaction. The REMIC regular interest corresponding to an Offered
Certificate (the "REGULAR INTEREST") will be entitled to receive interest and
principal payments at the times and in the amounts equal to those made on the
Offered Certificate to which it corresponds, except that (i) the maximum
interest rate of that Regular Interest will equal the Pool Cap of the Offered
Certificate computed for this purpose by limiting the Notional Amount of the
Interest Rate Swap Agreement to the aggregate Principal Balance of the Mortgage
Loans and (ii) any Swap Termination Payment will be treated as being payable
solely from Net Monthly Excess Cashflow otherwise distributable to the Class CE
Certificate. As a result of the foregoing, the amount of distributions on the
Regular Interest corresponding to an Offered Certificate may exceed the actual
amount of distributions on the Offered Certificate.
The Regular Interest component of the Offered Certificates (but not the
Notional Principal Contract Arrangement components) generally will be treated as
assets described in Section 7701(a)(19)(C) of the Code for a domestic building
and loan association and "real estate assets" under Section 856(c)(5)(B) of the
Code for a real estate investment trust (a "REIT"), in the same proportion that
the assets in the Issuing Entity would be so treated. In addition, interest on
the Offered Certificates generally will be treated as "interest on obligations
secured by mortgages on real property" under Section 856(c)(3)(B) of the Code
for a REIT, to the extent that the Offered Certificates are treated as "real
estate assets" under Section 856(c)(5)(B) of the Code. See "Federal Income Tax
Consequences--REMICs--Characterization of Investments in REMIC Securities" in
the Prospectus. If more than 95% of the Regular Interests and income qualify for
these treatments, the Regular Interests generally will qualify for such
treatments in their entirety (exclusive of the Notional Principal Contract
Arrangement component). However, no portion of an Offered Certificateholder's
basis or income allocable to a Notional Principal Contract Arrangement will
qualify for such treatment. As a result, the Offered Certificates generally are
not suitable investments for inclusion in another REMIC.
S-68
TAXATION OF THE NOTIONAL PRINCIPAL CONTRACT ARRANGEMENTS
General. Each holder of an Offered Certificate will be treated for
federal income tax purposes as having entered into a notional principal contract
pursuant to its rights to receive payment with respect to Cap Carryover Amounts
from the Cap Carryover Reserve Account and the Supplemental Interest Trust and
the obligation to make payments to the Supplemental Interest Trust on the date
it purchases its Certificates.
In general, the holders of the Offered Certificates must allocate the
price they pay for the Offered Certificates between the Regular Interest
component and the Notional Principal Contract Arrangement component based on
their relative fair market values. To the extent rights to receive payments are
determined to have a value on the Closing Date that is greater than zero, a
portion of such purchase price will be allocable to such rights, and such
portion will be treated as a cap premium (the "CAP PREMIUM") paid or received by
the holders of Offered Certificates, as applicable. A holder of an Offered
Certificate will be required to amortize the Cap Premium under a level payment
method as if the Cap Premium represented the present value of a series of equal
payments made over the life of the applicable Notional Principal Contract
Arrangement (adjusted to take into account decreases in notional principal
amount), discounted at a rate equal to the rate used to determine the amount of
the Cap Premium (or some other reasonable rate). Prospective purchasers of
Offered Certificates are encouraged to consult their own tax advisors regarding
the appropriate method of amortizing any Cap Premium. The Notional Principal
Contract Regulations treat a nonperiodic payment made under a notional principal
contract as a loan for federal income tax purposes if the payment is
"significant." It is not known whether any Cap Premium would be treated in part
as a loan under the regulations governing notional principal contracts (the
"NOTIONAL PRINCIPAL CONTRACT REGULATIONS").
Under the Notional Principal Contract Regulations (i) all taxpayers
must recognize periodic payments with respect to a notional principal contract
under the accrual method of accounting, and (ii) any periodic payments received
under the applicable Notional Principal Contract Arrangement must be netted
against payments, if any, deemed made as a result of the Cap Premiums over the
recipient's taxable year, rather than accounted for on a gross basis. Net income
or deduction with respect to net payments under a notional principal contract
for a taxable year should constitute ordinary income or ordinary deduction. The
IRS could contend the amount is capital gain or loss, but such treatment is
unlikely, at least in the absence of further regulations. Any regulations
requiring capital gain or loss treatment presumably would apply only
prospectively. Individuals may be limited in their ability to deduct any such
net deduction and are encouraged to consult their tax advisors prior to
investing in the Offered Certificates.
Any payments made to a beneficial owner of an Offered Certificate in
excess of the amounts payable on the corresponding Regular Interest will be
treated as having been received as a payment on a notional principal contract.
To the extent the sum of such periodic payments for any year exceeds that year's
amortized cost of any Cap Carryover Amounts, such excess represents net income
for that year. Conversely, to the extent that the amount of that year's
amortized cost exceeds the sum of the periodic payments, such excess shall
represent a net deduction for that year. In addition, any amounts payable on
such Regular Interest in excess of the amount of payments on the Offered
Certificate to which it relates will be treated as having been received by the
beneficial owners of such Certificates and then paid by such owners to the
Supplemental Interest Trust pursuant to the Interest Rate Swap Agreement, and
such excess should be treated as a periodic payment on a notional principal
contract that is made by the beneficial owner during the applicable taxable year
and that is taken into account in determining the beneficial owner's net income
or net deduction with respect to any Cap Carryover Amounts for such taxable
year. Although not clear, net income or a net deduction with respect to the Cap
Carryover Amount should be treated as ordinary income or as an ordinary
deduction. Holders of the Offered Certificates are advised to consult their own
tax advisors regarding the tax characterization and timing issues relating to
payments and obligations under the Notional Principal Contract Arrangement.
A beneficial owner's ability to recognize a net deduction with respect
to the Notional Principal Contract Arrangement component is limited under
Sections 67 and 68 of the Code in the case of (i) estates and trusts and (ii)
individuals owning an interest in such component directly or through a
"pass-through entity" (other than in connection with such individual's trade or
business). Pass-through entities include partnerships, S corporations, grantor
trusts and non-publicly offered regulated investment companies, but do not
include estates, nongrantor trusts, cooperatives, real estate investment trusts
and publicly offered regulated investment companies. Further, such a beneficial
owner will not be able to recognize a net deduction with respect the Notional
Principal Contract Arrangement component in computing the beneficial owner's
alternative minimum tax liability.
S-69
It is possible that the right to receive payments in respect of the
Notional Principal Contract Arrangement could be treated as a partnership among
the holders of all of the Certificates, in which case holders of such
Certificates potentially would be subject to different timing of income and
foreign holders of such Certificates could be subject to withholding in respect
of any related Cap Carryover Amount. Holders of the Offered 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 their Certificates.
Any amount of proceeds from the sale, redemption or retirement of an
Offered Certificate that is considered to be allocated to rights under a
Notional Principal Contract Arrangement would be considered a "termination
payment" under the Notional Principal Contract Regulations. It is anticipated
that the Supplemental Interest Trust Trustee will account for any termination
payments for reporting purposes in accordance with the Notional Principal
Contract Regulations, as described below.
Termination Payments. Any amount of sales proceeds that is considered
to be allocated to the selling beneficial owner's rights under the applicable
Notional Principal Contract Arrangement in connection with the sale or exchange
of an Offered Certificate would be considered a "termination payment" under the
Notional Principal Contract Regulations allocable to that Offered Certificate. A
holder of an Offered Certificate will have gain or loss from such a termination
of a Notional Principal Contract Arrangement equal to (i) any termination
payment it received or is deemed to have received minus (ii) the unamortized
portion of any Cap Premium paid (or deemed paid) by the beneficial owner upon
entering into or acquiring its interest in a Notional Principal Contract
Arrangement.
Gain or loss realized upon the termination of a Notional Principal
Contract Arrangement will generally be treated as capital gain or loss.
Moreover, in the case of a bank or thrift institution, Code Section 582(c) would
likely not apply to treat such gain or loss as ordinary.
REMIC TAXES AND REPORTING
It is not anticipated that the Issuing Entity will engage in any
transactions that would subject it to the prohibited transactions tax as defined
in Section 860F(a)(2) of the Code, the contributions tax as defined in Section
860G(d) of the Code or the tax on net income from foreclosure property as
defined in Section 860G(c) of the Code. However, in the event that any such tax
is imposed on the Issuing Entity, such tax will be borne (i) by the Trustee, if
the Trustee has breached its obligations with respect to REMIC compliance under
the Agreement, (ii) the Servicer, if the Servicer has breached its obligations
with respect to REMIC compliance under the Agreement, and (iii) otherwise by the
Issuing Entity, with a resulting reduction in amounts otherwise distributable to
Holders of the Offered Certificates. See "Description of the
Securities--General" and "Federal Income Tax Consequences--REMICs--Taxes That
May Be Imposed on the REMIC Pool--Prohibited Transactions" in the Prospectus.
The responsibility for filing annual federal information returns and
other reports will be borne by the Trustee. See "Federal Income Tax
Consequences--REMICs--Taxes That May Be Imposed on the REMIC
Pool--Administrative Matters" in the Prospectus.
For further information regarding the federal income tax consequences
of investing in the Offered Certificates, see "Federal Income Tax
Consequences--REMICs" in the Prospectus.
ERISA CONSIDERATIONS
Section 406 of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), prohibits "parties in interest" with respect to an employee
benefit plan subject to ERISA and/or a plan or other arrangement subject to the
excise tax provisions set forth under Section 4975 of the Code (each of the
foregoing, an "ERISA PLAN") from engaging in certain transactions involving such
ERISA Plan and its assets unless a statutory, regulatory or administrative
exemption applies to the transaction. Section 4975 of the Code imposes certain
excise taxes on prohibited transactions involving plans described under that
Section; ERISA authorizes the imposition of civil penalties for prohibited
transactions involving plans not covered under Section 4975 of the Code. Any
ERISA Plan fiduciary which proposes to cause an ERISA Plan to acquire any of the
Offered Certificates is encouraged to consult
S-70
with its counsel with respect to the potential consequences under ERISA and the
Code of the ERISA Plan's acquisition and ownership of such Certificates. See
"ERISA Considerations" in the Prospectus.
Certain employee benefit plans, including governmental plans and
certain church plans (collectively with ERISA Plans, "PLANS"), are not subject
to ERISA's requirements. However, such plans may be subject to the provisions of
other applicable federal, state or local law ("SIMILAR LAW") materially similar
to the foregoing provisions of ERISA and the Code. Any such plan which is
qualified and exempt from taxation under Sections 401(a) and 501(a) of the Code
may nonetheless be subject to the prohibited transaction rules set forth in
Section 503 of the Code.
Except as noted above, investments by Plans are subject to ERISA's
general fiduciary requirements, including the requirement of investment prudence
and diversification and the requirement that a Plan's investments be made in
accordance with the documents governing the Plan. A fiduciary which decides to
invest the assets of a Plan in the Offered Certificates should consider, among
other factors, the extreme sensitivity of the investments to the rate of
principal payments (including prepayments) on the Mortgage Loans.
The U.S. Department of Labor has extended to the Underwriter an
administrative exemption (the "EXEMPTION") from certain of the prohibited
transaction rules of ERISA and the related excise tax provisions of Section 4975
of the Code with respect to the initial purchase, the holding and the subsequent
resale by Plans of certificates in pass-through trusts that consist of certain
receivables, loans and other obligations that meet the conditions and
requirements of the Exemptions. The Exemptions can apply to certificates in a
pass-through trust holding mortgage loans, and the Exemptions may apply to the
Class A Certificates. The Exemption will not apply to the Class M Certificates.
Among the conditions that must be satisfied for the Exemptions to apply
are the following:
(1) the acquisition of the certificates by a Plan is on
terms (including the price for the certificates) that are at least as
favorable to the Plan as they would be in an arm's length transaction
with an unrelated party;
(2) the certificates acquired by the Plan have received a
rating at the time of such acquisition that is one of the four highest
generic rating categories from Standard & Poor's, a division of The
McGraw-Hill Companies, Inc., Moody's Investors Service, Inc. or Fitch
Ratings (collectively, the "EXEMPTION RATING AGENCIES");
(3) the trustee must not be an affiliate of any other
member of the Restricted Group (as defined below), other than an
underwriter;
(4) the sum of all payments made to and retained by the
underwriter in connection with the distribution of the certificates
represents not more than reasonable compensation for underwriting the
certificates; the sum of all payments made to and retained by the
seller pursuant to the assignment of the loans to the trust represents
not more than the fair market value of such loans; the sum of all
payments made to and retained by the servicer represents not more than
reasonable compensation for such person's services under the agreement
pursuant to which the loans are pooled and reimbursements of such
person's reasonable expenses in connection therewith; and
(5) the Plan investing in the certificates is an
"accredited investor" as defined in Rule 501(a)(1) of Regulation D of
the Securities and Exchange Commission under the Securities Act of
1933, as amended (the "ACT").
The trust must also meet the following requirements:
(i) the corpus of the trust must consist solely of assets
of the type that have been included in other investment pools;
S-71
(ii) certificates in such other investment pools must have
been rated in one of the four highest generic rating categories by an
Exemption Rating Agency for at least one year prior to the Plan's
acquisition of certificates; and
(iii) certificates evidencing interests in such other
investment pools must have been purchased by investors other than Plans
for at least one year prior to any Plan's acquisition of the
certificates.
Notwithstanding the discussion above, special rules apply regarding the
Exemption in the case of certificates backed by pools containing residential or
home equity loans with loan-to-value ratios in excess of 100%.
(a) The rights and interests evidenced by such certificates acquired
by Plans cannot be subordinated to the rights and interests evidenced by other
certificates of the same trust;
(b) Such certificates acquired by Plans must have received a rating
from an Exemption Rating Agency at the time of such acquisition that is in one
of the two highest generic rating categories; and
(c) Any obligation included in the pool must be secured by collateral
whose fair market value on the date of issuance of the securities is at least
equal to 80% of the sum of (I) the outstanding principal balance due under the
obligation which is included in the pool and (II) the outstanding balance of any
other obligation of higher priority secured by the same collateral.
Because the Mortgage Pool contains Mortgage Loans with loan-to-value
ratios in excess of 100%, the special rules discussed above will apply to the
acquisition of offered Certificates by Plans. Consequently, the Exemption will
apply to the acquisition and holding by Plans of the Class A Certificates,
exclusive of the right to receive payments from the Supplemental Interest Trust,
if all conditions of the Exemption are met.
Moreover, the Exemption provides relief from certain
self-dealing/conflict of interest prohibited transactions that may occur when
the Plan fiduciary causes a Plan to acquire certificates in a trust holding
receivables as to which the fiduciary (or its affiliate) is an obligor provided
that, among other requirements, (i) in the case of an acquisition in connection
with the initial issuance of certificates, at least fifty percent (50%) of each
class of certificates in which Plans have invested is acquired by persons
independent of the Restricted Group; (ii) such fiduciary (or its affiliate) is
an obligor with respect to five percent (5%) or less of the fair market value of
the obligations contained in the trust; (iii) a Plan's investment in
certificates of any class does not exceed twenty-five percent (25%) of all of
the certificates of that class outstanding at the time of the acquisition; and
(iv) immediately after the acquisition, no more than twenty-five percent (25%)
of the assets of any Plan with respect to which such person is a fiduciary are
invested in certificates representing an interest in one or more trusts
containing assets sold or serviced by the same entity. The Exemption does not
apply to Plans sponsored by the Underwriter, the Trustee, the Servicer, the Swap
Provider, any obligor with respect to Mortgage Loans included in the Trust
constituting more than five percent of the aggregate unamortized principal
balance of the assets in the Trust, or any affiliate of such parties (the
"RESTRICTED GROUP").
For so long as the holder of a Class A Certificate also holds an
interest in the Supplemental Interest Trust, the holder will be deemed to have
acquired and be holding the Class A Certificate without the right to receive
payments from the Supplemental Interest Trust and, separately, the right to
receive payments from the Supplemental Interest Trust. The Exemption is not
applicable to the acquisition, holding and transfer of an interest in the
Supplemental Interest Trust. In addition, while the Supplemental Interest Trust
is in existence, it is possible that not all of the requirements for the
Exemption to apply to the acquisition, holding and transfer of Class A
Certificates will be satisfied. However, if the Exemption is not available,
there may be other exemptions that apply. Accordingly, no Plan or other person
using assets of a Plan may acquire or hold a Class A Certificate while the
Supplemental Interest Trust is in existence, unless (1) such Plan is an
accredited investor within the meaning of the Exemption and (2) such acquisition
or holding is eligible for the exemptive relief available under Department of
Labor Prohibited Transaction Class Exemption 84-14 (for transactions by
independent "qualified professional asset managers"), 91-38 (for transactions by
bank collective investment funds), 90-1 (for transactions by insurance company
pooled separate accounts), 95-60 (for transactions by insurance company general
accounts) or 96-23 (for transactions effected by "in-house asset managers"). For
so long as the Supplemental Interest Trust is in existence, each beneficial
owner of a Class A Certificate or any interest therein, shall be deemed to have
represented, by virtue
S-72
of its acquisition or holding of the Class A Certificate, or interest therein,
that either (i) it is not a Plan or other person using the assets of a Plan or
(ii) (A) it is an accredited investor within the meaning of the Exemption and
(B) the acquisition and holding of such Certificate and the separate right to
receive payments from the Supplemental Interest Trust are eligible for the
exemptive relief available under one of the five prohibited transaction class
exemptions enumerated above.
Because the Class M Certificates are subordinate to the Class A
Certificates and the Mortgage Pool contain Mortgage Loans with loan-to-value
ratios in excess of 100%, the Class M Certificates cannot be purchased unless
the Trustee receives: (i) a representation from the transferee of such
Certificate, acceptable to and in form and substance satisfactory to the
Trustee, to the effect that such transferee is not a Plan, or a person acting on
behalf of a Plan or using the assets of a Plan to effect such transfer; (ii) if
the purchaser is an insurance company, a representation that the purchaser is an
insurance company which is purchasing such Certificates with funds contained in
an "insurance company general account" (as such term is defined in Section V(e)
of Prohibited Transaction Class Exemption 95-60 ("PTCE 95-60")) and that the
purchase and holding of such Certificates are covered under Sections I and III
of PTCE 95-60; or (iii) an opinion of counsel satisfactory to the Trustee that
the purchase or holding of such Certificate by a Plan, any person acting on
behalf of a Plan or using such Plan's assets, will not constitute or result in a
non-exempt prohibited transaction within the meaning of ERISA, Section 4975 of
the Code or Similar Law and will not subject the Depositor, the Servicer or the
Trustee to any obligation in addition to those undertaken in the Pooling and
Servicing Agreement. Each beneficial owner of a Class M Certificate that is a
Book-Entry Certificate or any interest therein shall be deemed to have
represented, by virtue of its acquisition or holding of the Class M Certificate,
or interest therein, that either (i) or (ii) of this paragraph applies.
Plan fiduciaries should consult their legal counsel concerning the
availability of, and scope of relief provided by, the Exemption and the
enumerated class exemptions.
If any Offered Certificate, or any interest therein, is acquired or
held in violation of the provisions discussed above, the next preceding
permitted beneficial owner will be treated as the beneficial owner of that
Certificate, retroactive to the date of transfer to the purported beneficial
owner. Any purported beneficial owner whose acquisition or holding of an Offered
Certificate, or interest therein, was effected in violation of the provisions of
the preceding paragraph shall indemnify to the extent permitted by law and hold
harmless the Depositor, the Trustee, the Servicer and any the NIMS Insurer from
and against any and all liabilities, claims, costs or expenses incurred by such
parties as a result of such acquisition or holding.
Prospective Plan investors should consult with their legal advisors
concerning the impact of ERISA and the Exemption or any other exemption, and the
potential consequences in their specific circumstances, prior to making an
investment in the certificates. Moreover, each Plan fiduciary should determine
whether under the general fiduciary standards of investment prudence and
diversification, an investment in the Offered Certificates is appropriate for
the Plan, taking into account the overall investment policy of the Plan and the
composition of the Plan's investment portfolio.
For more information about ERISA considerations, see the information
under the heading "ERISA Considerations" in the Prospectus.
LEGAL INVESTMENT
The Class A, Class M-1, Class M-2, Class M-3 and Class M-4 Certificates
will not constitute "mortgage related securities" for purposes of the Secondary
Mortgage Market Enhancement Act of 1984, as amended ("SMMEA") for so long as
they are rated not lower than the second highest rating category by one or more
nationally recognized statistical rating organizations and, as such, will be
legal investments for certain entities to the extent provided in SMMEA and
applicable state laws. SMMEA, however, provides for state limitation on the
authority of such entities to invest in "mortgage related securities" provided
that such restrictive legislation was enacted prior to October 3, 1991. Certain
states have enacted legislation which overrides the preemption provisions of
SMMEA. The Class M Certificates (other than the Class M-1, Class M-2, Class M-3
and Class M-4 Certificates) will not constitute "mortgage related securities"
for purposes of SMMEA.
S-73
There may be restrictions on the ability of certain investors,
including depository institutions, either to purchase the Offered Certificates
or to purchase Offered Certificates representing more than a specified
percentage of the investor's assets. Investors are encouraged to consult their
own legal advisors in determining whether and to what extent the Offered
Certificates constitute legal investments for such investors. See "Legal
Investment" in the Prospectus.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting
Agreement, between the Depositor and Banc of America Securities LLC (the
"UNDERWRITER"), the Underwriter has agreed to purchase and the Depositor has
agreed to sell to the Underwriter all of the Offered Certificates.
Distribution of the Offered Certificates will be made by the
Underwriter from time to time in negotiated transactions or otherwise at varying
prices to be determined at the time of sale. The Underwriter may effect such
transactions by selling Offered Certificates to or through dealers and such
dealers may receive from the Underwriter, for which they act as agent,
compensation in the form of underwriting discounts, concessions or commissions.
The Underwriter and any dealers that participate with the Underwriter in the
distribution of such Offered Certificates may be deemed to be underwriters, and
any discounts, commissions or concessions received by them, and any profits on
resale of the Offered Certificates purchased by them, may be deemed to be
underwriting discounts and commissions under the Act.
The Depositor has been advised by the Underwriter that it intends to
make a market in the Offered Certificates but has no obligation to do so. There
can be no assurance that a secondary market for the Offered Certificates will
develop or, if it does develop, that it will continue.
The Depositor has agreed to indemnify the Underwriter against, or make
contributions to the Underwriter with respect to, certain liabilities, including
liabilities under the Act.
The Underwriter is an affiliate of the Depositor and the Sponsor.
REPORTS TO CERTIFICATEHOLDERS
The Trustee will prepare on a monthly basis a statement containing,
among other things, information relating to principal and interest distributions
on the Certificates, the status of the Mortgage Pool and certain other
information as set forth in the Pooling and Servicing Agreement in accordance
with Item 1121 of Regulation AB (17 C.F.R. 229.1121), as described under
"Description of the Agreements--Material Terms of the Pooling and Servicing
Agreements and Underlying Servicing Agreements--Reports to Securityholders" in
the prospectus. In addition, the Trustee and the Servicer, and potentially
certain other parties as described in the Pooling and Servicing Agreement, will
furnish to the Depositor and the Trustee, as applicable, the compliance
statements, assessments and attestation reports in accordance with Item 1122 and
Item 1123 of Regulation AB (17 CFR 229.1122 and 229.1123) detailed under
"Description of the Agreements--Material Terms of the Pooling and Servicing
Agreements and Underlying Servicing Agreements--Evidence as to Compliance" in
the prospectus.
Copies of these statements and reports will be filed on Forms 10-D and
10-K with the SEC through its EDGAR system located at "http://www.sec.gov" under
the name of the Issuing Entity for so long as the Issuing Entity is subject to
the reporting requirement of the Securities Exchange Act of 1934, as amended.
The Trustee will make the statement described in the prospectus under
"Description of the Agreements--Material Terms of the Pooling and Servicing
Agreements and Underlying Servicing Agreements--Reports to Securityholders"
available each month to Certificateholders and the other parties to the Pooling
and Servicing Agreement via the Trustee's internet website. To the extent set
forth in the Pooling and Servicing Agreement, the Trustee will also make the
Periodic Reports described in the prospectus under "Where You Can Find More
Information" relating to the Issuing Entity available through its website. The
Trustee's internet website will initially be located at "www.ctslink.com."
Assistance in using the website can be obtained by calling the Trustee's
customer
S-74
service desk at (301) 815-6600. Parties that are unable to use the website are
entitled to have a paper copy mailed to them at no charge via first class mail
by calling the customer service desk.
LEGAL MATTERS
The legality of the Offered Certificates and certain tax matters will
be passed upon for the Depositor and the Underwriter by Hunton & Williams LLP.
RATINGS
It is a condition to the issuance of the Offered Certificates that the
Certificates receive at least the rating set forth in the table beginning on
page S-3 of this prospectus supplement from S&P, Fitch and Moody's.
A securities rating addresses the likelihood of the receipt by a
Certificateholder of distributions on the Mortgage Loans. The rating takes into
consideration the characteristics of the Mortgage Loans and the structural,
legal and tax aspects associated with the certificates. The ratings on the
Offered Certificates do not, however, constitute statements regarding the
likelihood of the payment of any Cap Carryover Amount, the frequency of
prepayments on the Mortgage Loans, or the possibility that a holder of an
Offered Certificate might realize a lower than anticipated yield.
A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. In the event that the ratings initially assigned
to any of the Offered Certificates by the Rating Agencies are subsequently
lowered for any reason, no person or entity is obligated to provide any
additional support or credit enhancement with respect to such Offered
Certificates.
In addition, the rating agencies that assign the initial ratings to the
Offered Certificates will monitor those ratings for so long as the Offered
Certificates remain outstanding.
S-75
INDEX OF PROSPECTUS SUPPLEMENT DEFINITIONS
60+ Day Delinquent Loan........................................S-49
Accrued Certificate Interest...................................S-47
Act............................................................S-73
Adjustable-Rate Mortgage Loans.................................S-25
Adjustable-Rate Prepayment Curve...............................S-68
Adjustment Date................................................S-26
Advance........................................................S-41
Advancing Person...............................................S-42
Applied Realized Loss Amount...................................S-56
ARM PPC........................................................S-68
Available Funds................................................S-46
Bank of America................................................S-35
Business Day...................................................S-41
Cap............................................................S-60
Cap Carryover Amount...........................................S-61
Cap Carryover Reserve Account..................................S-61
Cap Premium....................................................S-71
Certificate Interest Rate......................................S-60
Certificate Principal Balance..................................S-49
Class M-1 Principal Distribution Amount........................S-50
Class M-1 Realized Loss Amortization Amount....................S-58
Class M-10 Principal Distribution Amount.......................S-52
Class M-10 Realized Loss Amortization Amount...................S-59
Class M-2 Principal Distribution Amount........................S-50
Class M-2 Realized Loss Amortization Amount....................S-59
Class M-3 Principal Distribution Amount........................S-50
Class M-3 Realized Loss Amortization Amount....................S-59
Class M-4 Principal Distribution Amount........................S-50
Class M-4 Realized Loss Amortization Amount....................S-59
Class M-5 Principal Distribution Amount........................S-50
Class M-5 Realized Loss Amortization Amount....................S-59
Class M-6 Principal Distribution Amount........................S-51
Class M-6 Realized Loss Amortization Amount....................S-59
Class M-7 Principal Distribution Amount........................S-51
Class M-7 Realized Loss Amortization Amount....................S-59
Class M-8 Principal Distribution Amount........................S-51
Class M-8 Realized Loss Amortization Amount....................S-59
Class M-9 Principal Distribution Amount........................S-52
Class M-9 Realized Loss Amortization Amount....................S-59
Closing Date....................................................S-5
Code...........................................................S-69
Collection Account.............................................S-40
Collection Period...............................................S-5
Compensating Interest..........................................S-42
Corporate Trust Office.........................................S-37
CPR............................................................S-68
Credit Risk Manager.............................................S-5
Credit Risk Manager Fee........................................S-42
Credit Risk Manager Fee Rate...................................S-42
Credit Scores..................................................S-26
Cut-off Date....................................................S-5
Cut-off Date Principal Balance.................................S-25
Defective Mortgage Loans.......................................S-40
Deficient Valuation............................................S-55
Delinquent.....................................................S-26
Depositor.......................................................S-5
Determination Date..............................................S-5
Distribution Account...........................................S-41
Distribution Date...............................................S-5
Downgrade Provision............................................S-62
Due Date.......................................................S-25
Eligible Account...............................................S-41
Eligible Substitute Mortgage Loan..............................S-39
ERISA..........................................................S-72
ERISA Plan.....................................................S-72
Events of Default..............................................S-62
Exemption......................................................S-73
Exemption Rating Agencies......................................S-73
Extra Principal Distribution Amount............................S-53
Fixed-Rate Mortgage Loans......................................S-25
Fixed-Rate Prepayment Curve....................................S-68
FRM PPC........................................................S-68
Gross Margin...................................................S-26
Index..........................................................S-26
Initial Periodic Rate Cap......................................S-26
Interest Accrual Period........................................S-47
Interest Carry Forward Amount..................................S-47
Interest Only Mortgage Loan....................................S-25
Interest Percentage............................................S-47
Interest Remittance Amount.....................................S-47
Issuing Entity..................................................S-5
LIBOR Determination Date.......................................S-65
Liquidated Mortgage Loan.......................................S-55
Loan-to-Value Ratio............................................S-26
Maximum Mortgage Interest Rate.................................S-26
MERS...........................................................S-39
Minimum Mortgage Interest Rate.................................S-26
Monthly Excess Cashflow Allocation.............................S-56
Monthly Excess Cashflow Amount.................................S-56
Monthly Excess Interest Amount.................................S-56
Monthly Payment................................................S-26
Mortgage.......................................................S-25
Mortgage Interest Rate.........................................S-25
Mortgage Loan Purchase Agreement...............................S-27
Mortgage Loan Schedule.........................................S-38
Mortgage Loans..................................................S-8
Mortgage Pool..................................................S-25
Mortgaged Property.............................................S-25
Net Maximum Mortgage Interest Rate.............................S-60
Net Mortgage Interest Rate.....................................S-56
Net Swap Payment...............................................S-61
NIMS Insurer....................................................S-5
Notional Amount................................................S-12
Notional Principal Contract Arrangement........................S-70
Notional Principal Contract Regulations........................S-71
OID............................................................S-70
OID Regulations................................................S-70
One-Month LIBOR................................................S-65
S-76
Optional Termination Date......................................S-43
Originator......................................................S-5
Originator Mortgage Loan Purchase Agreement....................S-27
Overcollateralization Amount...................................S-53
Overcollateralization Deficiency...............................S-53
Overcollateralization Release Amount...........................S-53
Pass-Through Rate..............................................S-60
Periodic Rate Cap..............................................S-26
Plans..........................................................S-73
Pool Balance...................................................S-25
Pool Cap.......................................................S-60
Pool Maximum Rate Cap..........................................S-60
Pooling and Servicing Agreement................................S-38
Prepayment Assumptions.........................................S-67
Prepayment Interest Excess.....................................S-43
Prepayment Interest Shortfall..................................S-43
Prepayment Period...............................................S-5
Principal Balance..............................................S-25
Principal Distribution Amount..................................S-53
Principal Remittance Amount....................................S-53
Purchase Price.................................................S-39
Rating Agencies................................................S-41
Realized Loss..................................................S-55
Realized Loss Amortization Amount..............................S-60
Record Date.....................................................S-5
Reference Bank Rate............................................S-65
Regular Interest...............................................S-70
Reimbursement Amount...........................................S-40
REIT...........................................................S-70
Related Documents..............................................S-38
Relief Act.....................................................S-41
Restricted Group...............................................S-74
Senior Enhancement Percentage..................................S-54
Senior Principal Distribution Amount...........................S-54
Servicer........................................................S-5
Servicer Modification..........................................S-55
Servicing Advance..............................................S-42
Servicing Fee..................................................S-42
Servicing Fee Rate.............................................S-42
Similar Law....................................................S-73
Six-Month LIBOR................................................S-28
SMMEA..........................................................S-75
Sponsor.........................................................S-5
Stepdown Date..................................................S-54
Structuring Assumptions........................................S-68
Subordination Depletion Date...................................S-54
Subsequent Recovery............................................S-54
Substitution Adjustment........................................S-39
Supplemental Interest Trust Trustee............................S-61
Swap Account...................................................S-62
Swap Default...................................................S-62
Swap Early Termination.........................................S-62
Swap Provider...................................................S-5
Swap Provider Trigger Event....................................S-63
Swap Termination Payment.......................................S-63
Targeted Overcollateralization Amount..........................S-54
Telerate Page 3750.............................................S-65
Termination Event..............................................S-63
Termination Price..............................................S-43
Trigger Event..................................................S-54
Trust..........................................................S-36
Trust Fund.....................................................S-38
Trustee and Supplemental Interest Trust Trustee.................S-5
Underwriter....................................................S-76
Unpaid Realized Loss Amount....................................S-60
Value..........................................................S-26
Wells Fargo Bank...............................................S-36
S-77
[This page intentionally left blank.]
APPENDIX A - MORTGAGE LOAN DATA
The Mortgage Loans are expected to have the following characteristics as of the
Cut-off Date (the sum in any column may not equal the total indicated due to
rounding):
CUT-OFF DATE PRINCIPAL BALANCES OF THE MORTGAGE LOANS(1)
% OF
MORTGAGE
LOANS BY WEIGHTED WEIGHTED
AGGREGATE CUT-OFF AVERAGE AVERAGE WEIGHTED
NUMBER OF CUT-OFF DATE DATE DEBT-TO- MORTGAGE AVERAGE
MORTGAGE PRINCIPAL PRINCIPAL INCOME INTEREST CREDIT
RANGE OF PRINCIPAL BALANCES ($) LOANS BALANCE BALANCE RATIO (%) RATE (%) SCORE
- ----------------------------------- ---------- ----------------- ---------- ---------- ---------- ----------
less than 50,000.00 ........ 183 $ 7,957,339.11 1.63% 36.73% 8.926% 643
50,000.01 - 100,000.00 ........ 1,112 85,880,721.32 17.61 40.60 8.627 641
100,000.01 - 150,000.00 ........ 784 97,450,246.72 19.98 42.35 8.393 651
150,000.01 - 200,000.00 ........ 450 77,573,564.93 15.90 42.91 8.374 657
200,000.01 - 250,000.00 ........ 223 50,350,691.90 10.32 43.04 8.258 664
250,000.01 - 300,000.00 ........ 142 38,635,810.57 7.92 44.27 8.228 671
300,000.01 - 350,000.00 ........ 78 25,532,639.40 5.23 43.95 8.301 668
350,000.01 - 400,000.00 ........ 60 22,465,488.97 4.61 43.14 8.223 671
400,000.01 - 450,000.00 ........ 38 16,165,226.82 3.31 44.73 8.300 679
450,000.01 - 500,000.00 ........ 34 16,227,977.32 3.33 46.00 8.299 676
500,000.01 - 550,000.00 ........ 21 11,098,355.89 2.28 43.95 8.054 669
550,000.01 - 600,000.00 ........ 20 11,560,854.85 2.37 45.21 8.182 681
600,000.01 - 650,000.00 ........ 13 8,169,256.72 1.67 43.44 8.128 669
650,000.01 - 700,000.00 ........ 6 4,144,325.34 0.85 39.28 8.566 701
700,000.01 - 750,000.00 ........ 5 3,632,416.48 0.74 46.84 8.218 679
750,000.01 - 800,000.00 ........ 4 3,127,967.71 0.64 43.96 7.785 730
800,000.01 - 850,000.00 ........ 3 2,497,937.20 0.51 50.00 7.663 690
850,000.01 - 900,000.00 ........ 5 4,350,713.00 0.89 49.77 7.530 697
950,000.01 - 1,000,000.00 ......... 1 960,000.00 0.20 49.00 8.125 702
---------- ----------------- ---------- ---------- ---------- ----------
TOTAL: ............................ 3,182 $ 487,781,534.25 100.00% 42.84% 8.361% 660
========== ================= ========== ========== ========== ==========
WEIGHTED WEIGHTED
AVERAGE AVERAGE
ORIGINAL ORIGINAL WEIGHTED
LOAN-TO- TERM TO AVERAGE
VALUE MATURITY LOAN AGE
RANGE OF PRINCIPAL BALANCES ($) RATIO (%) (MONTHS) (MONTHS)
- ----------------------------------- ---------- ---------- ----------
less than 50,000.00 ........ 100.04% 355 2
50,000.01 - 100,000.00 ........ 99.98 359 2
100,000.01 - 150,000.00 ........ 100.01 360 2
150,000.01 - 200,000.00 ........ 99.96 359 2
200,000.01 - 250,000.00 ........ 100.09 360 2
250,000.01 - 300,000.00 ........ 99.88 359 2
300,000.01 - 350,000.00 ........ 100.12 360 2
350,000.01 - 400,000.00 ........ 100.05 360 2
400,000.01 - 450,000.00 ........ 99.94 360 2
450,000.01 - 500,000.00 ........ 99.99 360 2
500,000.01 - 550,000.00 ........ 99.71 360 2
550,000.01 - 600,000.00 ........ 100.14 360 2
600,000.01 - 650,000.00 ........ 100.24 360 2
650,000.01 - 700,000.00 ........ 99.55 360 2
700,000.01 - 750,000.00 ........ 100.00 360 2
750,000.01 - 800,000.00 ........ 100.22 360 2
800,000.01 - 850,000.00 ........ 100.00 360 3
850,000.01 - 900,000.00 ........ 100.00 360 2
950,000.01 - 1,000,000.00 ......... 100.00 360 3
---------- ---------- ----------
TOTAL: ............................ 100.00% 359 2
========== ========== ==========
Min = $26,315.02
Max = $960,000.00
(1) The average Cut-off Date Principal Balance of the Mortgage Loans was
$153,294.01.
A-1
MORTGAGE INTEREST RATES OF THE MORTGAGE LOANS AS OF THE CUT-OFF DATE(1)
% OF
MORTGAGE
LOANS BY WEIGHTED WEIGHTED
AGGREGATE CUT-OFF AVERAGE AVERAGE WEIGHTED
NUMBER OF CUT-OFF DATE DATE DEBT-TO- MORTGAGE AVERAGE
MORTGAGE PRINCIPAL PRINCIPAL INCOME INTEREST CREDIT
RANGE OF MORTGAGE INTEREST RATES (%) LOANS BALANCE BALANCE RATIO (%) RATE (%) SCORE
- ----------------------------------- ---------- ----------------- ---------- ---------- ---------- ----------
5.501 - 6.000 ................... 1 $ 172,093.31 0.04% 49.00% 5.875% 743
6.001 - 6.500 ................... 2 292,635.21 0.06 41.26 6.500 751
6.501 - 7.000 ................... 49 9,889,383.47 2.03 43.05 6.903 699
7.001 - 7.500 ................... 237 46,311,242.99 9.49 43.61 7.366 698
7.501 - 8.000 ................... 678 119,052,047.86 24.41 42.75 7.852 678
8.001 - 8.500 ................... 846 137,356,306.36 28.16 43.19 8.327 662
8.501 - 9.000 ................... 746 102,190,044.84 20.95 42.46 8.786 643
9.001 - 9.500 ................... 379 45,033,615.76 9.23 43.01 9.300 622
9.501 - 10.000 ................... 205 23,543,019.45 4.83 41.31 9.775 614
10.001 - 10.500 ................... 33 3,537,711.85 0.73 42.04 10.266 606
10.501 - 11.000 ................... 4 290,676.81 0.06 30.54 10.696 600
11.001 - 11.500 ................... 2 112,756.34 0.02 28.87 11.221 598
---------- ----------------- ---------- ---------- ---------- ----------
TOTAL: ............................ 3,182 $ 487,781,534.25 100.00% 42.84% 8.361% 660
========== ================= ========== ========== ========== ==========
WEIGHTED WEIGHTED
AVERAGE AVERAGE
ORIGINAL ORIGINAL WEIGHTED
LOAN-TO- TERM TO AVERAGE
VALUE MATURITY LOAN AGE
RANGE OF MORTGAGE INTEREST RATES (%) RATIO (%) (MONTHS) (MONTHS)
- ----------------------------------- ---------- ---------- ----------
5.501 - 6.000 ................... 100.00% 360 2
6.001 - 6.500 ................... 100.00 360 1
6.501 - 7.000 ................... 99.96 360 2
7.001 - 7.500 ................... 100.12 359 2
7.501 - 8.000 ................... 100.02 360 2
8.001 - 8.500 ................... 99.97 359 2
8.501 - 9.000 ................... 99.97 359 2
9.001 - 9.500 ................... 99.96 360 2
9.501 - 10.000 ................... 99.97 360 2
10.001 - 10.500 ................... 100.00 360 2
10.501 - 11.000 ................... 100.00 360 2
11.001 - 11.500 ................... 100.00 360 2
---------- ---------- ----------
TOTAL: ............................ 100.00% 359 2
========== ========== ==========
Min = 5.875 %
Max - 11.250%
(1) As of the Cut-off Date, the weighted average Mortgage Interest Rate of the
Mortgage Loans was approximately 8.361% per annum.
A-2
ORIGINAL DEBT-TO-INCOME RATIOS(1) OF THE MORTGAGE LOANS(2)
% OF
MORTGAGE
LOANS BY WEIGHTED WEIGHTED
AGGREGATE CUT-OFF AVERAGE AVERAGE WEIGHTED
NUMBER OF CUT-OFF DATE DATE DEBT-TO- MORTGAGE AVERAGE
RANGE OF ORIGINAL MORTGAGE PRINCIPAL PRINCIPAL INCOME INTEREST CREDIT
DEBT-TO-INCOME RATIOS (%) LOANS BALANCE BALANCE RATIO (%) RATE (%) SCORE
- ----------------------------------- ---------- ----------------- ---------- ---------- ---------- ----------
0.00 - 4.99 ..................... 1 $ 156,582.05 0.03% 2.00% 8.000% 631
5.00 - 9.99 ..................... 3 723,367.08 0.15 6.91 8.564 641
10.00 - 14.99 ..................... 7 996,838.84 0.20 11.56 8.853 659
15.00 - 19.99 ..................... 39 3,533,615.93 0.72 17.26 8.281 657
20.00 - 24.99 ..................... 122 12,445,588.45 2.55 22.23 8.451 650
25.00 - 29.99 ..................... 186 20,664,312.52 4.24 27.27 8.474 657
30.00 - 34.99 ..................... 308 37,157,339.45 7.62 32.23 8.400 656
35.00 - 39.99 ..................... 465 66,826,838.44 13.70 37.23 8.343 664
40.00 - 44.99 ..................... 610 101,722,384.17 20.85 42.13 8.378 663
45.00 - 49.99 ..................... 793 138,391,841.73 28.37 47.13 8.359 663
50.00 - 54.99 ..................... 531 87,641,726.58 17.97 51.59 8.336 654
55.00 >= .......................... 117 17,521,099.01 3.59 55.00 8.180 651
---------- ----------------- ---------- ---------- ---------- ----------
TOTAL: ............................ 3,182 $ 487,781,534.25 100.00% 42.84% 8.361% 660
========== ================= ========== ========== ========== ==========
WEIGHTED WEIGHTED
AVERAGE AVERAGE
ORIGINAL ORIGINAL WEIGHTED
LOAN-TO- TERM TO AVERAGE
RANGE OF ORIGINAL VALUE MATURITY LOAN AGE
DEBT-TO-INCOME RATIOS (%) RATIO (%) (MONTHS) (MONTHS)
- ----------------------------------- ---------- ---------- ----------
0.00 - 4.99 ..................... 100.00% 360 3
5.00 - 9.99 ..................... 100.00 360 2
10.00 - 14.99 ..................... 100.00 360 2
15.00 - 19.99 ..................... 99.85 358 2
20.00 - 24.99 ..................... 100.03 360 2
25.00 - 29.99 ..................... 99.89 359 2
30.00 - 34.99 ..................... 100.00 359 2
35.00 - 39.99 ..................... 100.06 360 2
40.00 - 44.99 ..................... 100.01 359 2
45.00 - 49.99 ..................... 100.02 360 2
50.00 - 54.99 ..................... 99.94 360 2
55.00 >= .......................... 99.95 360 2
---------- ---------- ----------
TOTAL: ............................ 100.00% 359 2
========== ========== ==========
Min = 2.00%
Max = 55.00%
(1) The "Debt-to-Income Ratio" of a Mortgage Loan generally means the ratio,
expressed as a percentage, of a Mortgagor's monthly debt obligations
(including the monthly payment on the Mortgage Loan and related expenses
such as property taxes and hazard insurance) to his or her gross monthly
income.
(2) As of the Cut-off Date, the weighted average Debt-to-Income Ratio of the
Mortgage Loans was approximately 42.84%.
A-3
LOAN-TO-VALUE RATIOS OF THE MORTGAGE LOANS(1)
% OF
MORTGAGE
LOANS BY WEIGHTED WEIGHTED
AGGREGATE CUT-OFF AVERAGE AVERAGE WEIGHTED
NUMBER OF CUT-OFF DATE DATE DEBT-TO- MORTGAGE AVERAGE
MORTGAGE PRINCIPAL PRINCIPAL INCOME INTEREST CREDIT
RANGE OF LOAN-TO-VALUE RATIOS (%) LOANS BALANCE BALANCE RATIO (%) RATE (%) SCORE
- --------------------------------- ---------- ----------------- ---------- ---------- ---------- ----------
90.01-95.00 ..................... 1 $ 113,683.08 0.02% 46.00% 7.875% 629
95.01-100.00 .................... 3,127 476,475,726.63 97.68 42.87 8.373 659
over 100.01 ................ 54 11,192,124.54 2.29 41.40 7.843 685
---------- ----------------- ---------- ---------- ---------- ----------
TOTAL: .......................... 3,182 $ 487,781,534.25 100.00% 42.84% 8.361% 660
========== ================= ========== ========== ========== ==========
WEIGHTED WEIGHTED
AVERAGE AVERAGE
ORIGINAL ORIGINAL WEIGHTED
LOAN-TO- TERM TO AVERAGE
VALUE MATURITY LOAN AGE
RANGE OF LOAN-TO-VALUE RATIOS (%) RATIO (%) (MONTHS) (MONTHS)
- --------------------------------- ---------- ---------- ----------
90.01-95.00 ..................... 95.00% 360 4
95.01-100.00 .................... 99.93 359 2
over 100.01 ................ 102.74 360 2
---------- ---------- ----------
TOTAL: .......................... 100.00% 359 2
========== ========== ==========
Min = 95.00%
Max = 103.00%
(1) As of the Cut-off Date, the weighted average Loan-to-Value Ratio of the
Mortgage Loans was approximately 100.00%.
ORIGINAL TERMS TO MATURITY OF THE MORTGAGE LOANS(1)
% OF
MORTGAGE
LOANS BY WEIGHTED WEIGHTED
AGGREGATE CUT-OFF AVERAGE AVERAGE WEIGHTED
NUMBER OF CUT-OFF DATE DATE DEBT-TO- MORTGAGE AVERAGE
MORTGAGE PRINCIPAL PRINCIPAL INCOME INTEREST CREDIT
ORIGINAL TERM (MONTHS) LOANS BALANCE BALANCE RATIO (%) RATE (%) SCORE
- ----------------------------------- ---------- ----------------- ---------- ---------- ---------- ----------
180 ............................... 16 $ 1,461,023.35 0.30% 41.07% 8.435% 676
240 ............................... 1 67,768.31 0.01 16.00 7.999 661
360 ............................... 3,165 486,252,742.59 99.69 42.85 8.361 660
---------- ----------------- ---------- ---------- ---------- ----------
TOTAL: ............................ 3,182 $ 487,781,534.25 100.00% 42.84% 8.361% 660
========== ================= ========== ========== ========== ==========
WEIGHTED WEIGHTED
AVERAGE AVERAGE
ORIGINAL ORIGINAL WEIGHTED
LOAN-TO- TERM TO AVERAGE
VALUE MATURITY LOAN AGE
ORIGINAL TERM (MONTHS) RATIO (%) (MONTHS) (MONTHS)
- ----------------------------------- ---------- ---------- ----------
180 ............................... 100.00% 180 2
240 ............................... 97.14 240 2
360 ............................... 100.00 360 2
---------- ---------- ----------
TOTAL: ............................ 100.00% 359 2
========== ========== ==========
Min = 180 months
Max = 360 months
(1) As of the Cut-off Date, the weighted average original term to maturity of
the Mortgage Loans was approximately 359 months.
A-4
REMAINING TERMS TO MATURITY OF THE MORTGAGE LOANS(1)
% OF
MORTGAGE
LOANS BY WEIGHTED WEIGHTED
AGGREGATE CUT-OFF AVERAGE AVERAGE WEIGHTED
NUMBER OF CUT-OFF DATE DATE DEBT-TO- MORTGAGE AVERAGE
MORTGAGE PRINCIPAL PRINCIPAL INCOME INTEREST CREDIT
REMAINING TERM (MONTHS) LOANS BALANCE BALANCE RATIO (%) RATE (%) SCORE
- ----------------------------------- ---------- ----------------- ---------- ---------- ---------- ----------
176 - 180 ......................... 16 $ 1,461,023.35 0.30% 41.07% 8.435% 676
236 - 240 ......................... 1 67,768.31 0.01 16.00 7.999 661
351 - 355 ......................... 13 3,687,001.43 0.76 44.16 7.821 676
356 - 360 ......................... 3,152 482,565,741.16 98.93 42.84 8.365 660
---------- ----------------- ---------- ---------- ---------- ----------
TOTAL: ............................ 3,182 $ 487,781,534.25 100.00% 42.84% 8.361% 660
========== ================= ========== ========== ========== ==========
WEIGHTED WEIGHTED
AVERAGE AVERAGE
ORIGINAL ORIGINAL WEIGHTED
LOAN-TO- TERM TO AVERAGE
VALUE MATURITY LOAN AGE
REMAINING TERM (MONTHS) RATIO (%) (MONTHS) (MONTHS)
- ----------------------------------- ---------- ---------- ----------
176 - 180 ......................... 100.00% 180 2
236 - 240 ......................... 97.14 240 2
351 - 355 ......................... 100.22 360 6
356 - 360 ......................... 100.00 360 2
---------- ---------- ----------
TOTAL: ............................ 100.00% 359 2
========== ========== ==========
Min = 177 months
Max = 360 months
(1) As of the Cut-off Date, the weighted average remaining term to maturity of
the Mortgage Loans was approximately 357 months.
PROPERTY TYPES OF THE MORTGAGE LOANS
% OF
MORTGAGE
LOANS BY WEIGHTED WEIGHTED
AGGREGATE CUT-OFF AVERAGE AVERAGE WEIGHTED
NUMBER OF CUT-OFF DATE DATE DEBT-TO- MORTGAGE AVERAGE
MORTGAGE PRINCIPAL PRINCIPAL INCOME INTEREST CREDIT
PROPERTY TYPE LOANS BALANCE BALANCE RATIO (%) RATE (%) SCORE
- ----------------------------------- ---------- ----------------- ---------- ---------- ---------- ----------
Single Family Residence ........... 2,575 $ 360,503,644.79 73.91% 42.47% 8.387% 656
Planned Unit Development .......... 306 72,717,253.69 14.91 43.72 8.299 666
Low Rise Condominium .............. 182 31,053,118.99 6.37 43.83 8.329 668
2-4 Family ........................ 107 20,698,412.41 4.24 44.59 8.153 681
High Rise Condominium ............. 11 2,729,660.48 0.56 43.95 8.615 706
Modular ........................... 1 79,443.89 0.02 44.00 7.750 754
---------- ----------------- ---------- ---------- ---------- ----------
TOTAL: ............................ 3,182 $ 487,781,534.25 100.00% 42.84% 8.361% 660
========== ================= ========== ========== ========== ==========
WEIGHTED WEIGHTED
AVERAGE AVERAGE
ORIGINAL ORIGINAL WEIGHTED
LOAN-TO- TERM TO AVERAGE
VALUE MATURITY LOAN AGE
PROPERTY TYPE RATIO (%) (MONTHS) (MONTHS)
- ----------------------------------- ---------- ---------- ----------
Single Family Residence ........... 99.97% 359 2
Planned Unit Development .......... 100.05 360 2
Low Rise Condominium .............. 100.17 358 2
2-4 Family ........................ 100.00 360 2
High Rise Condominium ............. 100.03 360 2
Modular ........................... 100.00 360 1
---------- ---------- ----------
TOTAL: ............................ 100.00% 359 2
========== ========== ==========
A-5
CREDIT SCORE(1)
% OF
MORTGAGE
LOANS BY WEIGHTED WEIGHTED
AGGREGATE CUT-OFF AVERAGE AVERAGE WEIGHTED
NUMBER OF CUT-OFF DATE DATE DEBT-TO- MORTGAGE AVERAGE
MORTGAGE PRINCIPAL PRINCIPAL INCOME INTEREST CREDIT
RANGE OF CREDIT SCORES LOANS BALANCE BALANCE RATIO (%) RATE (%) SCORE
- ----------------------------------- ---------- ----------------- ---------- ---------- ---------- ----------
801 - 850 ......................... 9 $ 1,977,884.83 0.41% 43.79% 7.927% 805
751 - 800 ......................... 86 15,122,842.69 3.10 40.85 7.818 769
701 - 750 ......................... 354 72,506,345.54 14.86 42.83 7.911 719
651 - 700 ......................... 1,053 179,817,444.10 36.86 43.12 8.137 672
601 - 650 ......................... 1,289 178,080,043.83 36.51 43.16 8.646 628
551 - 600 ......................... 391 40,276,973.26 8.26 40.87 9.136 590
---------- ----------------- ---------- ---------- ---------- ----------
TOTAL: ............................ 3,182 $ 487,781,534.25 100.00% 42.84% 8.361% 660
========== ================= ========== ========== ========== ==========
WEIGHTED WEIGHTED
AVERAGE AVERAGE
ORIGINAL ORIGINAL WEIGHTED
LOAN-TO- TERM TO AVERAGE
VALUE MATURITY LOAN AGE
RANGE OF CREDIT SCORES RATIO (%) (MONTHS) (MONTHS)
- ----------------------------------- ---------- ---------- ----------
801 - 850 ......................... 100.00% 360 2
751 - 800 ......................... 99.98 359 2
701 - 750 ......................... 100.06 359 2
651 - 700 ......................... 100.01 359 2
601 - 650 ......................... 99.96 360 2
551 - 600 ......................... 100.00 360 2
---------- ---------- ----------
TOTAL: ............................ 100.00% 359 2
========== ========== ==========
Min = 580
Max = 813
(1) As of the Cut-off Date, the weighted average Credit Scores (where Credit
Scores were available) of the Mortgage Loans was approximately 660.
ORIGINAL PREPAYMENT CHARGE TERM(1)
% OF
MORTGAGE
LOANS BY WEIGHTED WEIGHTED
AGGREGATE CUT-OFF AVERAGE AVERAGE WEIGHTED
NUMBER OF CUT-OFF DATE DATE DEBT-TO- MORTGAGE AVERAGE
ORIGINAL PREPAYMENT CHARGE TERM MORTGAGE PRINCIPAL PRINCIPAL INCOME INTEREST CREDIT
(MONTHS) LOANS BALANCE BALANCE RATIO (%) RATE (%) SCORE
- ----------------------------------- ---------- ----------------- ---------- ---------- ---------- ----------
No prepayment charge .............. 1,080 $ 173,328,939.60 35.53% 43.11% 8.435% 663
12 ................................ 97 19,497,165.08 4.00 44.75 8.513 669
24 ................................ 1,150 177,726,199.12 36.44 42.32 8.322 660
36 ................................ 855 117,229,230.45 24.03 42.92 8.286 654
---------- ----------------- ---------- ---------- ---------- ----------
TOTAL: ............................ 3,182 $ 487,781,534.25 100.00% 42.84% 8.361% 660
========== ================= ========== ========== ========== ==========
WEIGHTED WEIGHTED
AVERAGE AVERAGE
ORIGINAL ORIGINAL WEIGHTED
LOAN-TO- TERM TO AVERAGE
ORIGINAL PREPAYMENT CHARGE TERM VALUE MATURITY LOAN AGE
(MONTHS) RATIO (%) (MONTHS) (MONTHS)
- ----------------------------------- ---------- ---------- ----------
No prepayment charge .............. 99.97% 359 2
12 ................................ 100.01 358 2
24 ................................ 100.04 360 2
36 ................................ 99.97 359 2
---------- ---------- ----------
TOTAL: ............................ 100.00% 359 2
========== ========== ==========
(1) As of the Cut-off Date, the weighted average original prepayment charge
term of the Mortgage Loans with prepayment charges was approximately 28
months. The majority of the Mortgage Loans with prepayment charges charge a
charge of 6 months interest on 80% of the prepaid balance.
A-6
OCCUPANCY STATUS OF THE MORTGAGE LOANS(1)
% OF
MORTGAGE
LOANS BY WEIGHTED WEIGHTED
AGGREGATE CUT-OFF AVERAGE AVERAGE WEIGHTED
NUMBER OF CUT-OFF DATE DATE DEBT-TO- MORTGAGE AVERAGE
MORTGAGE PRINCIPAL PRINCIPAL INCOME INTEREST CREDIT
OCCUPANCY STATUS LOANS BALANCE BALANCE RATIO (%) RATE (%) SCORE
- ----------------------------------- ---------- ----------------- ---------- ---------- ---------- ----------
Primary ........................... 3,161 $ 483,291,127.79 99.08% 42.87% 8.361% 659
Secondary ......................... 21 4,490,406.46 0.92 39.35 8.375 736
---------- ----------------- ---------- ---------- ---------- ----------
TOTAL: ............................ 3,182 $ 487,781,534.25 100.00% 42.84% 8.361% 660
========== ================= ========== ========== ========== ==========
WEIGHTED WEIGHTED
AVERAGE AVERAGE
ORIGINAL ORIGINAL WEIGHTED
LOAN-TO- TERM TO AVERAGE
VALUE MATURITY LOAN AGE
OCCUPANCY STATUS RATIO (%) (MONTHS) (MONTHS)
- ----------------------------------- ---------- ---------- ----------
Primary ........................... 100.00% 359 2
Secondary ......................... 100.00 358 2
---------- ---------- ----------
TOTAL: ............................ 100.00% 359 2
========== ========== ==========
(1) Based on a representation made by the borrower at the time of origination.
A-7
PURPOSE OF THE MORTGAGE LOANS
% OF
MORTGAGE
LOANS BY WEIGHTED WEIGHTED
AGGREGATE CUT-OFF AVERAGE AVERAGE WEIGHTED
NUMBER OF CUT-OFF DATE DATE DEBT-TO- MORTGAGE AVERAGE
MORTGAGE PRINCIPAL PRINCIPAL INCOME INTEREST CREDIT
PURPOSE LOANS BALANCE BALANCE RATIO (%) RATE (%) SCORE
- ----------------------------------- ---------- ----------------- ---------- ---------- ---------- ----------
Purchase .......................... 2,617 $ 380,836,984.92 78.08% 42.70% 8.351% 660
Refinance - Cashout ............... 509 97,585,729.06 20.01 43.44 8.422 657
Refinance - Rate Term ............. 56 9,358,820.27 1.92 42.40 8.135 670
---------- ----------------- ---------- ---------- ---------- ----------
TOTAL: ............................ 3,182 $ 487,781,534.25 100.00% 42.84% 8.361% 660
========== ================= ========== ========== ========== ==========
WEIGHTED WEIGHTED
AVERAGE AVERAGE
ORIGINAL ORIGINAL WEIGHTED
LOAN-TO- TERM TO AVERAGE
VALUE MATURITY LOAN AGE
PURPOSE RATIO (%) (MONTHS) (MONTHS)
- ----------------------------------- ---------- ---------- ----------
Purchase .......................... 100.06% 360 2
Refinance - Cashout ............... 99.82 358 2
Refinance - Rate Term ............. 99.36 360 2
---------- ---------- ----------
TOTAL: ............................ 100.00% 359 2
========== ========== ==========
PRODUCT TYPE OF THE MORTGAGE LOANS
% OF
MORTGAGE
LOANS BY WEIGHTED WEIGHTED
AGGREGATE CUT-OFF AVERAGE AVERAGE WEIGHTED
NUMBER OF CUT-OFF DATE DATE DEBT-TO- MORTGAGE AVERAGE
MORTGAGE PRINCIPAL PRINCIPAL INCOME INTEREST CREDIT
PRODUCT TYPE LOANS BALANCE BALANCE RATIO (%) RATE (%) SCORE
- ----------------------------------- ---------- ----------------- ---------- ---------- ---------- ----------
15 YR FIXED ....................... 13 $ 1,016,758.41 0.21% 40.30% 8.241% 687
15 YR FIXED with 5 yr IO .......... 2 329,384.64 0.07 44.16 8.750 617
15/30 BALLOON ..................... 1 114,880.30 0.02 39.00 9.250 747
1/29 6ML .......................... 4 1,110,934.39 0.23 49.36 8.040 692
20 YR FIXED ....................... 1 67,768.31 0.01 16.00 7.999 661
2/28 6ML .......................... 1,397 189,452,347.34 38.84 41.78 8.338 657
2/28 6ML with 5 yr IO ............. 455 102,779,996.08 21.07 44.53 8.314 667
2/28 6ML 30/40 BALLOON ............ 72 17,082,344.77 3.50 45.42 8.164 675
30 YR FIXED ....................... 497 57,330,437.50 11.75 41.84 8.706 645
30 YR FIXED with 5 yr IO .......... 34 5,331,127.40 1.09 45.33 8.976 627
30/40 BALLOON ..................... 5 899,055.84 0.18 41.14 8.579 651
3/27 6ML .......................... 498 73,233,348.58 15.01 42.66 8.298 658
3/27 6ML with 5 yr IO ............. 180 35,690,024.68 7.32 43.98 8.209 673
5/25 6ML .......................... 16 2,104,529.73 0.43 42.35 7.996 696
5/25 6ML with 5 yr IO ............. 6 1,057,750.00 0.22 41.52 8.697 665
5/25 6ML 30/40 BALLOON ............ 1 180,846.28 0.04 52.00 7.875 680
---------- ----------------- ---------- ---------- ---------- ----------
TOTAL: ............................ 3,182 $ 487,781,534.25 100.00% 42.84% 8.361% 660
========== ================= ========== ========== ========== ==========
WEIGHTED WEIGHTED
AVERAGE AVERAGE
ORIGINAL ORIGINAL WEIGHTED
LOAN-TO- TERM TO AVERAGE
VALUE MATURITY LOAN AGE
PRODUCT TYPE RATIO (%) (MONTHS) (MONTHS)
- ----------------------------------- ---------- ---------- ----------
15 YR FIXED ....................... 100.00% 180 2
15 YR FIXED with 5 yr IO .......... 100.00 180 3
15/30 BALLOON ..................... 100.00 180 2
1/29 6ML .......................... 99.82 360 3
20 YR FIXED ....................... 97.14 240 2
2/28 6ML .......................... 100.05 360 2
2/28 6ML with 5 yr IO ............. 99.94 360 2
2/28 6ML 30/40 BALLOON ............ 100.01 360 1
30 YR FIXED ....................... 100.00 360 2
30 YR FIXED with 5 yr IO .......... 99.76 360 2
30/40 BALLOON ..................... 100.00 360 1
3/27 6ML .......................... 99.98 360 2
3/27 6ML with 5 yr IO ............. 99.95 360 2
5/25 6ML .......................... 100.00 360 2
5/25 6ML with 5 yr IO ............. 100.00 360 2
5/25 6ML 30/40 BALLOON ............ 100.00 360 1
---------- ---------- ----------
TOTAL: ............................ 100.00% 359 2
========== ========== ==========
A-8
LIEN POSITION OF THE MORTGAGE LOANS
% OF
MORTGAGE
LOANS BY WEIGHTED WEIGHTED
AGGREGATE CUT-OFF AVERAGE AVERAGE WEIGHTED
NUMBER OF CUT-OFF DATE DATE DEBT-TO- MORTGAGE AVERAGE
MORTGAGE PRINCIPAL PRINCIPAL INCOME INTEREST CREDIT
LIEN POSITION LOANS BALANCE BALANCE RATIO (%) RATE (%) SCORE
- ----------------------------------- ---------- ----------------- ---------- ---------- ---------- ----------
1st Lien .......................... 3,182 $ 487,781,534.25 100.00% 42.84% 8.361% 660
---------- ----------------- ---------- ---------- ---------- ----------
TOTAL: ............................ 3,182 $ 487,781,534.25 100.00% 42.84% 8.361% 660
========== ================= ========== ========== ========== ==========
WEIGHTED WEIGHTED
AVERAGE AVERAGE
ORIGINAL ORIGINAL WEIGHTED
LOAN-TO- TERM TO AVERAGE
VALUE MATURITY LOAN AGE
LIEN POSITION RATIO (%) (MONTHS) (MONTHS)
- ----------------------------------- ---------- ---------- ----------
1st Lien .......................... 100.00% 359 2
---------- ---------- ----------
TOTAL: ............................ 100.00% 359 2
========== ========== ==========
GEOGRAPHIC DISTRIBUTION OF THE MORTGAGE LOANS(1)
% OF
MORTGAGE
LOANS BY WEIGHTED WEIGHTED
AGGREGATE CUT-OFF AVERAGE AVERAGE WEIGHTED
NUMBER OF CUT-OFF DATE DATE DEBT-TO- MORTGAGE AVERAGE
MORTGAGE PRINCIPAL PRINCIPAL INCOME INTEREST CREDIT
LOCATION LOANS BALANCE BALANCE RATIO (%) RATE (%) SCORE
- ----------------------------------- ---------- ----------------- ---------- ---------- ---------- ----------
Alabama ........................... 57 $ 6,551,644.20 1.34% 40.81% 8.961% 634
Arizona ........................... 14 3,938,444.78 0.81 44.38 8.382 678
Arkansas .......................... 27 2,491,720.62 0.51 44.89 8.406 648
California ........................ 98 42,646,227.19 8.74 44.64 8.136 680
Colorado .......................... 14 2,861,838.38 0.59 40.77 8.074 668
Connecticut ....................... 11 2,136,316.08 0.44 44.12 8.423 661
Delaware .......................... 2 451,428.68 0.09 30.67 8.885 706
District of Columbia .............. 3 1,423,788.16 0.29 40.71 7.820 710
Florida ........................... 142 30,605,218.32 6.27 41.58 8.440 672
Georgia ........................... 120 18,537,194.25 3.80 43.30 8.461 652
Idaho ............................. 4 446,111.05 0.09 45.06 9.404 624
Illinois .......................... 217 39,499,196.60 8.10 44.10 8.290 669
Indiana ........................... 245 25,976,268.83 5.33 41.07 8.428 642
Iowa .............................. 47 3,799,282.76 0.78 40.62 8.594 638
Kansas ............................ 15 1,299,984.81 0.27 43.44 8.858 655
Kentucky .......................... 89 10,105,740.39 2.07 41.23 8.440 639
Louisiana ......................... 4 361,300.46 0.07 22.21 9.466 623
Maine ............................. 8 1,165,647.93 0.24 46.30 8.715 658
WEIGHTED WEIGHTED
AVERAGE AVERAGE
ORIGINAL ORIGINAL WEIGHTED
LOAN-TO- TERM TO AVERAGE
VALUE MATURITY LOAN AGE
LOCATION RATIO (%) (MONTHS) (MONTHS)
- ----------------------------------- ---------- ---------- ----------
Alabama ........................... 99.92% 360 3
Arizona ........................... 100.21 360 2
Arkansas .......................... 100.00 360 2
California ........................ 100.05 360 2
Colorado .......................... 99.70 360 2
Connecticut ....................... 100.00 360 2
Delaware .......................... 99.99 360 2
District of Columbia .............. 100.00 360 1
Florida ........................... 100.18 360 2
Georgia ........................... 99.84 360 2
Idaho ............................. 100.00 360 2
Illinois .......................... 99.97 357 2
Indiana ........................... 99.89 360 2
Iowa .............................. 99.97 360 2
Kansas ............................ 99.99 360 2
Kentucky .......................... 99.86 360 2
Louisiana ......................... 100.00 360 2
Maine ............................. 99.96 360 3
(Continued on next Page)
A-9
(Continued from previous page)
% OF
MORTGAGE
LOANS BY WEIGHTED WEIGHTED
AGGREGATE CUT-OFF AVERAGE AVERAGE WEIGHTED
NUMBER OF CUT-OFF DATE DATE DEBT-TO- MORTGAGE AVERAGE
MORTGAGE PRINCIPAL PRINCIPAL INCOME INTEREST CREDIT
LOCATION LOANS BALANCE BALANCE RATIO (%) RATE (%) SCORE
- ----------------------------------- ---------- ----------------- ---------- ---------- ---------- ----------
Maryland .......................... 42 11,798,486.89 2.42 44.29 8.355 672
Massachusetts ..................... 22 6,120,875.94 1.25 45.52 8.287 683
Michigan .......................... 271 37,108,353.75 7.61 43.04 8.194 656
Minnesota ......................... 46 8,137,305.84 1.67 44.81 8.273 665
Mississippi ....................... 11 1,198,869.33 0.25 45.60 8.675 630
Missouri .......................... 80 9,716,581.41 1.99 42.61 8.578 659
Montana ........................... 1 63,528.42 0.01 20.00 8.875 632
Nebraska .......................... 5 458,166.97 0.09 32.31 9.339 613
Nevada ............................ 18 3,725,334.23 0.76 39.99 8.437 660
New Hampshire ..................... 8 1,532,290.66 0.31 46.08 8.477 642
New Jersey ........................ 85 21,831,828.67 4.48 42.57 8.259 674
New Mexico ........................ 5 451,310.33 0.09 38.08 8.507 641
New York .......................... 204 28,490,947.99 5.84 43.22 8.352 666
North Carolina .................... 254 33,928,339.73 6.96 42.64 8.422 651
North Dakota ...................... 5 483,821.97 0.10 45.36 7.805 661
Ohio .............................. 361 40,778,112.47 8.36 42.10 8.442 643
Oklahoma .......................... 16 1,338,769.69 0.27 41.02 8.647 633
Oregon ............................ 23 6,001,416.68 1.23 45.24 8.128 679
Pennsylvania ...................... 156 17,775,420.12 3.64 42.97 8.446 651
Rhode Island ...................... 5 1,148,724.63 0.24 48.88 8.529 650
South Carolina .................... 106 13,510,507.99 2.77 41.94 8.534 642
South Dakota ...................... 6 462,236.32 0.09 39.51 8.787 649
Tennessee ......................... 66 7,058,805.89 1.45 38.84 8.560 647
Texas ............................. 92 8,606,082.19 1.76 40.08 8.498 655
Utah .............................. 23 3,968,162.08 0.81 42.77 8.388 657
Vermont ........................... 1 79,923.05 0.02 32.00 9.625 631
Virginia .......................... 35 10,437,698.42 2.14 44.24 8.051 674
Washington ........................ 24 4,605,440.56 0.94 44.94 8.064 670
West Virginia ..................... 11 1,086,451.84 0.22 45.03 8.429 641
Wisconsin ......................... 81 11,389,738.71 2.34 42.72 8.326 664
Wyoming ........................... 2 190,647.99 0.04 31.43 9.151 667
---------- ----------------- ---------- ---------- ---------- ----------
TOTAL: ............................ 3,182 $ 487,781,534.25 100.00% 42.84% 8.361% 660
========== ================= ========== ========== ========== ==========
WEIGHTED WEIGHTED
AVERAGE AVERAGE
ORIGINAL ORIGINAL WEIGHTED
LOAN-TO- TERM TO AVERAGE
VALUE MATURITY LOAN AGE
LOCATION RATIO (%) (MONTHS) (MONTHS)
- ----------------------------------- ---------- ---------- ----------
Maryland .......................... 100.33 360 2
Massachusetts ..................... 100.00 360 2
Michigan .......................... 99.93 360 2
Minnesota ......................... 99.93 360 2
Mississippi ....................... 99.68 353 2
Missouri .......................... 99.89 360 2
Montana ........................... 100.00 360 2
Nebraska .......................... 99.83 360 2
Nevada ............................ 99.81 360 2
New Hampshire ..................... 100.00 360 2
New Jersey ........................ 99.98 360 2
New Mexico ........................ 100.00 360 3
New York .......................... 99.92 359 2
North Carolina .................... 100.02 360 2
North Dakota ...................... 100.00 336 2
Ohio .............................. 99.99 359 2
Oklahoma .......................... 100.00 360 2
Oregon ............................ 100.00 360 2
Pennsylvania ...................... 100.04 360 2
Rhode Island ...................... 100.00 360 2
South Carolina .................... 100.00 360 2
South Dakota ...................... 100.30 360 2
Tennessee ......................... 100.03 360 2
Texas ............................. 99.97 352 2
Utah .............................. 100.08 360 2
Vermont ........................... 100.00 360 2
Virginia .......................... 100.34 360 2
Washington ........................ 99.99 360 2
West Virginia ..................... 100.00 353 2
Wisconsin ......................... 99.95 360 2
Wyoming ........................... 100.00 360 2
---------- ---------- ----------
TOTAL: ............................ 100.00% 359 2
========== ========== ==========
(1) The greatest ZIP Code geographic concentration of the Mortgage Loans, by
Principal Balance as of the Cut-off Date, was approximately 0.32% in the
22192 ZIP Code.
A-10
DOCUMENTATION LEVELS OF THE MORTGAGE LOANS(1)
% OF
MORTGAGE
LOANS BY WEIGHTED WEIGHTED
AGGREGATE CUT-OFF AVERAGE AVERAGE WEIGHTED
NUMBER OF CUT-OFF DATE DATE DEBT-TO- MORTGAGE AVERAGE
MORTGAGE PRINCIPAL PRINCIPAL INCOME INTEREST CREDIT
DOCUMENTATION LEVEL LOANS BALANCE BALANCE RATIO (%) RATE (%) SCORE
- ----------------------------------- ---------- ----------------- ---------- ---------- ---------- ----------
Full Documentation ................ 2,055 $ 258,158,753.04 52.93% 42.61% 8.378% 647
No Income Verification (NIV) ...... 970 176,298,006.92 36.14 42.58 8.380 674
Stated Plus ....................... 135 48,845,844.19 10.01 44.78 8.218 679
Blended Access .................... 19 3,435,856.50 0.70 44.41 8.283 657
Limited Income Verification (LIV) . 3 1,043,073.60 0.21 48.03 7.823 688
---------- ----------------- ---------- ---------- ---------- ----------
TOTAL: ............................ 3,182 $ 487,781,534.25 100.00% 42.84% 8.361% 660
========== ================= ========== ========== ========== ==========
WEIGHTED WEIGHTED
AVERAGE AVERAGE
ORIGINAL ORIGINAL WEIGHTED
LOAN-TO- TERM TO AVERAGE
VALUE MATURITY LOAN AGE
DOCUMENTATION LEVEL RATIO (%) (MONTHS) (MONTHS)
- ----------------------------------- ---------- ---------- ----------
Full Documentation ................ 100.06% 359 2
No Income Verification (NIV) ...... 99.91 359 2
Stated Plus ....................... 99.98 360 2
Blended Access .................... 99.84 360 2
Limited Income Verification (LIV) . 100.00 360 3
---------- ---------- ----------
TOTAL: ............................ 100.00% 359 2
========== ========== ==========
(1) For a description of each documentation level, see "Underwriting Standards"
in this prospectus supplement.
A-11
The following tables present certain statistical information relevant only to
the Adjustable-Rate Mortgage Loans:
MAXIMUM MORTGAGE INTEREST RATE OF THE ADJUSTABLE-RATE MORTGAGE LOANS(1)
% OF
MORTGAGE
LOANS BY WEIGHTED WEIGHTED
AGGREGATE CUT-OFF AVERAGE AVERAGE WEIGHTED
NUMBER OF CUT-OFF DATE DATE DEBT-TO- MORTGAGE AVERAGE
RANGE OF MAXIMUM MORTGAGE MORTGAGE PRINCIPAL PRINCIPAL INCOME INTEREST CREDIT
INTEREST RATES (%) LOANS BALANCE BALANCE RATIO (%) RATE (%) SCORE
- ----------------------------------- ---------- ----------------- ---------- ---------- ---------- ----------
11.501 - 12.000 ................... 1 $ 172,093.31 0.04% 49.00% 5.875% 743
12.001 - 12.500 ................... 2 292,635.21 0.07 41.26 6.500 751
12.501 - 13.000 ................... 49 10,198,789.40 2.41 43.21 6.943 698
13.001 - 13.500 ................... 227 44,527,072.56 10.53 43.50 7.363 696
13.501 - 14.000 ................... 621 110,430,598.02 26.13 42.87 7.849 677
14.001 - 14.500 ................... 723 121,988,591.82 28.86 43.28 8.324 664
14.501 - 15.000 ................... 552 79,444,381.08 18.79 42.45 8.787 644
15.001 - 15.500 ................... 281 34,294,642.96 8.11 43.15 9.297 621
15.501 - 16.000 ................... 152 18,632,341.93 4.41 41.55 9.774 614
16.001 - 16.500 ................... 19 2,619,709.70 0.62 44.44 10.275 607
16.501 - 17.000 ................... 1 64,950.84 0.02 37.00 10.750 616
17.001 - 17.500 ................... 1 26,315.02 0.01 35.00 11.125 583
---------- ----------------- ---------- ---------- ---------- ----------
TOTAL: ............................ 2,629 $ 422,692,121.85 100.00% 42.96% 8.306% 662
========== ================= ========== ========== ========== ==========
WEIGHTED WEIGHTED
AVERAGE AVERAGE
ORIGINAL ORIGINAL WEIGHTED
LOAN-TO- TERM TO AVERAGE
RANGE OF MAXIMUM MORTGAGE VALUE MATURITY LOAN AGE
INTEREST RATES (%) RATIO (%) (MONTHS) (MONTHS)
- ----------------------------------- ---------- ---------- ----------
11.501 - 12.000 ................... 100.00% 360 2
12.001 - 12.500 ................... 100.00 360 1
12.501 - 13.000 ................... 99.96 360 2
13.001 - 13.500 ................... 100.12 360 2
13.501 - 14.000 ................... 100.02 360 2
14.001 - 14.500 ................... 99.98 360 2
14.501 - 15.000 ................... 99.97 360 2
15.001 - 15.500 ................... 99.95 360 2
15.501 - 16.000 ................... 99.96 360 2
16.001 - 16.500 ................... 100.00 360 2
16.501 - 17.000 ................... 100.00 360 2
17.001 - 17.500 ................... 100.00 360 2
---------- ---------- ----------
TOTAL: ............................ 100.00% 360 2
========== ========== ==========
Min = 11.875%
Max = 17.125%
(1) As of the Cut-off Date, the weighted average Maximum Mortgage Interest Rate
of the Adjustable-Rate Mortgage Loans was approximately 14.304%.
A-12
MINIMUM MORTGAGE INTEREST RATE OF THE ADJUSTABLE-RATE MORTGAGE LOANS(1)
% OF
MORTGAGE
LOANS BY WEIGHTED WEIGHTED
AGGREGATE CUT-OFF AVERAGE AVERAGE WEIGHTED
NUMBER OF CUT-OFF DATE DATE DEBT-TO- MORTGAGE AVERAGE
RANGE OF MINIMUM MORTGAGE MORTGAGE PRINCIPAL PRINCIPAL INCOME INTEREST CREDIT
INTEREST RATES (%) LOANS BALANCE BALANCE RATIO (%) RATE (%) SCORE
- ----------------------------------- ---------- ----------------- ---------- ---------- ---------- ----------
5.501 - 6.000 ..................... 1 $ 172,093.31 0.04% 49.00% 5.875% 743
6.001 - 6.500 ..................... 2 292,635.21 0.07 41.26 6.500 751
6.501 - 7.000 ..................... 49 10,198,789.40 2.41 43.21 6.943 698
7.001 - 7.500 ..................... 227 44,527,072.56 10.53 43.50 7.363 696
7.501 - 8.000 ..................... 621 110,430,598.02 26.13 42.87 7.849 677
8.001 - 8.500 ..................... 723 121,988,591.82 28.86 43.28 8.324 664
8.501 - 9.000 ..................... 552 79,444,381.08 18.79 42.45 8.787 644
9.001 - 9.500 ..................... 281 34,294,642.96 8.11 43.15 9.297 621
9.501 - 10.000 .................... 152 18,632,341.93 4.41 41.55 9.774 614
10.001 - 10.500 ................... 19 2,619,709.70 0.62 44.44 10.275 607
10.501 - 11.000 ................... 1 64,950.84 0.02 37.00 10.750 616
11.001 - 11.500 ................... 1 26,315.02 0.01 35.00 11.125 583
---------- ----------------- ---------- ---------- ---------- ----------
TOTAL: ............................ 2,629 $ 422,692,121.85 100.00% 42.96% 8.306% 662
========== ================= ========== ========== ========== ==========
WEIGHTED WEIGHTED
AVERAGE AVERAGE
ORIGINAL ORIGINAL WEIGHTED
LOAN-TO- TERM TO AVERAGE
RANGE OF MINIMUM MORTGAGE VALUE MATURITY LOAN AGE
INTEREST RATES (%) RATIO (%) (MONTHS) (MONTHS)
- ----------------------------------- ---------- ---------- ----------
5.501 - 6.000 ..................... 100.00% 360 2
6.001 - 6.500 ..................... 100.00 360 1
6.501 - 7.000 ..................... 99.96 360 2
7.001 - 7.500 ..................... 100.12 360 2
7.501 - 8.000 ..................... 100.02 360 2
8.001 - 8.500 ..................... 99.98 360 2
8.501 - 9.000 ..................... 99.97 360 2
9.001 - 9.500 ..................... 99.95 360 2
9.501 - 10.000 .................... 99.96 360 2
10.001 - 10.500 ................... 100.00 360 2
10.501 - 11.000 ................... 100.00 360 2
11.001 - 11.500 ................... 100.00 360 2
---------- ---------- ----------
TOTAL: ............................ 100.00% 360 2
========== ========== ==========
Min = 5.875%
Max = 11.125%
(1) As of the Cut-off Date, the weighted average Minimum Mortgage Interest Rate
of the Adjustable-Rate Mortgage Loans was approximately 8.305%.
A-13
INITIAL PERIODIC CAP OF THE ADJUSTABLE-RATE MORTGAGE LOANS(1)
% OF
MORTGAGE
LOANS BY WEIGHTED WEIGHTED
AGGREGATE CUT-OFF AVERAGE AVERAGE WEIGHTED
NUMBER OF CUT-OFF DATE DATE DEBT-TO- MORTGAGE AVERAGE
MORTGAGE PRINCIPAL PRINCIPAL INCOME INTEREST CREDIT
INITIAL PERIODIC CAP (%) LOANS BALANCE BALANCE RATIO (%) RATE (%) SCORE
- ----------------------------------- ---------- ----------------- ---------- ---------- ---------- ----------
2.000 ............................. 4 $ 1,110,934.39 0.26% 49.36% 8.040% 692
3.000 ............................. 2,625 421,581,187.46 99.74 42.94 8.306 662
---------- ----------------- ---------- ---------- ---------- ----------
TOTAL: ............................ 2,629 $ 422,692,121.85 100.00% 42.96% 8.306% 662
========== ================= ========== ========== ========== ==========
WEIGHTED WEIGHTED
AVERAGE AVERAGE
ORIGINAL ORIGINAL WEIGHTED
LOAN-TO- TERM TO AVERAGE
VALUE MATURITY LOAN AGE
INITIAL PERIODIC CAP (%) RATIO (%) (MONTHS) (MONTHS)
- ----------------------------------- ---------- ---------- ----------
2.000 ............................. 99.82% 360 3
3.000 ............................. 100.00 360 2
---------- ---------- ----------
TOTAL: ............................ 100.00% 360 2
========== ========== ==========
Min = 2.000%
Max = 3.000%
(1) As of the Cut-off Date, the weighted average Initial Periodic Cap of the
Adjustable-Rate Mortgage Loans was approximately 2.997%.
PERIODIC CAP OF THE ADJUSTABLE-RATE MORTGAGE LOANS(1)
% OF
MORTGAGE
LOANS BY WEIGHTED WEIGHTED
AGGREGATE CUT-OFF AVERAGE AVERAGE WEIGHTED
NUMBER OF CUT-OFF DATE DATE DEBT-TO- MORTGAGE AVERAGE
MORTGAGE PRINCIPAL PRINCIPAL INCOME INTEREST CREDIT
PERIODIC CAP (%) LOANS BALANCE BALANCE RATIO (%) RATE (%) SCORE
- ----------------------------------- ---------- ----------------- ---------- ---------- ---------- ----------
1.000 ............................. 2,629 $ 422,692,121.85 100.00% 42.96% 8.306% 662
---------- ----------------- ---------- ---------- ---------- ----------
TOTAL: ............................ 2,629 $ 422,692,121.85 100.00% 42.96% 8.306% 662
========== ================= ========== ========== ========== ==========
WEIGHTED WEIGHTED
AVERAGE AVERAGE
ORIGINAL ORIGINAL WEIGHTED
LOAN-TO- TERM TO AVERAGE
VALUE MATURITY LOAN AGE
PERIODIC CAP (%) RATIO (%) (MONTHS) (MONTHS)
- ----------------------------------- ---------- ---------- ----------
1.000 ............................. 100.00% 360 2
---------- ---------- ----------
TOTAL: ............................ 100.00% 360 2
========== ========== ==========
Min = 1.000%
Max = 1.000%
(1) As of the Cut-off Date, the weighted average Periodic Cap of the
Adjustable-Rate Mortgage Loans was approximately 1.000%.
A-14
GROSS MARGINS OF THE ADJUSTABLE-RATE MORTGAGE LOANS(1)
% OF
MORTGAGE
LOANS BY WEIGHTED WEIGHTED
AGGREGATE CUT-OFF AVERAGE AVERAGE WEIGHTED
NUMBER OF CUT-OFF DATE DATE DEBT-TO- MORTGAGE AVERAGE
MORTGAGE PRINCIPAL PRINCIPAL INCOME INTEREST CREDIT
RANGE OF GROSS MARGINS (%) LOANS BALANCE BALANCE RATIO (%) RATE (%) SCORE
- ----------------------------------- ---------- ----------------- ---------- ---------- ---------- ----------
4.501 - 5.000 ..................... 2 $ 872,950.00 0.21% 44.23% 7.452% 690
5.001 - 5.500 ..................... 1 195,554.47 0.05 38.00 7.490 743
5.501 - 6.000 ..................... 665 133,241,626.73 31.52 43.72 7.909 665
6.001 - 6.500 ..................... 1,056 174,940,904.31 41.39 43.21 8.272 664
6.501 - 7.000 ..................... 653 85,867,181.07 20.31 42.42 8.705 656
7.001 - 7.500 ..................... 225 25,650,988.55 6.07 39.33 9.215 650
7.501 - 8.000 ..................... 22 1,738,338.41 0.41 40.88 9.456 654
8.001 - 8.500 ..................... 5 184,578.31 0.04 30.40 9.720 659
---------- ----------------- ---------- ---------- ---------- ----------
TOTAL: ............................ 2,629 $ 422,692,121.85 100.00% 42.96% 8.306% 662
========== ================= ========== ========== ========== ==========
WEIGHTED WEIGHTED
AVERAGE AVERAGE
ORIGINAL ORIGINAL WEIGHTED
LOAN-TO- TERM TO AVERAGE
VALUE MATURITY LOAN AGE
RANGE OF GROSS MARGINS (%) RATIO (%) (MONTHS) (MONTHS)
- ----------------------------------- ---------- ---------- ----------
4.501 - 5.000 ..................... 100.00% 360 2
5.001 - 5.500 ..................... 103.00 360 1
5.501 - 6.000 ..................... 99.97 360 2
6.001 - 6.500 ..................... 100.01 360 2
6.501 - 7.000 ..................... 100.03 360 2
7.001 - 7.500 ..................... 99.96 360 2
7.501 - 8.000 ..................... 100.00 360 2
8.001 - 8.500 ..................... 100.00 360 3
---------- ---------- ----------
TOTAL: ............................ 100.00% 360 2
========== ========== ==========
Min = 5.000%
Max = 8.375%
(1) As of the Cut-off Date, the weighted average Gross Margin of the
Adjustable-Rate Mortgage Loans was approximately 6.372%.
A-15
NEXT ADJUSTMENT DATE FOR THE ADJUSTABLE-RATE MORTGAGE LOANS(1)
% OF
MORTGAGE
LOANS BY WEIGHTED WEIGHTED
AGGREGATE CUT-OFF AVERAGE AVERAGE WEIGHTED
NUMBER OF CUT-OFF DATE DATE DEBT-TO- MORTGAGE AVERAGE
MONTH OF NEXT MORTGAGE MORTGAGE PRINCIPAL PRINCIPAL INCOME INTEREST CREDIT
INTEREST RATE CHANGE LOANS BALANCE BALANCE RATIO (%) RATE (%) SCORE
- ----------------------------------- ---------- ----------------- ---------- ---------- ---------- ----------
November 1, 2006 .................. 2 $ 802,795.38 0.19% 49.15% 7.792% 704
December 1, 2006 .................. 2 308,139.01 0.07 49.93 8.687 662
May 1, 2007 ....................... 2 571,301.38 0.14 36.11 7.579 646
June 1, 2007 ...................... 1 82,148.45 0.02 32.00 9.250 585
July 1, 2007 ...................... 1 150,294.38 0.04 18.00 8.125 642
August 1, 2007 .................... 1 158,384.41 0.04 55.00 8.625 603
September 1, 2007 ................. 4 1,476,346.44 0.35 50.82 7.533 731
October 1, 2007 ................... 14 2,374,479.11 0.56 42.31 8.193 662
November 1, 2007 .................. 546 85,171,109.79 20.15 42.40 8.265 654
December 1, 2007 .................. 1,054 165,056,543.70 39.05 42.98 8.467 657
January 1, 2008 ................... 300 54,184,080.53 12.82 43.35 7.995 684
February 1, 2008 .................. 1 90,000.00 0.02 50.00 7.875 722
August 1, 2008 .................... 1 237,890.28 0.06 36.00 7.375 670
September 1, 2008 ................. 1 568,012.72 0.13 43.00 7.875 649
October 1, 2008 ................... 2 238,293.60 0.06 40.69 7.625 693
November 1, 2008 .................. 208 33,614,654.30 7.95 43.15 8.143 660
December 1, 2008 .................. 370 59,038,423.02 13.97 43.20 8.425 659
January 1, 2009 ................... 96 15,226,099.34 3.60 42.71 7.980 684
November 1, 2010 .................. 4 591,509.85 0.14 48.94 8.414 650
December 1, 2010 .................. 13 1,704,579.55 0.40 39.13 8.547 683
January 1, 2011 ................... 6 1,047,036.61 0.25 44.70 7.550 709
---------- ----------------- ---------- ---------- ---------- ----------
TOTAL: ............................ 2,629 $ 422,692,121.85 100.00% 42.96% 8.306% 662
========== ================= ========== ========== ========== ==========
WEIGHTED WEIGHTED
AVERAGE AVERAGE
ORIGINAL ORIGINAL WEIGHTED
LOAN-TO- TERM TO AVERAGE
MONTH OF NEXT MORTGAGE VALUE MATURITY LOAN AGE
INTEREST RATE CHANGE RATIO (%) (MONTHS) (MONTHS)
- ----------------------------------- ---------- ---------- ----------
November 1, 2006 .................. 99.75% 360 3
December 1, 2006 .................. 100.00 360 2
May 1, 2007 ....................... 100.00 360 9
June 1, 2007 ...................... 100.00 360 8
July 1, 2007 ...................... 100.00 360 7
August 1, 2007 .................... 100.00 360 6
September 1, 2007 ................. 100.54 360 5
October 1, 2007 ................... 99.98 360 4
November 1, 2007 .................. 99.97 360 3
December 1, 2007 .................. 100.01 360 2
January 1, 2008 ................... 100.06 360 1
February 1, 2008 .................. 100.00 360 0
August 1, 2008 .................... 100.00 360 6
September 1, 2008 ................. 100.00 360 5
October 1, 2008 ................... 100.85 360 4
November 1, 2008 .................. 99.94 360 3
December 1, 2008 .................. 99.97 360 2
January 1, 2009 ................... 100.03 360 1
November 1, 2010 .................. 100.00 360 3
December 1, 2010 .................. 100.00 360 2
January 1, 2011 ................... 100.00 360 1
---------- ---------- ----------
TOTAL: ............................ 100.00% 360 2
========== ========== ==========
(1) As of the Cut-off Date, the weighted average number of months until the
next Adjustment Date of the Adjustable-Rate Mortgage Loans was
approximately 25 months.
A-16
DURATION OF INTEREST ONLY PERIOD
% OF
MORTGAGE
LOANS BY WEIGHTED WEIGHTED
AGGREGATE CUT-OFF AVERAGE AVERAGE WEIGHTED
NUMBER OF CUT-OFF DATE DATE DEBT-TO- MORTGAGE AVERAGE
DURATION OF INTEREST ONLY PERIOD MORTGAGE PRINCIPAL PRINCIPAL INCOME INTEREST CREDIT
(MONTHS) LOANS BALANCE BALANCE RATIO (%) RATE (%) SCORE
- ----------------------------------- ---------- ----------------- ---------- ---------- ---------- ----------
0 ................................. 2,505 $ 342,593,251.45 70.23% 42.18% 8.380% 657
60 ................................ 677 145,188,282.80 29.77 44.40 8.317 667
---------- ----------------- ---------- ---------- ---------- ----------
TOTAL: ............................ 3,182 $ 487,781,534.25 100.00% 42.84% 8.361% 660
========== ================= ========== ========== ========== ==========
WEIGHTED WEIGHTED
AVERAGE AVERAGE
ORIGINAL ORIGINAL WEIGHTED
LOAN-TO- TERM TO AVERAGE
DURATION OF INTEREST ONLY PERIOD VALUE MATURITY LOAN AGE
(MONTHS) RATIO (%) (MONTHS) (MONTHS)
- ----------------------------------- ---------- ---------- ----------
0 ................................. 100.02% 359 2
60 ................................ 99.94 360 2
---------- ---------- ----------
TOTAL: ............................ 100.00% 359 2
========== ========== ==========
DELINQUENCY STATUS OF MORTGAGE LOANS(1)
% OF
MORTGAGE
LOANS BY WEIGHTED WEIGHTED
AGGREGATE CUT-OFF AVERAGE AVERAGE WEIGHTED
NUMBER OF CUT-OFF DATE DATE DEBT-TO- MORTGAGE AVERAGE
MORTGAGE PRINCIPAL PRINCIPAL INCOME INTEREST CREDIT
DELINQUENCY STATUS (DAYS) LOANS BALANCE BALANCE RATIO (%) RATE (%) SCORE
- ----------------------------------- ---------- ----------------- ---------- ---------- ---------- ----------
0 - 29 ............................ 3,181 $ 487,456,534.25 99.93% 42.85% 8.361% 660
30 - 59 ........................... 1 325,000.00 0.07 35.00 8.500 646
---------- ----------------- ---------- ---------- ---------- ----------
TOTAL: ............................ 3,182 $ 487,781,534.25 100.00% 42.84% 8.361% 660
========== ================= ========== ========== ========== ==========
WEIGHTED WEIGHTED
AVERAGE AVERAGE
ORIGINAL ORIGINAL WEIGHTED
LOAN-TO- TERM TO AVERAGE
VALUE MATURITY LOAN AGE
DELINQUENCY STATUS (DAYS) RATIO (%) (MONTHS) (MONTHS)
- ----------------------------------- ---------- ---------- ----------
0 - 29 ............................ 100.00% 359 2
30 - 59 ........................... 100.00 360 3
---------- ---------- ----------
TOTAL: ............................ 100.00% 359 2
========== ========== ==========
(1) A Mortgage Loan is "Delinquent" if the scheduled monthly payment of
principal and interest on such Mortgage Loan which is payable by the
related mortgagor under the related Mortgage Note due on a due date is not
paid by the close of business on the next scheduled due date for such
Mortgage Loan.
A-17
[This page intentionally left blank.]
APPENDIX B
The following tables have been prepared based on the assumptions
described in this prospectus supplement under "Yield, Prepayment and Maturity
Considerations" and should be read in conjunction with that section.
PERCENTAGE OF ORIGINAL PRINCIPAL BALANCE OUTSTANDING(1) AT THE
SPECIFIED PERCENTAGES OF THE APPLICABLE PREPAYMENT ASSUMPTION
CLASS A-1
ARM PPC 0% 50% 75% 100% 125% 150% 175%
- ----------------------------------- ------- ------- ------- ------- ------- ------- -------
FRM PPC 0% 50% 75% 100% 125% 150% 175%
- ----------------------------------- ------- ------- ------- ------- ------- ------- -------
Distribution Date
Initial Percentage 100 100 100 100 100 100 100
February 25, 2007 98 75 63 51 40 28 16
February 25, 2008 96 31 0 0 0 0 0
February 25, 2009 95 0 0 0 0 0 0
February 25, 2010 94 0 0 0 0 0 0
February 25, 2011 92 0 0 0 0 0 0
February 25, 2012 89 0 0 0 0 0 0
February 25, 2013 86 0 0 0 0 0 0
February 25, 2014 83 0 0 0 0 0 0
February 25, 2015 80 0 0 0 0 0 0
February 25, 2016 76 0 0 0 0 0 0
February 25, 2017 71 0 0 0 0 0 0
February 25, 2018 66 0 0 0 0 0 0
February 25, 2019 61 0 0 0 0 0 0
February 25, 2020 55 0 0 0 0 0 0
February 25, 2021 48 0 0 0 0 0 0
February 25, 2022 40 0 0 0 0 0 0
February 25, 2023 32 0 0 0 0 0 0
February 25, 2024 23 0 0 0 0 0 0
February 25, 2025 13 0 0 0 0 0 0
February 25, 2026 1 0 0 0 0 0 0
February 25, 2027 0 0 0 0 0 0 0
February 25, 2028 0 0 0 0 0 0 0
February 25, 2029 0 0 0 0 0 0 0
February 25, 2030 0 0 0 0 0 0 0
February 25, 2031 0 0 0 0 0 0 0
February 25, 2032 0 0 0 0 0 0 0
February 25, 2033 0 0 0 0 0 0 0
February 25, 2034 0 0 0 0 0 0 0
February 25, 2035 0 0 0 0 0 0 0
February 25, 2036 0 0 0 0 0 0 0
Weighted Avg. Life to
Maturity (in years)(2) 13.52 1.57 1.20 1.00 0.86 0.76 0.69
Weighted Avg. Life to
Optional Termination
Date (in years)(2)(3) 13.52 1.57 1.20 1.00 0.86 0.76 0.69
- ----------
(1) Rounded to the nearest whole percentage.
(2) The weighted average life of any class of Certificates is determined by (i)
multiplying the assumed net reduction, if any, in the Certificate Principal
Balance on each Distribution Date of such class of Certificates by the
number of years from the date of issuance of the Certificates to the
related Distribution Date, (ii) summing the results, and (iii) dividing the
sum by the aggregate amount of the assumed net reduction in the Certificate
Principal Balance of such class of Certificates.
(3) Assumes an optional purchase of the Mortgage Loans on the earliest
Distribution Date on which it is permitted.
B-1
PERCENTAGE OF ORIGINAL PRINCIPAL BALANCE OUTSTANDING(1) AT THE
SPECIFIED PERCENTAGES OF THE APPLICABLE PREPAYMENT ASSUMPTION
CLASS A-2
ARM PPC 0% 50% 75% 100% 125% 150% 175%
- ----------------------------------- ------- ------- ------- ------- ------- ------- -------
FRM PPC 0% 50% 75% 100% 125% 150% 175%
- ----------------------------------- ------- ------- ------- ------- ------- ------- -------
Distribution Date
Initial Percentage 100 100 100 100 100 100 100
February 25, 2007 100 100 100 100 100 100 100
February 25, 2008 100 100 100 45 0 0 0
February 25, 2009 100 76 0 0 0 0 0
February 25, 2010 100 8 0 0 0 0 0
February 25, 2011 100 0 0 0 0 0 0
February 25, 2012 100 0 0 0 0 0 0
February 25, 2013 100 0 0 0 0 0 0
February 25, 2014 100 0 0 0 0 0 0
February 25, 2015 100 0 0 0 0 0 0
February 25, 2016 100 0 0 0 0 0 0
February 25, 2017 100 0 0 0 0 0 0
February 25, 2018 100 0 0 0 0 0 0
February 25, 2019 100 0 0 0 0 0 0
February 25, 2020 100 0 0 0 0 0 0
February 25, 2021 100 0 0 0 0 0 0
February 25, 2022 100 0 0 0 0 0 0
February 25, 2023 100 0 0 0 0 0 0
February 25, 2024 100 0 0 0 0 0 0
February 25, 2025 100 0 0 0 0 0 0
February 25, 2026 100 0 0 0 0 0 0
February 25, 2027 78 0 0 0 0 0 0
February 25, 2028 50 0 0 0 0 0 0
February 25, 2029 20 0 0 0 0 0 0
February 25, 2030 0 0 0 0 0 0 0
February 25, 2031 0 0 0 0 0 0 0
February 25, 2032 0 0 0 0 0 0 0
February 25, 2033 0 0 0 0 0 0 0
February 25, 2034 0 0 0 0 0 0 0
February 25, 2035 0 0 0 0 0 0 0
February 25, 2036 0 0 0 0 0 0 0
Weighted Avg. Life to
Maturity (in years)(2) 21.98 3.41 2.47 2.00 1.72 1.52 1.37
Weighted Avg. Life to
Optional Termination
Date (in years)(2)(3) 21.98 3.41 2.47 2.00 1.72 1.52 1.37
- ----------
(1) Rounded to the nearest whole percentage.
(2) The weighted average life of any class of Certificates is determined by (i)
multiplying the assumed net reduction, if any, in the Certificate Principal
Balance on each Distribution Date of such class of Certificates by the
number of years from the date of issuance of the Certificates to the
related Distribution Date, (ii) summing the results, and (iii) dividing the
sum by the aggregate amount of the assumed net reduction in the Certificate
Principal Balance of such class of Certificates.
(3) Assumes an optional purchase of the Mortgage Loans on the earliest
Distribution Date on which it is permitted.
B-2
PERCENTAGE OF ORIGINAL PRINCIPAL BALANCE OUTSTANDING(1) AT THE
SPECIFIED PERCENTAGES OF THE APPLICABLE PREPAYMENT ASSUMPTION
CLASS A-3
ARM PPC 0% 50% 75% 100% 125% 150% 175%
- ----------------------------------- ------- ------- ------- ------- ------- ------- -------
FRM PPC 0% 50% 75% 100% 125% 150% 175%
- ----------------------------------- ------- ------- ------- ------- ------- ------- -------
Distribution Date
Initial Percentage 100 100 100 100 100 100 100
February 25, 2007 100 100 100 100 100 100 100
February 25, 2008 100 100 100 100 93 52 13
February 25, 2009 100 100 94 34 0 0 0
February 25, 2010 100 100 60 32 0 0 0
February 25, 2011 100 75 37 12 0 0 0
February 25, 2012 100 57 21 0 0 0 0
February 25, 2013 100 42 8 0 0 0 0
February 25, 2014 100 29 0 0 0 0 0
February 25, 2015 100 19 0 0 0 0 0
February 25, 2016 100 11 0 0 0 0 0
February 25, 2017 100 4 0 0 0 0 0
February 25, 2018 100 0 0 0 0 0 0
February 25, 2019 100 0 0 0 0 0 0
February 25, 2020 100 0 0 0 0 0 0
February 25, 2021 100 0 0 0 0 0 0
February 25, 2022 100 0 0 0 0 0 0
February 25, 2023 100 0 0 0 0 0 0
February 25, 2024 100 0 0 0 0 0 0
February 25, 2025 100 0 0 0 0 0 0
February 25, 2026 100 0 0 0 0 0 0
February 25, 2027 100 0 0 0 0 0 0
February 25, 2028 100 0 0 0 0 0 0
February 25, 2029 100 0 0 0 0 0 0
February 25, 2030 88 0 0 0 0 0 0
February 25, 2031 73 0 0 0 0 0 0
February 25, 2032 57 0 0 0 0 0 0
February 25, 2033 39 0 0 0 0 0 0
February 25, 2034 19 0 0 0 0 0 0
February 25, 2035 0 0 0 0 0 0 0
February 25, 2036 0 0 0 0 0 0 0
Weighted Avg. Life to
Maturity (in years)(2) 26.32 6.87 4.71 3.38 2.37 2.05 1.83
Weighted Avg. Life to
Optional Termination
Date (in years)(2)(3) 26.32 6.87 4.71 3.38 2.37 2.05 1.83
- ----------
(1) Rounded to the nearest whole percentage.
(2) The weighted average life of any class of Certificates is determined by (i)
multiplying the assumed net reduction, if any, in the Certificate Principal
Balance on each Distribution Date of such class of Certificates by the
number of years from the date of issuance of the Certificates to the
related Distribution Date, (ii) summing the results, and (iii) dividing the
sum by the aggregate amount of the assumed net reduction in the Certificate
Principal Balance of such class of Certificates.
(3) Assumes an optional purchase of the Mortgage Loans on the earliest
Distribution Date on which it is permitted.
B-3
PERCENTAGE OF ORIGINAL PRINCIPAL BALANCE OUTSTANDING(1) AT THE
SPECIFIED PERCENTAGES OF THE APPLICABLE PREPAYMENT ASSUMPTION
CLASS A-4
ARM PPC 0% 50% 75% 100% 125% 150% 175%
- ----------------------------------- ------- ------- ------- ------- ------- ------- -------
FRM PPC 0% 50% 75% 100% 125% 150% 175%
- ----------------------------------- ------- ------- ------- ------- ------- ------- -------
Distribution Date
Initial Percentage 100 100 100 100 100 100 100
February 25, 2007 100 100 100 100 100 100 100
February 25, 2008 100 100 100 100 100 100 100
February 25, 2009 100 100 100 100 41 0 0
February 25, 2010 100 100 100 100 41 0 0
February 25, 2011 100 100 100 100 41 0 0
February 25, 2012 100 100 100 93 41 0 0
February 25, 2013 100 100 100 63 29 0 0
February 25, 2014 100 100 95 42 18 0 0
February 25, 2015 100 100 71 29 11 0 0
February 25, 2016 100 100 53 20 6 0 0
February 25, 2017 100 100 40 13 1 0 0
February 25, 2018 100 93 30 9 0 0 0
February 25, 2019 100 76 23 5 0 0 0
February 25, 2020 100 62 17 1 0 0 0
February 25, 2021 100 51 13 0 0 0 0
February 25, 2022 100 42 9 0 0 0 0
February 25, 2023 100 34 7 0 0 0 0
February 25, 2024 100 28 3 0 0 0 0
February 25, 2025 100 22 0 0 0 0 0
February 25, 2026 100 18 0 0 0 0 0
February 25, 2027 100 14 0 0 0 0 0
February 25, 2028 100 11 0 0 0 0 0
February 25, 2029 100 9 0 0 0 0 0
February 25, 2030 100 6 0 0 0 0 0
February 25, 2031 100 2 0 0 0 0 0
February 25, 2032 100 0 0 0 0 0 0
February 25, 2033 100 0 0 0 0 0 0
February 25, 2034 100 0 0 0 0 0 0
February 25, 2035 90 0 0 0 0 0 0
February 25, 2036 0 0 0 0 0 0 0
Weighted Avg. Life to
Maturity (in years)(2) 29.49 16.20 11.14 8.28 5.04 2.54 2.22
Weighted Avg. Life to
Optional Termination
Date (in years)(2)(3) 29.13 12.69 8.57 6.35 3.80 2.54 2.22
- ----------
(1) Rounded to the nearest whole percentage.
(2) The weighted average life of any class of Certificates is determined by (i)
multiplying the assumed net reduction, if any, in the Certificate Principal
Balance on each Distribution Date of such class of Certificates by the
number of years from the date of issuance of the Certificates to the
related Distribution Date, (ii) summing the results, and (iii) dividing the
sum by the aggregate amount of the assumed net reduction in the Certificate
Principal Balance of such class of Certificates.
(3) Assumes an optional purchase of the Mortgage Loans on the earliest
Distribution Date on which it is permitted.
B-4
PERCENTAGE OF ORIGINAL PRINCIPAL BALANCE OUTSTANDING(1) AT THE
SPECIFIED PERCENTAGES OF THE APPLICABLE PREPAYMENT ASSUMPTION
CLASS M-1
ARM PPC 0% 50% 75% 100% 125% 150% 175%
- ----------------------------------- ------- ------- ------- ------- ------- ------- -------
FRM PPC 0% 50% 75% 100% 125% 150% 175%
- ----------------------------------- ------- ------- ------- ------- ------- ------- -------
Distribution Date
Initial Percentage 100 100 100 100 100 100 100
February 25, 2007 100 100 100 100 100 100 100
February 25, 2008 100 100 100 100 100 100 100
February 25, 2009 100 100 100 100 100 94 83
February 25, 2010 100 100 77 53 100 94 67
February 25, 2011 100 89 57 35 64 59 30
February 25, 2012 100 74 43 24 20 31 14
February 25, 2013 100 61 32 16 7 17 3
February 25, 2014 100 51 24 11 4 7 0
February 25, 2015 100 42 18 7 3 0 0
February 25, 2016 100 34 13 5 0 0 0
February 25, 2017 100 28 10 3 0 0 0
February 25, 2018 100 23 8 2 0 0 0
February 25, 2019 100 19 6 0 0 0 0
February 25, 2020 100 16 4 0 0 0 0
February 25, 2021 100 13 3 0 0 0 0
February 25, 2022 100 11 2 0 0 0 0
February 25, 2023 100 9 0 0 0 0 0
February 25, 2024 100 7 0 0 0 0 0
February 25, 2025 100 6 0 0 0 0 0
February 25, 2026 100 4 0 0 0 0 0
February 25, 2027 100 4 0 0 0 0 0
February 25, 2028 100 3 0 0 0 0 0
February 25, 2029 100 2 0 0 0 0 0
February 25, 2030 100 0 0 0 0 0 0
February 25, 2031 88 0 0 0 0 0 0
February 25, 2032 74 0 0 0 0 0 0
February 25, 2033 59 0 0 0 0 0 0
February 25, 2034 42 0 0 0 0 0 0
February 25, 2035 23 0 0 0 0 0 0
February 25, 2036 0 0 0 0 0 0 0
Weighted Avg. Life to
Maturity (in years)(2) 27.40 9.49 6.50 5.19 5.55 5.56 4.47
Weighted Avg. Life to
Optional Termination
Date (in years)(2)(3) 27.31 8.63 5.87 4.72 4.95 4.06 3.29
- ----------
(1) Rounded to the nearest whole percentage.
(2) The weighted average life of any class of Certificates is determined by (i)
multiplying the assumed net reduction, if any, in the Certificate Principal
Balance on each Distribution Date of such class of Certificates by the
number of years from the date of issuance of the Certificates to the
related Distribution Date, (ii) summing the results, and (iii) dividing the
sum by the aggregate amount of the assumed net reduction in the Certificate
Principal Balance of such class of Certificates.
(3) Assumes an optional purchase of the Mortgage Loans on the earliest
Distribution Date on which it is permitted.
B-5
PERCENTAGE OF ORIGINAL PRINCIPAL BALANCE OUTSTANDING(1) AT THE
SPECIFIED PERCENTAGES OF THE APPLICABLE PREPAYMENT ASSUMPTION
CLASS M-2
ARM PPC 0% 50% 75% 100% 125% 150% 175%
- ----------------------------------- ------- ------- ------- ------- ------- ------- -------
FRM PPC 0% 50% 75% 100% 125% 150% 175%
- ----------------------------------- ------- ------- ------- ------- ------- ------- -------
Distribution Date
Initial Percentage 100 100 100 100 100 100 100
February 25, 2007 100 100 100 100 100 100 100
February 25, 2008 100 100 100 100 100 100 100
February 25, 2009 100 100 100 100 100 100 100
February 25, 2010 100 100 77 53 81 46 13
February 25, 2011 100 89 57 35 21 11 6
February 25, 2012 100 74 43 24 12 6 2
February 25, 2013 100 61 32 16 7 3 0
February 25, 2014 100 51 24 11 4 0 0
February 25, 2015 100 42 18 7 2 0 0
February 25, 2016 100 34 13 5 0 0 0
February 25, 2017 100 28 10 3 0 0 0
February 25, 2018 100 23 8 0 0 0 0
February 25, 2019 100 19 6 0 0 0 0
February 25, 2020 100 16 4 0 0 0 0
February 25, 2021 100 13 3 0 0 0 0
February 25, 2022 100 11 1 0 0 0 0
February 25, 2023 100 9 0 0 0 0 0
February 25, 2024 100 7 0 0 0 0 0
February 25, 2025 100 6 0 0 0 0 0
February 25, 2026 100 4 0 0 0 0 0
February 25, 2027 100 4 0 0 0 0 0
February 25, 2028 100 3 0 0 0 0 0
February 25, 2029 100 0 0 0 0 0 0
February 25, 2030 100 0 0 0 0 0 0
February 25, 2031 88 0 0 0 0 0 0
February 25, 2032 74 0 0 0 0 0 0
February 25, 2033 59 0 0 0 0 0 0
February 25, 2034 42 0 0 0 0 0 0
February 25, 2035 23 0 0 0 0 0 0
February 25, 2036 0 0 0 0 0 0 0
Weighted Avg. Life to
Maturity (in years)(2) 27.40 9.47 6.48 5.07 4.74 4.24 3.64
Weighted Avg. Life to
Optional Termination
Date (in years)(2)(3) 27.31 8.63 5.87 4.62 4.40 3.96 3.38
- ----------
(1) Rounded to the nearest whole percentage.
(2) The weighted average life of any class of Certificates is determined by (i)
multiplying the assumed net reduction, if any, in the Certificate Principal
Balance on each Distribution Date of such class of Certificates by the
number of years from the date of issuance of the Certificates to the
related Distribution Date, (ii) summing the results, and (iii) dividing the
sum by the aggregate amount of the assumed net reduction in the Certificate
Principal Balance of such class of Certificates.
(3) Assumes an optional purchase of the Mortgage Loans on the earliest
Distribution Date on which it is permitted.
B-6
PERCENTAGE OF ORIGINAL PRINCIPAL BALANCE OUTSTANDING(1) AT THE
SPECIFIED PERCENTAGES OF THE APPLICABLE PREPAYMENT ASSUMPTION
CLASS M-3
ARM PPC 0% 50% 75% 100% 125% 150% 175%
- ----------------------------------- ------- ------- ------- ------- ------- ------- -------
FRM PPC 0% 50% 75% 100% 125% 150% 175%
- ----------------------------------- ------- ------- ------- ------- ------- ------- -------
Distribution Date
Initial Percentage 100 100 100 100 100 100 100
February 25, 2007 100 100 100 100 100 100 100
February 25, 2008 100 100 100 100 100 100 100
February 25, 2009 100 100 100 100 100 100 63
February 25, 2010 100 100 77 53 35 22 13
February 25, 2011 100 89 57 35 21 11 6
February 25, 2012 100 74 43 24 12 6 0
February 25, 2013 100 61 32 16 7 3 0
February 25, 2014 100 51 24 11 4 0 0
February 25, 2015 100 42 18 7 0 0 0
February 25, 2016 100 34 13 5 0 0 0
February 25, 2017 100 28 10 3 0 0 0
February 25, 2018 100 23 8 0 0 0 0
February 25, 2019 100 19 6 0 0 0 0
February 25, 2020 100 16 4 0 0 0 0
February 25, 2021 100 13 3 0 0 0 0
February 25, 2022 100 11 0 0 0 0 0
February 25, 2023 100 9 0 0 0 0 0
February 25, 2024 100 7 0 0 0 0 0
February 25, 2025 100 6 0 0 0 0 0
February 25, 2026 100 4 0 0 0 0 0
February 25, 2027 100 4 0 0 0 0 0
February 25, 2028 100 0 0 0 0 0 0
February 25, 2029 100 0 0 0 0 0 0
February 25, 2030 100 0 0 0 0 0 0
February 25, 2031 88 0 0 0 0 0 0
February 25, 2032 74 0 0 0 0 0 0
February 25, 2033 59 0 0 0 0 0 0
February 25, 2034 42 0 0 0 0 0 0
February 25, 2035 23 0 0 0 0 0 0
February 25, 2036 0 0 0 0 0 0 0
Weighted Avg. Life to
Maturity (in years)(2) 27.40 9.45 6.46 5.02 4.50 3.91 3.35
Weighted Avg. Life to
Optional Termination
Date (in years)(2)(3) 27.31 8.63 5.87 4.57 4.16 3.65 3.14
- ----------
(1) Rounded to the nearest whole percentage.
(2) The weighted average life of any class of Certificates is determined by (i)
multiplying the assumed net reduction, if any, in the Certificate Principal
Balance on each Distribution Date of such class of Certificates by the
number of years from the date of issuance of the Certificates to the
related Distribution Date, (ii) summing the results, and (iii) dividing the
sum by the aggregate amount of the assumed net reduction in the Certificate
Principal Balance of such class of Certificates.
(3) Assumes an optional purchase of the Mortgage Loans on the earliest
Distribution Date on which it is permitted.
B-7
PERCENTAGE OF ORIGINAL PRINCIPAL BALANCE OUTSTANDING(1) AT THE
SPECIFIED PERCENTAGES OF THE APPLICABLE PREPAYMENT ASSUMPTION
CLASS M-4
ARM PPC 0% 50% 75% 100% 125% 150% 175%
- ----------------------------------- ------- ------- ------- ------- ------- ------- -------
FRM PPC 0% 50% 75% 100% 125% 150% 175%
- ----------------------------------- ------- ------- ------- ------- ------- ------- -------
Distribution Date
Initial Percentage 100 100 100 100 100 100 100
February 25, 2007 100 100 100 100 100 100 100
February 25, 2008 100 100 100 100 100 100 100
February 25, 2009 100 100 100 100 100 100 30
February 25, 2010 100 100 77 53 35 22 13
February 25, 2011 100 89 57 35 21 11 6
February 25, 2012 100 74 43 24 12 6 0
February 25, 2013 100 61 32 16 7 0 0
February 25, 2014 100 51 24 11 4 0 0
February 25, 2015 100 42 18 7 0 0 0
February 25, 2016 100 34 13 5 0 0 0
February 25, 2017 100 28 10 1 0 0 0
February 25, 2018 100 23 8 0 0 0 0
February 25, 2019 100 19 6 0 0 0 0
February 25, 2020 100 16 4 0 0 0 0
February 25, 2021 100 13 0 0 0 0 0
February 25, 2022 100 11 0 0 0 0 0
February 25, 2023 100 9 0 0 0 0 0
February 25, 2024 100 7 0 0 0 0 0
February 25, 2025 100 6 0 0 0 0 0
February 25, 2026 100 4 0 0 0 0 0
February 25, 2027 100 3 0 0 0 0 0
February 25, 2028 100 0 0 0 0 0 0
February 25, 2029 100 0 0 0 0 0 0
February 25, 2030 100 0 0 0 0 0 0
February 25, 2031 88 0 0 0 0 0 0
February 25, 2032 74 0 0 0 0 0 0
February 25, 2033 59 0 0 0 0 0 0
February 25, 2034 42 0 0 0 0 0 0
February 25, 2035 23 0 0 0 0 0 0
February 25, 2036 0 0 0 0 0 0 0
Weighted Avg. Life to
Maturity (in years)(2) 27.40 9.43 6.45 4.99 4.40 3.80 3.24
Weighted Avg. Life to
Optional Termination
Date (in years)(2)(3) 27.31 8.63 5.87 4.56 4.07 3.54 3.04
- ----------
(1) Rounded to the nearest whole percentage.
(2) The weighted average life of any class of Certificates is determined by (i)
multiplying the assumed net reduction, if any, in the Certificate Principal
Balance on each Distribution Date of such class of Certificates by the
number of years from the date of issuance of the Certificates to the
related Distribution Date, (ii) summing the results, and (iii) dividing the
sum by the aggregate amount of the assumed net reduction in the Certificate
Principal Balance of such class of Certificates.
(3) Assumes an optional purchase of the Mortgage Loans on the earliest
Distribution Date on which it is permitted.
B-8
PERCENTAGE OF ORIGINAL PRINCIPAL BALANCE OUTSTANDING(1) AT THE
SPECIFIED PERCENTAGES OF THE APPLICABLE PREPAYMENT ASSUMPTION
CLASS M-5
ARM PPC 0% 50% 75% 100% 125% 150% 175%
- ----------------------------------- ------- ------- ------- ------- ------- ------- -------
FRM PPC 0% 50% 75% 100% 125% 150% 175%
- ----------------------------------- ------- ------- ------- ------- ------- ------- -------
Distribution Date
Initial Percentage 100 100 100 100 100 100 100
February 25, 2007 100 100 100 100 100 100 100
February 25, 2008 100 100 100 100 100 100 100
February 25, 2009 100 100 100 100 100 100 30
February 25, 2010 100 100 77 53 35 22 13
February 25, 2011 100 89 57 35 21 11 6
February 25, 2012 100 74 43 24 12 6 0
February 25, 2013 100 61 32 16 7 0 0
February 25, 2014 100 51 24 11 4 0 0
February 25, 2015 100 42 18 7 0 0 0
February 25, 2016 100 34 13 5 0 0 0
February 25, 2017 100 28 10 0 0 0 0
February 25, 2018 100 23 8 0 0 0 0
February 25, 2019 100 19 6 0 0 0 0
February 25, 2020 100 16 4 0 0 0 0
February 25, 2021 100 13 0 0 0 0 0
February 25, 2022 100 11 0 0 0 0 0
February 25, 2023 100 9 0 0 0 0 0
February 25, 2024 100 7 0 0 0 0 0
February 25, 2025 100 6 0 0 0 0 0
February 25, 2026 100 4 0 0 0 0 0
February 25, 2027 100 0 0 0 0 0 0
February 25, 2028 100 0 0 0 0 0 0
February 25, 2029 100 0 0 0 0 0 0
February 25, 2030 100 0 0 0 0 0 0
February 25, 2031 88 0 0 0 0 0 0
February 25, 2032 74 0 0 0 0 0 0
February 25, 2033 59 0 0 0 0 0 0
February 25, 2034 42 0 0 0 0 0 0
February 25, 2035 23 0 0 0 0 0 0
February 25, 2036 0 0 0 0 0 0 0
Weighted Avg. Life to
Maturity (in years)(2) 27.40 9.41 6.43 4.96 4.32 3.71 3.17
Weighted Avg. Life to
Optional Termination
Date (in years)(2)(3) 27.31 8.63 5.87 4.54 4.01 3.47 2.98
- ----------
(1) Rounded to the nearest whole percentage.
(2) The weighted average life of any class of Certificates is determined by (i)
multiplying the assumed net reduction, if any, in the Certificate Principal
Balance on each Distribution Date of such class of Certificates by the
number of years from the date of issuance of the Certificates to the
related Distribution Date, (ii) summing the results, and (iii) dividing the
sum by the aggregate amount of the assumed net reduction in the Certificate
Principal Balance of such class of Certificates.
(3) Assumes an optional purchase of the Mortgage Loans on the earliest
Distribution Date on which it is permitted.
B-9
PERCENTAGE OF ORIGINAL PRINCIPAL BALANCE OUTSTANDING(1) AT THE
SPECIFIED PERCENTAGES OF THE APPLICABLE PREPAYMENT ASSUMPTION
CLASS M-6
ARM PPC 0% 50% 75% 100% 125% 150% 175%
- ----------------------------------- ------- ------- ------- ------- ------- ------- -------
FRM PPC 0% 50% 75% 100% 125% 150% 175%
- ----------------------------------- ------- ------- ------- ------- ------- ------- -------
Distribution Date
Initial Percentage 100 100 100 100 100 100 100
February 25, 2007 100 100 100 100 100 100 100
February 25, 2008 100 100 100 100 100 100 100
February 25, 2009 100 100 100 100 100 100 30
February 25, 2010 100 100 77 53 35 22 13
February 25, 2011 100 89 57 35 21 11 6
February 25, 2012 100 74 43 24 12 6 0
February 25, 2013 100 61 32 16 7 0 0
February 25, 2014 100 51 24 11 2 0 0
February 25, 2015 100 42 18 7 0 0 0
February 25, 2016 100 34 13 5 0 0 0
February 25, 2017 100 28 10 0 0 0 0
February 25, 2018 100 23 8 0 0 0 0
February 25, 2019 100 19 6 0 0 0 0
February 25, 2020 100 16 1 0 0 0 0
February 25, 2021 100 13 0 0 0 0 0
February 25, 2022 100 11 0 0 0 0 0
February 25, 2023 100 9 0 0 0 0 0
February 25, 2024 100 7 0 0 0 0 0
February 25, 2025 100 6 0 0 0 0 0
February 25, 2026 100 3 0 0 0 0 0
February 25, 2027 100 0 0 0 0 0 0
February 25, 2028 100 0 0 0 0 0 0
February 25, 2029 100 0 0 0 0 0 0
February 25, 2030 100 0 0 0 0 0 0
February 25, 2031 88 0 0 0 0 0 0
February 25, 2032 74 0 0 0 0 0 0
February 25, 2033 59 0 0 0 0 0 0
February 25, 2034 42 0 0 0 0 0 0
February 25, 2035 23 0 0 0 0 0 0
February 25, 2036 0 0 0 0 0 0 0
Weighted Avg. Life to
Maturity (in years)(2) 27.40 9.39 6.41 4.94 4.26 3.65 3.12
Weighted Avg. Life to
Optional Termination
Date (in years)(2)(3) 27.31 8.63 5.87 4.54 3.96 3.41 2.93
- ----------
(1) Rounded to the nearest whole percentage.
(2) The weighted average life of any class of Certificates is determined by (i)
multiplying the assumed net reduction, if any, in the Certificate Principal
Balance on each Distribution Date of such class of Certificates by the
number of years from the date of issuance of the Certificates to the
related Distribution Date, (ii) summing the results, and (iii) dividing the
sum by the aggregate amount of the assumed net reduction in the Certificate
Principal Balance of such class of Certificates.
(3) Assumes an optional purchase of the Mortgage Loans on the earliest
Distribution Date on which it is permitted.
B-10
PERCENTAGE OF ORIGINAL PRINCIPAL BALANCE OUTSTANDING(1) AT THE
SPECIFIED PERCENTAGES OF THE APPLICABLE PREPAYMENT ASSUMPTION
CLASS M-7
ARM PPC 0% 50% 75% 100% 125% 150% 175%
- ----------------------------------- ------- ------- ------- ------- ------- ------- -------
FRM PPC 0% 50% 75% 100% 125% 150% 175%
- ----------------------------------- ------- ------- ------- ------- ------- ------- -------
Distribution Date
Initial Percentage 100 100 100 100 100 100 100
February 25, 2007 100 100 100 100 100 100 100
February 25, 2008 100 100 100 100 100 100 100
February 25, 2009 100 100 100 100 100 64 30
February 25, 2010 100 100 77 53 35 22 13
February 25, 2011 100 89 57 35 21 11 5
February 25, 2012 100 74 43 24 12 6 0
February 25, 2013 100 61 32 16 7 0 0
February 25, 2014 100 51 24 11 0 0 0
February 25, 2015 100 42 18 7 0 0 0
February 25, 2016 100 34 13 1 0 0 0
February 25, 2017 100 28 10 0 0 0 0
February 25, 2018 100 23 8 0 0 0 0
February 25, 2019 100 19 5 0 0 0 0
February 25, 2020 100 16 0 0 0 0 0
February 25, 2021 100 13 0 0 0 0 0
February 25, 2022 100 11 0 0 0 0 0
February 25, 2023 100 9 0 0 0 0 0
February 25, 2024 100 7 0 0 0 0 0
February 25, 2025 100 4 0 0 0 0 0
February 25, 2026 100 0 0 0 0 0 0
February 25, 2027 100 0 0 0 0 0 0
February 25, 2028 100 0 0 0 0 0 0
February 25, 2029 100 0 0 0 0 0 0
February 25, 2030 100 0 0 0 0 0 0
February 25, 2031 88 0 0 0 0 0 0
February 25, 2032 74 0 0 0 0 0 0
February 25, 2033 59 0 0 0 0 0 0
February 25, 2034 42 0 0 0 0 0 0
February 25, 2035 23 0 0 0 0 0 0
February 25, 2036 0 0 0 0 0 0 0
Weighted Avg. Life to
Maturity (in years)(2) 27.39 9.35 6.38 4.90 4.20 3.59 3.06
Weighted Avg. Life to
Optional Termination
Date (in years)(2)(3) 27.31 8.63 5.87 4.52 3.92 3.36 2.88
- ----------
(1) Rounded to the nearest whole percentage.
(2) The weighted average life of any class of Certificates is determined by (i)
multiplying the assumed net reduction, if any, in the Certificate Principal
Balance on each Distribution Date of such class of Certificates by the
number of years from the date of issuance of the Certificates to the
related Distribution Date, (ii) summing the results, and (iii) dividing the
sum by the aggregate amount of the assumed net reduction in the Certificate
Principal Balance of such class of Certificates.
(3) Assumes an optional purchase of the Mortgage Loans on the earliest
Distribution Date on which it is permitted.
B-11
PERCENTAGE OF ORIGINAL PRINCIPAL BALANCE OUTSTANDING(1) AT THE
SPECIFIED PERCENTAGES OF THE APPLICABLE PREPAYMENT ASSUMPTION
CLASS M-8
ARM PPC 0% 50% 75% 100% 125% 150% 175%
- ----------------------------------- ------- ------- ------- ------- ------- ------- -------
FRM PPC 0% 50% 75% 100% 125% 150% 175%
- ----------------------------------- ------- ------- ------- ------- ------- ------- -------
Distribution Date
Initial Percentage 100 100 100 100 100 100 100
February 25, 2007 100 100 100 100 100 100 100
February 25, 2008 100 100 100 100 100 100 100
February 25, 2009 100 100 100 100 100 43 30
February 25, 2010 100 100 77 53 35 22 13
February 25, 2011 100 89 57 35 21 11 0
February 25, 2012 100 74 43 24 12 0 0
February 25, 2013 100 61 32 16 7 0 0
February 25, 2014 100 51 24 11 0 0 0
February 25, 2015 100 42 18 7 0 0 0
February 25, 2016 100 34 13 0 0 0 0
February 25, 2017 100 28 10 0 0 0 0
February 25, 2018 100 23 8 0 0 0 0
February 25, 2019 100 19 0 0 0 0 0
February 25, 2020 100 16 0 0 0 0 0
February 25, 2021 100 13 0 0 0 0 0
February 25, 2022 100 11 0 0 0 0 0
February 25, 2023 100 9 0 0 0 0 0
February 25, 2024 100 5 0 0 0 0 0
February 25, 2025 100 0 0 0 0 0 0
February 25, 2026 100 0 0 0 0 0 0
February 25, 2027 100 0 0 0 0 0 0
February 25, 2028 100 0 0 0 0 0 0
February 25, 2029 100 0 0 0 0 0 0
February 25, 2030 100 0 0 0 0 0 0
February 25, 2031 88 0 0 0 0 0 0
February 25, 2032 74 0 0 0 0 0 0
February 25, 2033 59 0 0 0 0 0 0
February 25, 2034 42 0 0 0 0 0 0
February 25, 2035 23 0 0 0 0 0 0
February 25, 2036 0 0 0 0 0 0 0
Weighted Avg. Life to
Maturity (in years)(2) 27.39 9.29 6.34 4.87 4.14 3.52 3.01
Weighted Avg. Life to
Optional Termination
Date (in years)(2)(3) 27.31 8.63 5.87 4.52 3.88 3.31 2.85
- ----------
(1) Rounded to the nearest whole percentage.
(2) The weighted average life of any class of Certificates is determined by (i)
multiplying the assumed net reduction, if any, in the Certificate Principal
Balance on each Distribution Date of such class of Certificates by the
number of years from the date of issuance of the Certificates to the
related Distribution Date, (ii) summing the results, and (iii) dividing the
sum by the aggregate amount of the assumed net reduction in the Certificate
Principal Balance of such class of Certificates.
(3) Assumes an optional purchase of the Mortgage Loans on the earliest
Distribution Date on which it is permitted.
B-12
PERCENTAGE OF ORIGINAL PRINCIPAL BALANCE OUTSTANDING(1) AT THE
SPECIFIED PERCENTAGES OF THE APPLICABLE PREPAYMENT ASSUMPTION
CLASS M-9
ARM PPC 0% 50% 75% 100% 125% 150% 175%
- ----------------------------------- ------- ------- ------- ------- ------- ------- -------
FRM PPC 0% 50% 75% 100% 125% 150% 175%
- ----------------------------------- ------- ------- ------- ------- ------- ------- -------
Distribution Date
Initial Percentage 100 100 100 100 100 100 100
February 25, 2007 100 100 100 100 100 100 100
February 25, 2008 100 100 100 100 100 100 100
February 25, 2009 100 100 100 100 100 43 30
February 25, 2010 100 100 77 53 35 22 13
February 25, 2011 100 89 57 35 21 11 0
February 25, 2012 100 74 43 24 12 0 0
February 25, 2013 100 61 32 16 0 0 0
February 25, 2014 100 51 24 11 0 0 0
February 25, 2015 100 42 18 0 0 0 0
February 25, 2016 100 34 13 0 0 0 0
February 25, 2017 100 28 10 0 0 0 0
February 25, 2018 100 23 2 0 0 0 0
February 25, 2019 100 19 0 0 0 0 0
February 25, 2020 100 16 0 0 0 0 0
February 25, 2021 100 13 0 0 0 0 0
February 25, 2022 100 11 0 0 0 0 0
February 25, 2023 100 8 0 0 0 0 0
February 25, 2024 100 0 0 0 0 0 0
February 25, 2025 100 0 0 0 0 0 0
February 25, 2026 100 0 0 0 0 0 0
February 25, 2027 100 0 0 0 0 0 0
February 25, 2028 100 0 0 0 0 0 0
February 25, 2029 100 0 0 0 0 0 0
February 25, 2030 100 0 0 0 0 0 0
February 25, 2031 88 0 0 0 0 0 0
February 25, 2032 74 0 0 0 0 0 0
February 25, 2033 59 0 0 0 0 0 0
February 25, 2034 42 0 0 0 0 0 0
February 25, 2035 23 0 0 0 0 0 0
February 25, 2036 0 0 0 0 0 0 0
Weighted Avg. Life to
Maturity (in years)(2) 27.39 9.22 6.29 4.83 4.09 3.48 2.96
Weighted Avg. Life to
Optional Termination
Date (in years)(2)(3) 27.31 8.63 5.87 4.52 3.86 3.30 2.81
- ----------
(1) Rounded to the nearest whole percentage.
(2) The weighted average life of any class of Certificates is determined by (i)
multiplying the assumed net reduction, if any, in the Certificate Principal
Balance on each Distribution Date of such class of Certificates by the
number of years from the date of issuance of the Certificates to the
related Distribution Date, (ii) summing the results, and (iii) dividing the
sum by the aggregate amount of the assumed net reduction in the Certificate
Principal Balance of such class of Certificates.
(3) Assumes an optional purchase of the Mortgage Loans on the earliest
Distribution Date on which it is permitted.
B-13
PERCENTAGE OF ORIGINAL PRINCIPAL BALANCE OUTSTANDING(1) AT THE
SPECIFIED PERCENTAGES OF THE APPLICABLE PREPAYMENT ASSUMPTION
CLASS M-10
ARM PPC 0% 50% 75% 100% 125% 150% 175%
- ----------------------------------- ------- ------- ------- ------- ------- ------- -------
FRM PPC 0% 50% 75% 100% 125% 150% 175%
- ----------------------------------- ------- ------- ------- ------- ------- ------- -------
Distribution Date
Initial Percentage 100 100 100 100 100 100 100
February 25, 2007 100 100 100 100 100 100 100
February 25, 2008 100 100 100 100 100 100 100
February 25, 2009 100 100 100 100 100 43 30
February 25, 2010 100 100 77 53 35 22 13
February 25, 2011 100 89 57 35 21 8 0
February 25, 2012 100 74 43 24 12 0 0
February 25, 2013 100 61 32 16 0 0 0
February 25, 2014 100 51 24 6 0 0 0
February 25, 2015 100 42 18 0 0 0 0
February 25, 2016 100 34 13 0 0 0 0
February 25, 2017 100 28 5 0 0 0 0
February 25, 2018 100 23 0 0 0 0 0
February 25, 2019 100 19 0 0 0 0 0
February 25, 2020 100 16 0 0 0 0 0
February 25, 2021 100 13 0 0 0 0 0
February 25, 2022 100 6 0 0 0 0 0
February 25, 2023 100 0 0 0 0 0 0
February 25, 2024 100 0 0 0 0 0 0
February 25, 2025 100 0 0 0 0 0 0
February 25, 2026 100 0 0 0 0 0 0
February 25, 2027 100 0 0 0 0 0 0
February 25, 2028 100 0 0 0 0 0 0
February 25, 2029 100 0 0 0 0 0 0
February 25, 2030 100 0 0 0 0 0 0
February 25, 2031 88 0 0 0 0 0 0
February 25, 2032 74 0 0 0 0 0 0
February 25, 2033 59 0 0 0 0 0 0
February 25, 2034 42 0 0 0 0 0 0
February 25, 2035 23 0 0 0 0 0 0
February 25, 2036 0 0 0 0 0 0 0
Weighted Avg. Life to
Maturity (in years)(2) 27.38 9.11 6.21 4.75 4.01 3.40 2.92
Weighted Avg. Life to
Optional Termination
Date (in years)(2)(3) 27.31 8.63 5.87 4.50 3.82 3.25 2.80
- ----------
(1) Rounded to the nearest whole percentage.
(2) The weighted average life of any class of Certificates is determined by (i)
multiplying the assumed net reduction, if any, in the Certificate Principal
Balance on each Distribution Date of such class of Certificates by the
number of years from the date of issuance of the Certificates to the
related Distribution Date, (ii) summing the results, and (iii) dividing the
sum by the aggregate amount of the assumed net reduction in the Certificate
Principal Balance of such class of Certificates.
(3) Assumes an optional purchase of the Mortgage Loans on the earliest
Distribution Date on which it is permitted.
B-14
APPENDIX C
ASSUMED MORTGAGE LOAN CHARACTERISTICS
ORIGINAL
ORIGINAL INTEREST
CUT-OFF DATE MORTGAGE AMORTIZATION ORIGINAL ONLY
PRINCIPAL INTEREST TERM TERM SEASONING TERM
DESCRIPTION BALANCE ($) RATE (%) (MONTHS) (MONTHS) (MONTHS) (MONTHS)
- ----------------------------- ---------------- ------------ ------------ ------------ ------------ ------------
15 Year Fixed 278,442.25 8.0404 180 180 2 0
15 Year Fixed 228,306.66 8.3750 180 180 2 0
15 Year Fixed 510,009.50 8.2910 180 180 2 0
15 Year Fixed w/IO Period 252,884.64 8.7500 180 180 3 60
15 Year Fixed w/IO Period 76,500.00 8.7500 180 180 3 60
15/30 Year Balloon 114,880.30 9.2500 360 180 2 0
20 Year Fixed 67,768.31 7.9990 240 240 2 0
30 Year Fixed 21,880,946.54 8.7653 360 360 2 0
30 Year Fixed 2,861,225.52 8.6555 360 360 2 0
30 Year Fixed 3,851,786.59 8.5796 360 360 3 0
30 Year Fixed 28,736,478.85 8.6833 360 360 2 0
30 Year Fixed w/IO Period 3,166,699.68 8.9350 360 360 3 60
30 Year Fixed w/IO Period 127,075.00 9.6308 360 360 3 60
30 Year Fixed w/IO Period 2,037,352.72 8.9990 360 360 2 60
30/40 Year Balloon 207,920.24 8.4928 480 360 1 0
30/40 Year Balloon 691,135.60 8.6050 480 360 1 0
1/29 ARM (LIBOR) 683,503.16 7.6250 360 360 3 0
1/29 ARM (LIBOR) 427,431.23 8.7043 360 360 2 0
2/28 ARM (LIBOR) 41,677,454.47 8.4218 360 360 2 0
2/28 ARM (LIBOR) 6,585,057.81 8.4645 360 360 2 0
2/28 ARM (LIBOR) 108,827,358.36 8.3457 360 360 2 0
2/28 ARM (LIBOR) 32,362,476.70 8.1802 360 360 2 0
2/28 ARM (LIBOR) w/IO Period 18,072,608.52 8.5872 360 360 2 60
2/28 ARM (LIBOR) w/IO Period 7,866,885.06 8.5775 360 360 2 60
2/28 ARM (LIBOR) w/IO Period 55,845,324.29 8.2718 360 360 2 60
2/28 ARM (LIBOR) w/IO Period 20,995,178.21 8.0941 360 360 2 60
2/28 6ML 30/40 Balloon 5,742,240.64 8.1679 480 360 1 0
2/28 6ML 30/40 Balloon 134,337.85 8.7500 480 360 2 0
2/28 6ML 30/40 Balloon 8,164,876.17 8.2323 480 360 1 0
2/28 6ML 30/40 Balloon 3,040,890.11 7.9491 480 360 1 0
3/27 ARM (LIBOR) 55,819,829.11 8.3172 360 360 2 0
3/27 ARM (LIBOR) 814,715.95 8.4142 360 360 3 0
3/27 ARM (LIBOR) 282,216.05 8.2590 360 360 3 0
3/27 ARM (LIBOR) 16,316,587.47 8.2279 360 360 2 0
3/27 ARM (LIBOR) w/IO Period 23,948,384.55 8.3353 360 360 2 60
3/27 ARM (LIBOR) w/IO Period 452,130.00 6.8697 360 360 3 60
3/27 ARM (LIBOR) w/IO Period 339,487.66 7.9887 360 360 3 60
3/27 ARM (LIBOR) w/IO Period 10,950,022.47 7.9949 360 360 2 60
5/25 ARM (LIBOR) 1,007,145.50 8.2219 360 360 2 0
5/25 ARM (LIBOR) 1,097,384.23 7.7889 360 360 2 0
5/25 ARM (LIBOR) w/IO Period 476,000.00 8.9527 360 360 2 60
5/25 ARM (LIBOR) w/IO Period 415,150.00 8.4002 360 360 3 60
5/25 ARM (LIBOR) w/IO Period 166,600.00 8.7054 360 360 2 60
5/25 6ML 30/40 Balloon 180,846.28 7.8750 480 360 1 0
MAXIMUM MINIMUM MONTHS TO INITIAL
GROSS MORTGAGE MORTGAGE NEXT PERIODIC PERIODIC
MARGIN INTEREST INTEREST ADJUSTMENT RATE CAP RATE CAP
DESCRIPTION (%) RATE (%) RATE (%) DATE (%) (%)
- ----------------------------- ------------ ------------ ------------ ------------ ------------ ------------
15 Year Fixed N/A N/A N/A 0 N/A N/A
15 Year Fixed N/A N/A N/A 0 N/A N/A
15 Year Fixed N/A N/A N/A 0 N/A N/A
15 Year Fixed w/IO Period N/A N/A N/A 0 N/A N/A
15 Year Fixed w/IO Period N/A N/A N/A 0 N/A N/A
15/30 Year Balloon N/A N/A N/A 0 N/A N/A
20 Year Fixed N/A N/A N/A 0 N/A N/A
30 Year Fixed N/A N/A N/A 0 N/A N/A
30 Year Fixed N/A N/A N/A 0 N/A N/A
30 Year Fixed N/A N/A N/A 0 N/A N/A
30 Year Fixed N/A N/A N/A 0 N/A N/A
30 Year Fixed w/IO Period N/A N/A N/A 0 N/A N/A
30 Year Fixed w/IO Period N/A N/A N/A 0 N/A N/A
30 Year Fixed w/IO Period N/A N/A N/A 0 N/A N/A
30/40 Year Balloon N/A N/A N/A 0 N/A N/A
30/40 Year Balloon N/A N/A N/A 0 N/A N/A
1/29 ARM (LIBOR) 6.0000 13.6250 7.6300 9 2.0000 1.0000
1/29 ARM (LIBOR) 6.5230 14.7043 8.7043 10 2.0000 1.0000
2/28 ARM (LIBOR) 6.4907 14.4225 8.4235 22 3.0000 1.0000
2/28 ARM (LIBOR) 6.4968 14.4645 8.4654 22 3.0000 1.0000
2/28 ARM (LIBOR) 6.4514 14.3407 8.3416 22 3.0000 1.0000
2/28 ARM (LIBOR) 6.4907 14.1802 8.1812 22 3.0000 1.0000
2/28 ARM (LIBOR) w/IO Period 6.3064 14.5872 8.5883 22 3.0000 1.0000
2/28 ARM (LIBOR) w/IO Period 6.3202 14.5775 8.5786 22 3.0000 1.0000
2/28 ARM (LIBOR) w/IO Period 6.2295 14.2718 8.2727 22 3.0000 1.0000
2/28 ARM (LIBOR) w/IO Period 6.2353 14.0941 8.0949 22 3.0000 1.0000
2/28 6ML 30/40 Balloon 6.2907 14.1679 8.1694 23 3.0000 1.0000
2/28 6ML 30/40 Balloon 6.2500 14.7500 8.7500 22 3.0000 1.0000
2/28 6ML 30/40 Balloon 6.2513 14.2323 8.2337 23 3.0000 1.0000
2/28 6ML 30/40 Balloon 6.2072 13.9491 7.9501 23 3.0000 1.0000
3/27 ARM (LIBOR) 6.4106 14.3150 8.3160 34 3.0000 1.0000
3/27 ARM (LIBOR) 6.2728 14.4142 8.4142 33 3.0000 1.0000
3/27 ARM (LIBOR) 6.3416 14.2590 8.2616 33 3.0000 1.0000
3/27 ARM (LIBOR) 6.3867 14.2279 8.2288 34 3.0000 1.0000
3/27 ARM (LIBOR) w/IO Period 6.2323 14.3353 8.3364 34 3.0000 1.0000
3/27 ARM (LIBOR) w/IO Period 6.0000 12.8697 6.8697 33 3.0000 1.0000
3/27 ARM (LIBOR) w/IO Period 6.4319 13.9887 7.9937 33 3.0000 1.0000
3/27 ARM (LIBOR) w/IO Period 6.1428 13.9949 7.9966 34 3.0000 1.0000
5/25 ARM (LIBOR) 6.3103 14.2219 8.2222 58 3.0000 1.0000
5/25 ARM (LIBOR) 6.1806 13.7889 7.7905 58 3.0000 1.0000
5/25 ARM (LIBOR) w/IO Period 6.5966 14.9527 8.9527 58 3.0000 1.0000
5/25 ARM (LIBOR) w/IO Period 6.4335 14.4002 8.4031 57 3.0000 1.0000
5/25 ARM (LIBOR) w/IO Period 6.4963 14.7054 8.7054 58 3.0000 1.0000
5/25 6ML 30/40 Balloon 6.0000 13.8750 7.8800 59 3.0000 1.0000
C-1
[This page intentionally left blank.]
APPENDIX D
INTEREST RATE SWAP SCHEDULE
NOTIONAL
DISTRIBUTION DATE AMOUNT ($)
------------------------- ---------------
March 25, 2006 463,392,457
April 25, 2006 459,110,838
May 25, 2006 453,923,220
June 25, 2006 447,836,675
July 25, 2006 440,863,736
August 25, 2006 433,022,531
September 25, 2006 424,336,833
October 25, 2006 414,836,086
November 25, 2006 404,581,479
December 25, 2006 393,263,852
January 25, 2007 381,684,685
February 25, 2007 370,004,132
March 25, 2007 357,913,165
April 25, 2007 345,452,852
May 25, 2007 332,667,046
June 25, 2007 319,602,079
July 25, 2007 306,306,437
August 25, 2007 292,830,401
September 25, 2007 279,225,663
October 25, 2007 265,544,924
November 25, 2007 251,841,466
December 25, 2007 238,168,718
January 25, 2008 90,774,617
February 25, 2008 78,338,293
March 25, 2008 74,351,839
April 25, 2008 70,579,828
May 25, 2008 67,010,234
June 25, 2008 63,631,721
July 25, 2008 60,433,613
August 25, 2008 57,405,844
September 25, 2008 54,538,928
October 25, 2008 51,823,924
November 25, 2008 49,252,405
December 25, 2006 46,403,855
January 25, 2009 21,010,372
February 25, 2009 20,249,111
March 25, 2009 19,515,764
April 25, 2009 18,809,281
May 25, 2009 18,128,658
June 25, 2009 17,472,928
July 25, 2009 16,841,161
August 25, 2009 16,232,463
September 25, 2009 15,645,976
October 25, 2009 15,080,872
November 25, 2009 14,536,359
December 25, 2006 14,011,670
January 25, 2010 13,506,073
February 25, 2010 13,018,860
March 25, 2010 12,549,352
April 25, 2010 12,096,894
D-1
[This page intentionally left blank.]
PROSPECTUS
ASSET BACKED FUNDING CORPORATION
Depositor
ASSET-BACKED CERTIFICATES
ASSET-BACKED NOTES
(ISSUABLE IN SERIES)
----------
YOU SHOULD CAREFULLY CONSIDER THE RISK FACTORS BEGINNING ON PAGE 7 OF THIS
PROSPECTUS.
The securities of any series and the underlying assets will not be insured or
guaranteed by any governmental agency or instrumentality or any other entity
other than as expressly described in the prospectus supplement for that series.
The securities of each series will represent interests in, or will represent
debt obligations of, the related issuing entity only and will not represent
interests in or obligations of the depositor, the sponsor or any other entity.
This prospectus may be used to offer and sell any series of securities only if
accompanied by the prospectus supplement for that series. The securities of each
series are not deposits or other obligations of a bank and are not insured by
the FDIC.
EACH ISSUING ENTITY--
o will issue a series of asset-backed certificates or asset-backed notes
that will consist of one or more classes; and
o may own--
o a pool or pools of single family and/or multifamily mortgage
loans, which may include sub-prime mortgage loans, and are
secured by either first or junior liens on one- to four-family
residential properties or primarily residential properties
consisting of five or more residential dwelling units and which
may include limited retail, office or other commercial space;
o a pool or pools of home improvement installment sales contracts
or installment loans that are unsecured; and
o a pool or pools of manufactured housing installment sales
contracts and installment loan agreements secured by a security
interest in a new or used manufactured home, and if indicated in
the accompanying prospectus supplement, by real property.
EACH SERIES OF SECURITIES--
o will represent ownership interest in the related issuing entity or
will represent debt obligations of the related issuing entity;
o may be entitled to the benefit of one or more of the other types of
credit support or derivative instruments described in this prospectus
and in more detail in the accompanying prospectus supplement; and
o will be paid only from the assets of the related issuing entity.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED THE SECURITIES OR DETERMINED THAT THIS PROSPECTUS IS
ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this prospectus is February 16, 2006.
[This page intentionally left blank.]
TABLE OF CONTENTS
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS
PROSPECTUS AND THE ACCOMPANYING PROSPECTUS SUPPLEMENT .......................1
SUMMARY OF PROSPECTUS..........................................................2
RISK FACTORS...................................................................7
Risks Associated with the Securities......................................7
Risks Associated with the Assets.........................................12
DESCRIPTION OF THE TRUST FUNDS................................................18
Assets...................................................................18
Mortgage Loans...........................................................19
Unsecured Home Improvement Loans.........................................21
Contracts................................................................22
Pre-Funding Account......................................................22
Accounts.................................................................23
USE OF PROCEEDS...............................................................23
YIELD CONSIDERATIONS..........................................................23
General..................................................................23
Pass-Through Rate and Interest Rate......................................23
Timing of Payment of Interest............................................24
Payments of Principal; Prepayments.......................................24
Prepayments--Maturity and Weighted Average Life .........................25
Other Factors Affecting Weighted Average Life............................26
THE DEPOSITOR.................................................................28
THE SPONSOR...................................................................29
DESCRIPTION OF THE SECURITIES.................................................30
General..................................................................30
Distributions............................................................30
Available Distribution Amount............................................31
Distributions of Interest on the Securities..............................32
Distributions of Principal of the Securities.............................32
Categories of Classes of Securities......................................33
Components...............................................................36
Distributions on the Securities of Prepayment Charges ...................36
Allocation of Losses and Shortfalls......................................36
Advances in Respect of Delinquencies.....................................36
Reports to Securityholders...............................................37
Termination..............................................................39
Definitive Form..........................................................40
Book-Entry Registration and Definitive Securities .......................40
Mandatory Auction of Certificates........................................46
DESCRIPTION OF THE AGREEMENTS.................................................47
Agreements Applicable to a Series........................................47
Material Terms of the Pooling and Servicing Agreements
and Underlying Servicing Agreements ...................................47
Material Terms of the Indenture..........................................62
DESCRIPTION OF CREDIT SUPPORT.................................................64
Subordination............................................................65
Limited Guarantee........................................................66
Financial Guaranty Insurance Policy or Surety Bond ......................66
Letter of Credit.........................................................66
Pool Insurance Policy....................................................67
Special Hazard Insurance Policy..........................................68
Mortgagor Bankruptcy Bond................................................68
Reserve Fund.............................................................68
Cross Collateralization..................................................69
Overcollateralization....................................................69
Excess Interest..........................................................69
CASH FLOW AGREEMENTS..........................................................70
Guaranteed Investment Contracts..........................................70
Yield Maintenance Agreements.............................................70
Swap Agreements..........................................................70
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS.......................................71
General..................................................................71
Types of Mortgage Instruments............................................71
Interest in Real Property................................................72
Condominiums.............................................................72
Cooperatives.............................................................72
Leaseholds...............................................................73
Land Sale Contracts......................................................73
Foreclosure..............................................................74
Junior Mortgages.........................................................77
Rights of Redemption.....................................................77
Anti-Deficiency Legislation, the Bankruptcy Code
and Other Limitations on Lenders ......................................78
Enforceability of Certain Provisions.....................................79
Environmental Considerations.............................................80
Due-on-Sale Clauses......................................................82
Prepayment Charges.......................................................82
Subordinate Financing....................................................82
Applicability of Usury Laws..............................................83
Alternative Mortgage Instruments.........................................83
Homeowners Protection Act of 1998........................................84
Texas Home Equity Loans..................................................84
Servicemembers Civil Relief Act..........................................84
Forfeiture for Drug, RICO and Money Laundering Violations ...............85
CERTAIN LEGAL ASPECTS OF THE CONTRACTS........................................85
General..................................................................85
Security Interests in the Manufactured Homes.............................85
Enforcement of Security Interests in Manufactured Homes .................87
Servicemembers Civil Relief Act..........................................87
Consumer Protection Laws.................................................87
Transfers of Manufactured Homes; Enforceability
of Due-on-Sale Clauses .. .............................................88
Applicability of Usury Laws..............................................88
FEDERAL INCOME TAX CONSEQUENCES...............................................88
General..................................................................88
REMICS...................................................................89
i
Grantor Trust Funds.....................................................109
Standard Securities.....................................................109
Stripped Securities.....................................................112
Partnership Trust Funds.................................................115
STATE AND OTHER TAX CONSEQUENCES.............................................121
ERISA CONSIDERATIONS.........................................................121
LEGAL INVESTMENT.............................................................124
METHODS OF DISTRIBUTION......................................................126
LEGAL MATTERS................................................................127
FINANCIAL INFORMATION........................................................127
RATING.......................................................................127
Reports to Securityholders...................................................127
WHERE YOU CAN FIND MORE INFORMATION..........................................127
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE............................128
INDEX OF PROSPECTUS DEFINITIONS..............................................129
ii
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS
PROSPECTUS AND THE ACCOMPANYING PROSPECTUS SUPPLEMENT
Information is provided to you about the securities in two separate
documents that progressively provide more detail: (a) this prospectus, which
provides general information, some of which may not apply to a particular series
of securities, including your series, and (b) the accompanying prospectus
supplement, which will describe the specific terms of your series of securities,
including:
o the principal balances and/or interest rates of each class;
o the timing and priority of interest and principal payments;
o statistical and other information about the mortgage loans;
o information about credit enhancement, if any, for each class;
o the ratings for each class; and
o the method for selling the securities.
The securities are not being offered in any state where the offer is
not permitted. The depositor does not claim that the information in this
prospectus or the accompanying prospectus supplement is accurate as of any date
other than the dates stated on their respective covers.
Cross-references are included in this prospectus and in the
accompanying prospectus supplement to captions in these materials where you can
find further related discussions. The table of contents in this prospectus and
the table of contents included in the accompanying prospectus supplement provide
the pages on which these captions are located.
You can find a listing of the pages where capitalized terms used in
this prospectus are defined under the caption "Index of Prospectus Definitions"
beginning on page 129 in this prospectus.
The depositor's principal executive office is located at 214 North
Tryon Street, Charlotte, North Carolina 28255 and the depositor's telephone
number is (704) 386-2400.
1
SUMMARY OF PROSPECTUS
This summary highlights selected information from this document and
does not contain all of the information that you need to consider in making an
investment decision. Please read this entire prospectus and the accompanying
prospectus supplement carefully to understand all of the terms of a series of
securities.
This summary provides an overview of certain calculations, cash flows
and other information to aid your understanding of the terms of the securities
and is qualified by the full description of these calculations, cash flows and
other information in the prospectus and the prospectus supplement.
RELEVANT PARTIES FOR EACH SERIES OF SECURITIES
TITLE OF SECURITIES
Asset-backed certificates and asset-backed notes issuable in series.
DEPOSITOR
Asset Backed Funding Corporation, a wholly-owned indirect subsidiary of Bank of
America Corporation. The depositor will acquire the underlying assets from the
sponsor, and will transfer them to each trust. It is not expected that the
depositor will have any business operations other than offering asset-backed
certificates and asset-backed notes and related activities.
ISSUING ENTITY
With respect to each series of certificates and/or notes, the trust to be formed
pursuant to either a pooling and servicing agreement or a deposit trust
agreement.
SPONSOR
Bank of America, National Association or another entity named in the related
prospectus supplement. The sponsor will sell the underlying assets to the
depositor on the closing date specified in the related prospectus supplement by
means of a purchase agreement between the sponsor and the depositor. The sponsor
may be an affiliate of the depositor.
SERVICER
The entity or entities named as servicer in the related prospectus supplement.
Each servicer will perform certain servicing functions related to the underlying
assets serviced by it in accordance with the related pooling and servicing
agreement or underlying servicing agreement. A servicer may be an affiliate of
the depositor.
MASTER SERVICER
The entity, if any, named as master servicer in the related prospectus
supplement that will perform certain administration, calculation and reporting
functions with respect to the trust and will supervise the servicers. The master
servicer may be an affiliate of the depositor.
TRUSTEE / INDENTURE TRUSTEE
The entity named as trustee or indenture trustee in the related prospectus
supplement. The trustee or indenture trustee generally will be responsible under
each pooling and servicing agreement or indenture for providing administrative
services on behalf of the trust for a series. To the extent specified in the
related prospectus supplement, a securities administrator may perform certain of
the duties of the trustee.
RELEVANT DATES
CUT-OFF DATE
The date specified in the related prospectus supplement which generally
represents the first date after which payments on or collection related to the
underlying assets, together with any proceeds thereof, will begin to be paid to
the issuing entity.
CLOSING DATE
The date when the certificates and/or notes of any series are initially issued
as specified in the related prospectus supplement.
DISTRIBUTION DATE
The monthly, quarterly or other periodic date specified in the related
prospectus supplement on which distributions will be made to holders of the
certificates and/or notes.
2
DESCRIPTION OF SECURITIES
Each series of certificates will be issued pursuant to a pooling and
servicing agreement and will include one or more classes representing an
ownership interest in a segregated pool of mortgage loans, unsecured home
improvement loans and/or manufactured housing installment sales contracts and
other assets of the trust. If a series of securities includes notes, such notes
will represent debt obligations of the related trust fund formed pursuant to a
deposit trust agreement and will be secured by the assets of the trust pursuant
to an indenture. A class of securities will be entitled, to the extent of funds
available, to receive distributions from collections on the related mortgage
loans and, to the extent specified in the related prospectus supplement, from
any credit enhancements or cash flow agreements described in this prospectus.
See "Description of the Securities" in this prospectus.
INTEREST DISTRIBUTIONS
For each series of securities, interest on each class of securities
(other than a class of securities entitled to receive only principal) will
accrue during each period specified in the prospectus supplement and will be
distributed to the holders of the related classes of securities on each
distribution date in accordance with the particular terms of each class of
securities. The terms of each class of securities will be described in the
related prospectus supplement.
See "Description of the Securities--Distributions of Interest on the
Securities" in this prospectus.
PRINCIPAL DISTRIBUTIONS
For each series of securities, principal payments (including
prepayments) on the related mortgage loans, unsecured home improvement loans
and/or manufactured housing installment sales contracts will be distributed to
holders of the related securities or otherwise applied as described in the
related prospectus supplement on each distribution date. Distributions in
reduction of principal balance will be allocated among the classes of securities
of a series in the manner specified in the applicable prospectus supplement.
See "Description of the Securities--Distribution of Principal of the
Securities" in this prospectus.
DENOMINATIONS
Each class of securities of a series will be issued in the minimum
denominations set forth in the related prospectus supplement.
REGISTRATION OF THE SECURITIES
The securities will be issued either:
o in book-entry form initially held through The Depository Trust
Company in the United States, or Clearstream or Euroclear in
Europe; or
o in fully registered, certificated form.
See "Description of the Securities--General" and "--Book-Entry
Registration and Definitive Securities" in this prospectus.
ASSETS OF THE TRUST
The trust related to each series will consist primarily of any of the
following assets:
o a segregated pool of single family and/or multifamily mortgage
loans which may include sub-prime mortgage loans;
o home improvement installment sales contracts or installment loans
that are unsecured;
3
o manufactured housing installment sales contracts and installment
loan agreements; and
o certain other property.
You should refer to the applicable prospectus supplement for the
precise characteristics or expected characteristics of the assets and a
description of the other property, such as cash flow agreements or derivative
instruments, if any, included in a particular trust.
See "Description of the Trust Funds" in this prospectus.
OPTIONAL TERMINATION OF THE TRUST
The related prospectus supplement may provide that the party specified
in the related prospectus supplement (which may be a securityholder) may
o repurchase all or part of the assets in the trust fund and
thereby cause early retirement of some or all of the securities
under the circumstances and in the manner specified in the
related prospectus supplement; or
o auction all or part of the assets in the trust fund and thereby
cause early retirement of the some or all of securities under the
circumstances and in the manner specified in the related
prospectus supplement.
If an election is made to treat the issuing entity (or one or more
segregated pools of assets of such issuing entity) as one or more "real estate
mortgage investment conduits," any optional termination or redemption will be
permitted only pursuant to a "qualified liquidation," as defined under Section
860F of the Internal Revenue Code of 1986, as amended.
See "Description of the Securities--Termination" and "Yield
Considerations" in this prospectus.
PREFUNDING ACCOUNT
The related prospectus supplement may provide that the depositor
deposit a specified amount in a pre-funding account on the date the securities
are issued. In this case, the deposited funds may only be used to acquire the
additional assets for the trust during a set period after the initial issuance
of the securities. Any amounts remaining in the account at the end of the period
will be distributed as a prepayment of principal to the holders of the related
securities.
See "Description of the Trust Funds--Prefunding Account" in this
prospectus.
CREDIT ENHANCEMENT
If so specified in the applicable prospectus supplement, the securities
of any series, or any one or more classes of a series, may, in addition to or in
lieu of subordination, be entitled to the benefits of one or more of the
following types of credit enhancement:
o overcollateralization
o surety bond
o financial guaranty insurance policy
o spread account
o letter of credit
o excess interest
o cross-collateralization
o reserve fund
o mortgage pool insurance policy
o limited guarantee
Any credit support will be described in detail in the applicable
prospectus supplement.
4
See "Description of Credit Support" in this prospectus.
In addition, if specified in the applicable prospectus supplement,
amounts received under one or more guaranteed investment contracts, swap
agreements or interest rate cap or floor agreements (also called yield
maintenance agreements) may also be used to provide credit enhancement for one
or more classes of a series. See "Cash Flow Agreements" in this prospectus.
RATING OF SECURITIES
The securities of any series will not be offered pursuant to this
prospectus and a prospectus supplement unless each offered security is rated in
one of the four highest rating categories by at least one nationally recognized
statistical rating agency.
o A security rating is not a recommendation to buy, sell or hold
the securities on any series and is subject to revision or
withdrawal at any time by the assigning rating agency.
o Ratings do not address the effect of prepayments on the yield you
may anticipate when you purchase your securities.
See "Risk Factors--Risks Associated with the Securities--Ratings
Assigned to the Securities Will Have Limitations" and "Ratings" in this
prospectus.
TAX STATUS OF THE SECURITIES
The securities of each series offered will be:
o regular interests and residual interests in a trust fund treated
as a REMIC;
o interests in a trust fund treated as a grantor trust;
o interests in a trust fund treated as a partnership; or
o debt obligations secured by assets of a trust.
For additional information see "Federal Income Tax Consequences" in
this prospectus and in the prospectus supplement.
ERISA CONSIDERATIONS
If you are a fiduciary of any employee benefit plan or arrangement,
including an individual retirement account, subject to the Employee Retirement
Income Security Act of 1974, as amended, the Internal Revenue Code of 1986, as
amended, or any federal, state or local law which is similar to ERISA or the
Code, you should carefully review with your legal advisors whether the purchase
or holding of securities could give rise to a transaction that is prohibited or
not otherwise permissible under ERISA, the Code or similar law.
For additional information see "ERISA Considerations" in this
prospectus and in the prospectus supplement.
LEGAL INVESTMENT
The applicable prospectus supplement will specify whether the class or
classes of securities offered will constitute "mortgage related securities" for
purposes of the Secondary Mortgage Market Enhancement Act of 1984, as amended.
If your investment activities are subject to legal investment laws and
regulations, regulatory capital requirements or review by regulatory
authorities, then you may be subject to restrictions on investment in the
securities. You should consult your own legal advisors for assistance in
determining the suitability of the securities for you and the consequences of
the purchase, ownership and sale of the securities.
5
For additional information see "Legal Investment" in this prospectus
and in the prospectus supplement.
6
RISK FACTORS
You should consider, among other things, the following factors in
connection with the purchase of securities as well as the specific risk
discussed in the applicable prospectus supplement under "Risk Factors."
RISKS ASSOCIATED WITH THE SECURITIES
Securities May Not be Liquid. The liquidity of your securities may be
limited. You should consider that:
o a secondary market for the securities of any series may not
develop, or if it does, it may not provide you with liquidity of
investment, or it may not continue for the life of the securities
of any series;
o the prospectus supplement for any series of securities may
indicate that an underwriter intends to establish a secondary
market in the securities of that series, but no underwriter will
be obligated to do so; and
o the securities generally will not be listed on any securities
exchange.
The secondary market for mortgage-backed securities has experienced
periods of illiquidity and can be expected to do so in the future. Illiquidity
can have a severely adverse effect on the prices of securities that are
especially sensitive to prepayment, credit, or interest rate risk (such as
securities that receive only payments of principal or interest or subordinated
securities), or that have been structured to meet the investment requirements of
limited categories of investors. Consequently, you may not be able to sell your
securities readily or at prices that will enable you to realize your desired
yield. The market values of the securities are likely to fluctuate; these
fluctuations may be significant and could result in significant losses to you.
Limited Source of Payments - No Recourse to Depositor, Sponsor, Master
Servicer, Servicer or Trustee. Except for any related insurance policies and any
reserve fund or other external credit enhancement described in the applicable
prospectus supplement:
o the assets included in the related trust fund will be the sole
source of payments on the securities of a series;
o the securities of any series will not represent an interest in or
obligation of the depositor, the sponsor, the master servicer,
the servicer, the trustee or any of their affiliates, except for
any representing parties' limited obligations relating to certain
breaches of its representations and warranties and limited
obligations of the servicer with respect to its servicing
obligations; and
o neither the securities of any series nor the related underlying
assets will be guaranteed or insured by any governmental agency
or instrumentality or any other entity.
Consequently, in the event that payments on the assets underlying your
series of securities are insufficient or otherwise unavailable to make all
payments required on your securities, there will be no recourse to the
depositor, the sponsor, the master servicer, the servicer, the trustee or any of
their affiliates or, except as specified in the applicable prospectus
supplement, any other entity.
Credit Enhancement is Limited in Amount and Coverage. With respect to
each series of securities, credit enhancement may be provided in limited amounts
to cover certain types of losses on the underlying assets. Credit enhancement
will be provided in one or more of the forms referred to in this prospectus,
including, but not limited to: subordination of other classes of securities of
the same series; excess interest; overcollateralization;
cross-collateralization; a financial guaranty insurance policy; a reserve fund;
a surety bond; a spread account; a mortgage pool insurance policy; a letter of
credit; a limited guarantee; or any combination of the preceding types of credit
enhancement. See "Description of Credit Support" in this prospectus. In
addition, if specified in the applicable prospectus supplement, amounts received
under any cash flow agreement described under "Description of the
7
Certificates--Cash Flow Agreements" may also be used to provide credit
enhancement for one or more classes of certificates.
Regardless of the form of credit enhancement provided:
o the amount of coverage will be limited in amount and in most
cases will be subject to periodic reduction in accordance with a
schedule or formula; and
o the credit enhancement may provide only very limited coverage as
to certain types of losses, and may provide no coverage as to
certain types of losses.
None of the depositor, the sponsor, the master servicer, the servicer,
the trustee or any of their affiliates will have any obligation to replace or
supplement any credit enhancement, or to take any other action to maintain any
rating of any class of securities.
Rate of Prepayment on Assets May Adversely Affect Average Lives and
Yields on the Securities. The yield on the securities of each series will depend
in part on the rate of principal payment on the assets (including prepayments,
liquidations due to defaults and asset repurchases). Such yield may be adversely
affected, depending upon whether a particular security is purchased at a premium
or a discount, by a higher or lower than anticipated rate of prepayments on the
related assets. In particular:
o the yield on principal-only or interest-only securities will be
extremely sensitive to the rate of prepayments on the related
assets; and
o the yield on certain classes of securities, such as companion
securities, may be relatively more sensitive to the rate of
prepayments of specified assets than other classes of securities.
The rate of prepayments on assets is influenced by a number of factors,
including:
o the prevailing mortgage market interest rates;
o local and national economic conditions;
o homeowner mobility; and
o the ability of the borrower to obtain financing.
If you are purchasing securities at a discount, and specifically if you
are purchasing principal-only securities, you should consider the risk that if
principal payments on the mortgage loans, or, in the case of any ratio strip
securities, the related mortgage loans, occur at a rate slower than you
expected, your yield will be lower than you expected.
If you are purchasing securities at a premium, or are purchasing an
interest-only security, you should consider the risk that if principal payments
on the mortgage loans or, in the case of any interest-only securities entitled
to a portion of interest paid on certain mortgage loans with higher mortgage
interest rate, those mortgage loans, occur at a rate faster than you expected,
your yield may be lower than you expected. If you are purchasing interest-only
securities, you should consider the risk that a rapid rate of principal payments
on the applicable mortgage loans could result in your failure to recover your
initial investment.
If you are purchasing any inverse floating rate securities, you should
also consider the risk that a high rate of the applicable index may result in a
lower actual yield than you expected or a negative yield. In particular, you
should consider the risk that high constant rates of the applicable index or
high constant prepayment rates on the mortgage loans may result in the failure
to recover your initial investment.
8
Timing of Prepayments on the Mortgage Loans May Result in Interest
Shortfalls on the Securities. When a mortgage loan is prepaid in full, the
mortgagor pays interest on the amount prepaid only to the date of prepayment.
Liquidation proceeds and amounts received in settlement of insurance claims are
also likely to include interest only to the time of payment or settlement. When
a mortgage loan is prepaid in full or in part, an interest shortfall may result
depending on the timing of the receipt of the prepayment and the timing of when
those prepayments are passed through to securityholders. To partially mitigate
this reduction in yield, the pooling agreement, indenture and/or underlying
servicing agreements relating to a series may provide, to the extent specified
in the applicable prospectus supplement, that for specified types of principal
prepayments received, the applicable servicer or the master servicer will be
obligated, on or before each distribution date, to pay an amount equal to the
lesser of (i) the aggregate interest shortfall with respect to the distribution
date resulting from those principal prepayments by mortgagors and (ii) all or a
portion of the servicer's or the master servicer's, as applicable, servicing
compensation for the distribution date as specified in the applicable prospectus
supplement or other mechanisms specified in the applicable prospectus
supplement. To the extent these shortfalls from the mortgage loans are not
covered by the amount of compensating interest or other mechanisms specified in
the applicable prospectus supplement, they will be allocated among the classes
of interest bearing securities as described in the related prospectus
supplement. No comparable interest shortfall coverage will be provided by the
servicer or the master servicer with respect to liquidations of any mortgage
loans. Any interest shortfall arising from liquidations will be covered by means
of the subordination of the rights of subordinated securityholders or any other
credit support arrangements described in this prospectus.
Ratings Assigned to the Securities Will Have Limitations. The ratings
assigned to your securities will not:
o assess the likelihood that principal prepayments (including those
caused by defaults) on the related assets will be made, the
degree to which the rate of such prepayments might differ from
that originally anticipated or the likelihood of early optional
termination or redemption of the series of securities; and
o address the possibility that prepayments at higher or lower rates
than anticipated by an investor may cause such investor to
experience a lower than anticipated yield or that an investor
purchasing a security at a significant premium might fail to
recoup its initial investment under certain prepayment scenarios.
In addition, the ratings of any series of securities by any applicable
rating agency may be lowered following the initial issuance of the securities.
The lowering of a rating on a series or class of securities may adversely affect
the market value of such securities and the liquidity of such securities. None
of the depositor, the sponsor or any of their affiliates will have any
obligation to maintain any rating of any series of securities.
Book-Entry System for Certain Classes of Securities May Decrease
Liquidity and Delay Payment. Since transactions in the classes of securities of
a Series issued in book-entry form can be effected only through The Depository
Trust Company, Clearstream, Euroclear, participating organizations, indirect
participants and certain banks:
o you may experience delays in your receipt of payments on book
entry securities because distributions will be made by the
trustee, or a paying agent on behalf of the trustee, to Cede &
Co., as nominee for The Depository Trust Company, rather than
directly to you;
o your ability to pledge such securities to persons or entities
that do not participate in The Depository Trust Company,
Clearstream or Euroclear may be limited due to the lack of a
physical certificate; and
o you may experience delays in your receipt of payments on
book-entry securities in the event of misapplication of payments
by DTC, DTC participants or indirect DTC participants or
bankruptcy or insolvency of those entities and your recourse will
be limited to your remedies against those entities.
See "Description of the Securities--Book-Entry Registration and
Definitive Securities" in this prospectus.
Risk of Loss May Be Greater on Subordinated Securities. The rights of
holders of subordinated securities will be subordinate:
9
o to the rights of the servicer and any master servicer (to the
extent of their servicing fees, including any unpaid servicing
fees, and reimbursement for certain unreimbursed advances and
unreimbursed liquidation expenses); and
o the holders of senior securities to the extent described in the
related prospectus supplement.
As a result of the foregoing, investors must be prepared to bear the
risk that they may be subject to delays in payment and may not recover their
initial investments in the subordinated securities. See "Description of Credit
Support" in this prospectus.
The yields on the subordinated securities may be extremely sensitive to
the loss experience of the related assets and the timing of any such losses. If
the actual rate and amount of losses experienced by the assets exceed the rate
and amount of such losses assumed by an investor, the yield to maturity on the
subordinated securities may be lower than anticipated.
Special Powers of the FDIC in the Event of Insolvency of the Bank of
America, National Association, as Sponsor, Could Delay or Reduce Distributions
on the Securities. If specified in the related prospectus supplement, the assets
may be acquired by Bank of America, National Association, as sponsor. Bank of
America, National Association is a national bank whose deposits are insured to
the applicable limits by the FDIC. If Bank of America, National Association
becomes insolvent, is in an unsound condition or engages in violations of its
bylaws or regulations applicable to it or if similar circumstances occur, the
FDIC could act as conservator and, if a receiver were appointed, would act as a
receiver for it. As receiver, the FDIC would have broad powers to:
o require the trust, as assignee of the depositor, to go through an
administrative claims procedure to establish its rights to
payments collected on the assets; or
o request a stay of proceedings to liquidate claims or otherwise
enforce contractual and legal remedies against Bank of America,
National Association.
If the FDIC were to take any of those actions, distributions on the
securities could be delayed or reduced.
By statute, the FDIC as conservator or receiver of Bank of America,
National Association is authorized to repudiate any "contract" of Bank of
America, National Association upon payment of "actual direct compensatory
damages." This authority may be interpreted by the FDIC to permit it to
repudiate a transfer of mortgage loans by Bank of America, National Association
to the depositor. Under an FDIC regulation, however, the FDIC as conservator or
receiver of a bank has stated that it will not reclaim, recover or
recharacterize a bank's transfer of financial assets in connection with a
securitization or participation, provided that the transfer meets all conditions
for sale accounting treatment under generally accepted accounting principles,
other than the "legal isolation" condition as it applies to institutions for
which the FDIC may be appointed as conservator or receiver, was made for
adequate consideration and was not made fraudulently, in contemplation of
insolvency, or with the intent to hinder, delay or defraud the bank or its
creditors. For purposes of the FDIC regulation, the term securitization means,
as relevant, the issuance by a special purpose entity of beneficial interests
the most senior class of which at time of issuance is rated in one of the four
highest categories assigned to long-term debt or in an equivalent short-term
category (within either of which there may be sub-categories or gradations
indicating relative standing) by one or more nationally recognized statistical
rating organizations. A special purpose entity, as the term is used in the
regulation, means a trust, corporation, or other entity demonstrably distinct
from the insured depository institution that is primarily engaged in acquiring
and holding (or transferring to another special purpose entity) financial
assets, and in activities related or incidental to these actions, in connection
with the issuance by the special purpose entity (or by another special purpose
entity that acquires financial assets directly or indirectly from the special
purpose entity) of beneficial interests. Any transactions involving Bank of
America, National Association as sponsor contemplated by this prospectus and the
related prospectus supplement will be structured so that this FDIC regulation
should apply to the transfer of the assets from Bank of America, National
Association to the depositor.
If a condition required under the FDIC regulation, or other statutory
or regulatory requirement applicable to the transaction, were found not to have
been satisfied, the FDIC as conservator or receiver might refuse to recognize
10
Bank of America, National Association's transfer of the assets to the depositor.
In that event the depositor could be limited to seeking recovery based upon its
security interest in the assets. The FDIC's statutory authority has been
interpreted by the FDIC and at least one court to permit the repudiation of a
security interest upon payment of actual direct compensatory damages measured as
of the date of conservatorship or receivership. These damages do not include
damages for lost profits or opportunity, and no damages would be paid for the
period between the date of conservatorship or receivership and the date of
repudiation. The FDIC could delay its decision whether to recognize Bank of
America, National Association's transfer of the assets for a reasonable period
following its appointment as conservator or receiver for Bank of America,
National Association. If the FDIC were to refuse to recognize Bank of America,
National Association's transfer of the assets, distributions on the related
securities could be delayed or reduced.
Insolvency of the Depositor May Delay or Reduce Collections on Assets.
Neither the United States Bankruptcy Code nor similar applicable state laws
prohibit the depositor from filing a voluntary application for relief under
these laws. However, the transactions contemplated by this prospectus and the
related prospectus supplement will be structured so that the voluntary or
involuntary application for relief under the bankruptcy laws by the depositor is
unlikely. The depositor is a separate, limited purpose subsidiary, the
certificate of incorporation of which contains limitations on the nature of the
depositor's business, including the ability to incur debt other than debt
associated with the transactions contemplated by this prospectus, and
restrictions on the ability of the depositor to commence voluntary or
involuntary cases or proceedings under bankruptcy laws without the prior
unanimous affirmative vote of all its directors (who are required to consider
the interests of the depositor's creditors, in addition to the depositor's
stockholders in connection the filing of a voluntary application for relief
under applicable insolvency laws). Further, the transfer of the assets to the
related trust will be structured so that the trustee has no recourse to the
depositor.
If the depositor were to become the subject of a proceeding under the
bankruptcy laws, a court could conclude that the transfer of the assets from the
depositor to the trust should not be characterized as an absolute transfer, and
accordingly, that the assets should be included as part of the depositor's
estate. Under these circumstances, the bankruptcy proceeding could delay or
reduce distributions on the securities. In addition, a bankruptcy proceeding
could result in the temporary disruption of distributions on the securities.
Cash Flow Agreements and External Credit Enhancements are Subject to
Third Party Risk. The assets of a trust may, if specified in the related
prospectus supplement, include cash flow agreements, such as swap, cap, floor or
similar agreements, which will require the counterparty to the trust (or the
trustee acting on behalf of the trust) to make payments to the trust under the
circumstances described in the prospectus supplement. If payments on the
securities of the related series depend in part on payments to be received under
one or these agreements, the ability of the trust to make payments on the
securities will be subject to the credit risk of the counterparty.
In addition, the ratings assigned to the securities of a series may
depend in part on the ratings assigned to the provider of certain types of
external credit enhancement, such as a mortgage pool insurance policy, surety
bond, financial guaranty insurance policy or limited guarantee. Any reduction in
the ratings assigned to the provider of one of these types of external credit
enhancement could result in the reduction of the ratings assigned to the
securities of the series. A reduction in the ratings assigned to the securities
of a series is likely to affect adversely the liquidity and market value of the
securities.
See "Description of Credit Support" and "Cash Flow Agreements" in this
prospectus.
Amounts Received from an Auction and a Related Swap Agreement May Be
Insufficient to Assure Completion of the Auction. If specified in the prospectus
supplement for a series, one or more classes of securities may be subject to a
mandatory auction. If you hold a class of securities subject to a mandatory
auction, on the distribution date specified in the related prospectus supplement
for the auction your security will be transferred to successful auction bidders,
thereby ending your investment in that security. If the security balance of your
class of auction securities plus, if applicable, accrued interest, after
application of all distributions and realized losses on the distribution date of
the auction, is greater than the amount received in the auction, a counterparty
will be obligated, pursuant to a swap agreement, to pay the amount of that
difference to the administrator of the auction for distribution to the holders
of the class of auction securities. Auction bidders will be permitted to bid for
all or a portion of a class of auction securities. If the counterparty under the
swap agreement defaults on its obligations, no
11
bids for all or a portion of a class of auction securities will be accepted
unless the amount of the bids are equal to the security balance of a class of
auction securities plus, if applicable, accrued interest, after application of
all distributions and realized losses on the distribution date of the auction
(or the pro rata portion of this price). If the counterparty under the swap
agreement defaults and no bids for a class of auction securities or portion of a
class are accepted or there are no bids for the class or portion of the class,
all or a portion of the securities of the class will not be transferred to
auction bidders. In the event this happens, you will retain the non-transferred
portion of your securities after the distribution date for the auction.
See "Description of the Securities--Mandatory Auction of the Auction
Securities" in this prospectus.
Servicing Transfer Following Event of Default May Result in Payment
Delays or Losses. Following the occurrence of an event of default under a
pooling and servicing agreement, indenture or underlying servicing agreement,
the trustee for the related series may, in its discretion or pursuant to
direction from securityholders, remove the defaulting master servicer or
servicer and succeed to its responsibilities, or may petition a court to appoint
a successor master servicer or servicer. The trustee or the successor master
servicer or servicer will be entitled to reimbursement of its costs of effecting
the servicing transfer from the predecessor master servicer or servicer, or from
the assets of the related trust if the predecessor fails to pay. In the event
that reimbursement to the trustee or the successor master servicer or servicer
is made from trust assets, the resulting shortfall will be borne by holders of
the related securities, to the extent not covered by any applicable credit
support. In addition, during the pendency of a servicing transfer or for some
time thereafter, mortgagors of the related mortgage loans may delay making their
monthly payments or may inadvertently continue making payments to the
predecessor servicer, potentially resulting in delays in distributions on the
related securities.
RISKS ASSOCIATED WITH THE ASSETS
Sub-Prime Mortgage Loans May Experience Greater Rates of Delinquency
and Foreclosure. All or a portion of the mortgage loans underlying a series of
securities may consist of mortgage loans underwritten in accordance with the
underwriting for sub-prime mortgage loans. A sub-prime mortgage loan is a
mortgage loan that is ineligible for purchase by Fannie Mae or the Freddie Mac
due to borrower credit characteristics, high loan-to-value ratios, high
debt-to-income ratios, property characteristics, loan documentation guidelines
or other credit characteristics that do not meet Fannie Mae or Freddie Mac
underwriting guidelines. As a consequence:
o delinquencies and foreclosures may be expected to be more likely
with respect to sub-prime mortgage loans than with respect to
mortgage loans originated in accordance with Fannie Mae or
Freddie Mac underwriting guidelines; and
o changes in the values of the mortgaged properties may have a
greater effect on the loss experience of sub-prime mortgage loans
than on mortgage loans originated in accordance with Fannie Mae
or Freddie Mac underwriting guidelines.
In the event these mortgage loans do become delinquent or subject to
liquidation, you may face delays in receiving payment and may suffer losses if
the credit enhancements for the series are insufficient to cover the delays and
losses.
Mortgage Loans Secured by Multifamily Properties May Experience Greater
Rates of Delinquency and Foreclosure. The ability of a borrower to repay a loan
secured by an income-producing property typically is dependent primarily upon
the successful operation of such property rather than upon the existence of
independent income or assets of the borrower; thus, the value of an
income-producing property typically is directly related to the net operating
income derived from such property. If the net operating income of the property
is reduced (for example, if rental or occupancy rates decline or real estate tax
rates or other operating expenses increase), the borrower's ability to repay the
loan may be impaired. In addition, the concentration of default, foreclosure and
loss risk for a pool of mortgage loans secured by multifamily properties may be
greater than for a pool of mortgage loans secured by single family properties of
comparable aggregate unpaid principal balance because the pool of mortgage loans
secured by multifamily properties is likely to consist of a smaller number of
higher balance loans.
12
General Economic Conditions Affect Mortgage Loan Performance. General
economic conditions have an impact on the ability of borrowers to repay mortgage
loans. Loss of earnings, illness and other similar factors may lead to an
increase in delinquencies and bankruptcy filings by borrowers. In the event of
personal bankruptcy of a borrower under a mortgage loan, it is possible that the
holders of the related securities could experience a loss with respect to such
mortgagor's mortgage loan. In conjunction with a mortgagor's bankruptcy, a
bankruptcy court may suspend or reduce the payments of principal and interest to
be paid with respect to such mortgage loan, thus delaying the amount received by
the holders of the related securities with respect to such mortgage loan.
Moreover, if a bankruptcy court prevents the transfer of the related mortgaged
property to the related trust, any remaining balance on such mortgage loan may
not be recoverable.
Real Estate Market Conditions Affect Mortgage Loan Performance. An
investment in the securities which are secured by or represent interests in
mortgage loans may be affected by, among other things, a decline in real estate
values. There is no assurance that the values of the mortgaged properties will
remain at the levels existing on the dates of origination of the related
mortgage loans.
If the residential real estate market should experience an overall
decline in property values such that the outstanding balances of the mortgage
loans contained in a particular trust and any secondary financing on the
mortgaged properties, become equal to or greater than the value of the mortgaged
properties, delinquencies, foreclosures and losses could be higher than those
now generally experienced in the mortgage lending industry.
Geographic Concentration May Increase Rates of Loss and Delinquency.
The assets underlying certain series of securities may be concentrated in
certain regions. Any concentration may present risk considerations in addition
to those generally present for similar asset-backed securities without a
concentration in a particular region. At various times, certain geographic
regions will experience weaker economic conditions and housing markets and,
consequently, will experience higher rates of delinquency and loss on mortgage
loans generally. In addition, certain states have experienced natural disasters,
including earthquakes, fires, floods and hurricanes, which may not be fully
insured against and may adversely affect property values. See the applicable
table or tables in Appendix A to the related prospectus supplement detailing the
geographic concentration of assets for listings of the locations and
concentrations of assets underlying the securities of a series.
Any deterioration in housing prices in a state or region due to adverse
economic conditions, natural disaster or other factors, and any deterioration of
economic conditions in a state or region that adversely affects the ability of
borrowers to make payments on the assets, may result in losses on the assets.
Any losses may adversely affect the yield to maturity of the related securities.
Any increase in the market value of properties located in a state or region
would reduce the combined loan-to-value ratios of the related assets and could,
therefore, make alternative sources of financing available to the borrowers at
lower interest rates, which could result in an increased rate of prepayment of
these assets.
See "The Mortgage Pool" and Appendix A in the related prospectus
supplement for further information regarding the geographic concentration of the
assets underlying the securities of any series.
Risk of Loss May Be Greater on Junior Mortgage Loans. Certain of the
mortgage loans underlying the securities of a series may be secured by mortgages
junior or subordinate to one or more other mortgages, and the related more
senior mortgages may not be included in the trust fund. Although little data is
available, the rate of default of second or more junior mortgage loans may be
greater than that of mortgage loans secured by senior liens on comparable
properties. A primary risk to holders of mortgage loans secured by junior
mortgages is the possibility that adequate funds will not be received in
connection with a foreclosure of the related senior mortgage to satisfy fully
both the senior mortgage and the mortgage that is junior or subordinate. In such
case, holders of the securities would bear:
o the risk of delay in distributions while a deficiency judgment
against the borrower is obtained; and
o the risk of loss if the deficiency judgment is not realized upon.
13
Moreover, deficiency judgments may not be available in certain
jurisdictions. In addition, a junior mortgagee may not foreclose on the property
securing a junior mortgage unless it forecloses subject to the more senior
mortgage.
In servicing junior mortgages, many servicers advance funds to keep the
senior mortgage current if the mortgagor is in default thereunder, but only to
the extent that they determine such advances will be recoverable from future
payments and collections on that mortgage loan or otherwise. Such practice may
not be followed in servicing loans more junior than second mortgages or may be
modified at any time. The related trust will have no source of funds to satisfy
any senior mortgage or make payments due to any senior mortgagee. The junior
mortgages securing the mortgage loans are subject and subordinate to any senior
mortgage affecting the related mortgaged property, including limitations and
prohibitions which may be contained in such senior mortgage upon subordinate
financing.
Special Risks of Certain Assets. Certain assets that may be included in
the Trust may involve additional uncertainties not present in other types of
assets. Certain of the assets may provide for escalating or variable payments
that may be larger than the initial payment amount; however, the borrowers under
such assets are generally approved on the basis of the initial payment amount
and the borrower's income may not be sufficient to enable them to pay the
increased payment amounts. Therefore, in such cases the likelihood of default
may increase.
Certain of the assets underlying a series of securities may be
delinquent in respect of the payment of principal and interest. In addition,
certain of the mortgagors under the mortgage loans underlying a series of
securities may be subject to personal bankruptcy proceedings. Credit enhancement
provided with respect to a particular series of securities may not cover all
losses related to such mortgage loans. Prospective investors should consider the
risk that the inclusion in a trust of delinquent assets and mortgage loans with
respect to which the mortgagor is the subject of bankruptcy proceedings may
cause the rate of the defaults and prepayments on such assets to increase and,
in turn, may cause losses to exceed the available credit enhancement for such
series and affect the yield on the securities of such series. See "The Mortgage
Pool" in the related prospectus supplement.
Alternatives to Foreclosure May Adversely Affect Yield. Certain assets
underlying a series of securities may become delinquent after the closing date.
A servicer may either foreclose on any such asset or work out an agreement with
the borrower if the delinquency is not cured, which may involve waiving or
modifying certain terms of the asset. If a servicer extends the payment period
or accepts a lesser amount than stated in the note or contract in satisfaction
of the note or contract, the yield on the related securities may be reduced.
Defaulted Assets May Experience Delays in Liquidation and Liquidation
Proceeds May Be Less than the Outstanding Principal Balance of the Asset. Even
assuming the applicable collateral provide adequate security for the assets
underlying a series of securities, substantial delays could result in connection
with the liquidation of defaulted assets. This could result in corresponding
delays in the receipt of the related proceeds by the related trust. Further,
liquidation expenses such as legal fees, real estate taxes and maintenance and
preservation expenses will reduce the portion of liquidation proceeds payable to
you. If the applicable collateral fails to provide adequate security for the
asset, you will incur a loss on your investment if the credit enhancements are
insufficient to cover the loss.
Liquidation Expenses May be Disproportionate. Liquidation expenses with
respect to defaulted assets do not vary directly with the outstanding principal
balance of the assets at the time of default. Therefore, assuming that the
servicer and master servicer took the same steps in realizing upon a defaulted
asset having a small remaining principal balance as they would in the case of a
defaulted asset having a large remaining principal balance, the amount realized
after expenses of liquidation would be smaller as a percentage of the
outstanding principal balance of the small asset than would be the case with the
defaulted asset having a large remaining principal balance. Because the average
outstanding principal balance of the assets is small relative to the size of the
average outstanding principal balance of the loans in a typical pool consisting
only of conventional purchase-money mortgage loans, net liquidation proceeds on
liquidated assets may also be smaller as a percentage of the principal balance
of the assets than would be the case in a typical pool consisting only of
conventional purchase-money mortgage loans.
14
Balloon Payment Assets May Have a Greater Default Risk at Maturity.
Certain of the underlying a series of securities may provide for a lump-sum
payment of the unamortized principal balance of the mortgage loan at the
maturity of the asset. See "The Mortgage Pool" in the related prospectus
supplement.
Because borrowers under this type of asset are required to make a
relatively large single payment upon maturity, it is possible that the default
risk associated with such assets is greater than that associated with
fully-amortizing mortgage loans. The ability of a mortgagor on this type of
asset to repay the mortgage loan upon maturity frequently depends upon the
mortgagor's ability:
o to refinance the asset, which will be affected by a number of
factors, including, without limitation, the level of mortgage
interest rates available in the primary mortgage market at the
time, the mortgagor's equity in the related mortgaged property,
the financial condition of the mortgagor, the condition of the
mortgaged property, tax law, general economic conditions and the
general willingness of financial institutions and primary
mortgage bankers to extend credit; or
o to sell the related mortgaged property at a price sufficient to
permit the mortgagor to make the lump-sum payment.
Collateral Securing Cooperative Loans May Diminish in Value. If
specified in the related prospectus supplement, certain of the mortgage loans
may be cooperative loans. There are certain risks that differentiate cooperative
loans from other types of mortgage loans. Ordinarily, the cooperative incurs a
blanket mortgage in connection with the construction or purchase of the
cooperative's apartment building and the underlying land. The interests of the
occupants under proprietary leases or occupancy agreements to which the
cooperative is a party are generally subordinate to the interest of the holder
of the blanket mortgage. 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 the collateral securing the cooperative loans.
Leaseholds May Be Subject to Default Risk on the Underlying Lease. If
specified in the related prospectus supplement, certain of the mortgage loans
may be secured by leasehold mortgages. Leasehold mortgages are subject to
certain risks not associated with mortgage loans secured by a fee estate of the
mortgagor. The most significant of these risks is that the ground lease creating
the leasehold estate could terminate, leaving the leasehold mortgagee without
its security. The ground lease may terminate, if among other reasons, the ground
lessee breaches or defaults in its obligations under the ground lease or there
is a bankruptcy of the ground lessee or the ground lessor. Any leasehold
mortgages underlying a series of securities will contain provisions protective
of the mortgagee, to the extent described in the applicable prospectus
supplement.
Increased Risk of Loss if Assets are Delinquent. A portion of the
assets may be delinquent upon the issuance of the related securities. Credit
enhancement provided with respect to a particular series of securities may not
cover all losses related thereto. You should consider the risk that the
inclusion of such assets in the trust fund for a series may cause the rate of
defaults and prepayments on the assets to increase and, in turn, may cause
losses to exceed the available credit enhancement for such series and affect the
yield on the securities of such series.
Violations of Federal, State and Local Laws May Adversely Affect
Ability to Collect on Loans. The mortgage loans may also be subject to federal,
state and local laws, including:
o the Federal Truth in Lending Act and Regulation Z promulgated
under that act, which require certain disclosures to the
borrowers regarding the terms of the residential loans;
o the Equal Credit Opportunity Act and Regulation B promulgated
under that act, which prohibit discrimination on the basis of
age, race, color, sex, religion, marital status, national origin,
receipt of
15
public assistance or the exercise of any right under the Consumer
Credit Protection Act, in the extension of credit;
o the Fair Credit Reporting Act, which regulates the use and
reporting of information related to the borrower's credit
experience; and
o for mortgage loans that were originated or closed after November
7, 1989, the Home Equity Loan Consumer Protection Act of 1988,
which requires additional disclosures, limits changes that may be
made to the loan documents without the borrower's consent. This
act also restricts a lender's ability to declare a default or to
suspend or reduce a borrower's credit limit to certain enumerated
events.
Certain mortgage loans are subject to the Riegle Community Development
and Regulatory Improvement Act of 1994 which incorporates the Home Ownership and
Equity Protection Act of 1994. These provisions may:
o impose additional disclosure and other requirements on creditors
with respect to non-purchase money mortgage loans with high
interest rates or high up-front fees and charges;
o apply on a mandatory basis to all mortgage loans originated on or
after October 1, 1995;
o impose specific statutory liabilities on creditors who fail to
comply with their provisions; and
o affect the enforceability of the related loans.
In addition, any assignee of the creditor would generally be subject to
all claims and defenses that the consumer could assert against the creditor,
including, without limitation, the right to rescind the mortgage loan.
Violations of certain provisions of these laws may limit the ability of the
servicer to collect all or part of the principal of or interest on the mortgage
loans, may entitle the mortgagor to a refund of amounts previously paid and may
subject the depositor, the servicer, the master servicer or the trust to damages
and administrative enforcement. As a result, these violations or alleged
violations could result in shortfalls in the distributions due on your
securities.
In the past few years, a number of legislative proposals have been
introduced at both 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 mortgage interest rates or origination costs in excess of prescribed
levels, and require that borrowers be given certain disclosures prior to the
consummation of such mortgage loans. In some cases, state and local laws may
impose requirements and restrictions greater than those in the Home Ownership
and Equity Protection Act of 1994. Lawsuits have been brought in various states
making claims against assignees of high cost loans for violations of state law.
Named defendants in these cases include numerous participants within the
secondary mortgage market, including some securitization trusts. The seller of
the assets, either directly or indirectly, to the depositor will make
representations and warranties with respect to each asset relating to compliance
with federal, state and local laws at the time of origination, that none of the
mortgage loans are subject to the Home Ownership and Equity Protection Act of
1994 and that none of the mortgage loans are "high cost" loans within the
meaning of such federal, state and local laws. In the event of a breach of any
such representations, the party specified in the related prospectus supplement
will be required to cure such breach or repurchase or replace the affected
mortgage loan. In addition, such party will be required to reimburse the related
trust fund for any damages or costs incurred by such trust fund as a result of a
breach of the representation as to compliance with federal, state and local
laws. To the extent Bank of America, National Association is the sponsor of a
series, it will be also make the representations and warranties above and cure
or repurchase the affected mortgage loan and reimburse the trust fund for any
costs and damages to the extent the seller of the assets fails to do so. To the
extent no party fulfills this reimbursement obligation for financial or other
reasons, shortfalls in the distributions due on your securities could occur. See
"Description of the Agreements--Material Terms of the Pooling and Servicing
Agreements and Underlying Servicing Agreements--Representations and Warranties;
Repurchases" in this prospectus.
16
The home improvement contracts are also subject to the Preservation of
Consumers' Claims and Defenses regulations of the Federal Trade Commission and
other similar federal and state statutes and regulations. These laws:
o protect the homeowner from defective craftsmanship or incomplete
work by a contractor;
o permit the obligated party to withhold payment if the work does
not meet the quality and durability standards agreed to by the
homeowner and the contractor; and
o subject any person to whom the seller of the goods assigns its
consumer credit transaction to all claims and defenses which the
obligated party in a credit sale transaction could assert against
such seller.
Market Values of Manufactured Homes May Increase the Risk of Loss.
Manufactured homes generally depreciate in value. Thus investors should expect
that, as a general matter, the market value of any manufactured home will be
lower than the outstanding principal balance of the related installment
contract. As a result, investors must be prepared to bear the risk of loss
resulting from any delinquency or liquidation loss on the contracts in a trust
fund, to the extent not covered by the applicable credit support.
Risk of Loss May Be Greater on Unsecured Home Improvement Loans. The
obligations of the borrower under any unsecured home improvement loan included
in a trust fund will not be secured by an interest in the related real estate or
any other property. In the event of a default, the trust fund will have recourse
only against the borrower's assets generally, along with all other general
unsecured creditors of the borrower. In a bankruptcy or insolvency proceeding,
the obligations of the borrower under an unsecured home improvement loan may be
discharged in their entirety. As a result, the trust fund may suffer losses. In
addition, a borrower on an unsecured home improvement loan may not demonstrate
the same degree of concern over performance of the borrower's obligations as if
such obligations were secured by the real estate or other assets owned by such
borrower.
Risks of Loss May Increase Due to Defective Security Interest and
Effects of Certain Other Legal Aspects of the Contracts. The seller of the
assets, either directly or indirectly, to the depositor will represent that a
contract is secured by a security interest in a manufactured home. Perfection of
such security interests and the right to realize upon the value of the
manufactured homes as collateral for the contracts are subject to a number of
federal and state laws, including the Uniform Commercial Code. The steps
necessary to perfect the security interest in a manufactured home will vary from
state to state. Because of the expense and administrative inconvenience
involved, the servicer or the master servicer will not amend any certificates of
title to change the lienholder specified therein from the seller of the assets
to the trustee and will not deliver any certificate of title to the trustee or
note thereon the trustee's interest. Consequently, in some states, in the
absence of such an amendment, the assignment to the trustee of the security
interest in the manufactured home may not be effective or such security interest
may not be perfected and, may not be effective against creditors of the seller
of the assets or a trustee in bankruptcy of such seller.
In addition, numerous federal and state consumer protection laws impose
requirements on lending under installment sales contracts and installment loan
agreements such as the contracts, and the failure by the lender or seller of
goods to comply with such requirements could give rise to liabilities of
assignees for amounts due under such agreements and claims by such assignees may
be subject to set-off as a result of such lender's or seller's noncompliance.
These laws would apply to the trustee as assignee of the contracts. The seller
of the assets of the contracts will warrant that each contract complies with all
requirements of law and will make certain warranties relating to the validity,
subsistence, perfection and priority of the security interest in each
manufactured home securing a contract. A breach of any such warranty that
materially adversely affects any contract would create an obligation of the
seller of the assets to repurchase, or if permitted by the applicable agreement,
substitute for, such contract unless such breach is cured. If the credit support
is exhausted and recovery of amounts due on the contracts is dependent on
repossession and resale of manufactured homes securing contracts that are in
default, certain other factors may limit the ability to realize upon the
manufactured home or may limit the amount realized by securityholders to less
than the amount due.
17
DESCRIPTION OF THE TRUST FUNDS
ASSETS
The primary assets of each Trust Fund (the "Assets" ) will include (i)
a segregated pool of single family and/or multifamily mortgage loans which may
include sub-prime mortgage loans (the "MORTGAGE LOANS" ), including without
limitation, Home Equity Loans, Home Improvement Contracts and Land Sale
Contracts, (ii) home improvement installment sales contracts or installment
loans that are unsecured (the "UNSECURED HOME IMPROVEMENT LOANS" ), (iii)
manufactured housing installment sales contracts and installment loan agreements
(the "CONTRACTS" ) or (iv) a combination of Mortgage Loans, Unsecured Home
Improvement Loans and/or Contracts. The Mortgage Loans will not be guaranteed or
insured by the Depositor or any of its affiliates. The Mortgage Loans will be
guaranteed or insured by a governmental agency or instrumentality or other
person only if and to the extent expressly provided in the related prospectus
supplement. If specified in the related prospectus supplement, the sponsor of a
Series may have purchased the Assets from a prior holder (an "ASSET SELLER"),
which prior holder may or may not be the originator of such Mortgage Loan,
Unsecured Home Improvement Loan or Contract.
The Assets included in the Trust Fund for a Series may be subject to
various types of payment provisions. Such Assets may consist of (1) "LEVEL
PAYMENT ASSETS," which may provide for the payment of interest and full
repayment of principal in level monthly payments with a fixed rate of interest
computed on their declining principal balances; (2) "ADJUSTABLE RATE ASSETS,"
which may provide for periodic adjustments to their rates of interest to equal
the sum (which may be rounded) of a fixed margin and an index; (3) "BUY DOWN
ASSETS," which are Assets for which funds have been provided by someone other
than the related obligors to reduce the obligors' monthly payments during the
early period after origination of such Assets; (4) "INCREASING PAYMENT ASSETS,"
as described below; (5) "INTEREST REDUCTION ASSETS," which provide for the
one-time reduction of the interest rate payable thereon; (6) "GEM ASSETS," which
provide for (a) monthly payments during the first year after origination that
are at least sufficient to pay interest due thereon, and (b) an increase in such
monthly payments in subsequent years at a predetermined rate resulting in full
repayment over a shorter term than the initial amortization terms of such
Assets; (7) "GPM ASSETS," which allow for payments during a portion of their
terms which are or may be less than the amount of interest due on the unpaid
principal balances thereof, and which unpaid interest will be added to the
principal balances of such Assets and will be paid, together with interest
thereon, in later years; (8) "STEP-UP RATE ASSETS" which provide for interest
rates that increase over time; (9) "BALLOON PAYMENT ASSETS" which are mortgage
loans that are not fully amortizing over their terms and, thus, will require a
lump-sum payment at their stated maturity; (10) "CONVERTIBLE ASSETS" which are
Adjustable Rate Assets subject to provisions pursuant to which, subject to
certain limitations, the related obligors may exercise an option to convert the
adjustable interest rate to a fixed interest rate; and (11) "BI-WEEKLY ASSETS,"
which provide for obligor payments to be made on a bi-weekly basis.
The applicable prospectus supplement will set forth the relevant index
or indices with respect to the Adjustable Rate Assets in the related Trust Fund.
The indices will be one or more of the following: one-month, three-month,
six-month or one-year LIBOR (an average of the interest rate on one-month,
three-month, six-month or one-year dollar-denominated deposits traded between
banks in London), CMT (weekly or monthly average yields of U.S. treasury short
and long-term securities, adjusted to a constant maturity), COFI (an index of
the weighted average interest rate paid by savings institutions in Nevada,
Arizona and California), MTA (a one-year average of the monthly average yields
of U.S. treasury securities) or the Prime Rate (an interest rate charged by
banks for short-term loans to their most creditworthy customers).
An Increasing Payment Asset is an Asset that provides for monthly
payments that are fixed for an initial period to be specified in the related
prospectus supplement and which increase thereafter (at a predetermined rate
expressed as a percentage of the monthly payment during the preceding payment
period, subject to any caps on the amount of any single monthly payment
increase) for a period to be specified in the related prospectus supplement from
the date of origination, after which the monthly payment is fixed at a
level-payment amount so as to fully amortize the Asset over its remaining term
to maturity. The scheduled monthly payment with respect to an Increasing Payment
Asset is the total amount required to be paid each month in accordance with its
terms and equals the sum of (1) the obligor's monthly payments referred to in
the preceding sentence and (2) in the case of certain Increasing Payment Assets,
payments made by the respective Servicers pursuant to buy-down or subsidy
agreements. The obligor's initial monthly payments for each Increasing Payment
Asset are set at the level-payment
18
amount that would apply to an otherwise identical Level Payment Asset having an
interest rate a certain number of percentage points below the Asset Rate of such
Increasing Payment Asset. The obligor's monthly payments on each Increasing
Payment Asset, together with any payments made thereon by the related Servicers
pursuant to buy-down or subsidy agreements, will in all cases be sufficient to
allow payment of accrued interest on such Increasing Payment Asset at the
related interest rate, without negative amortization. An obligor's monthly
payments on such an Asset may, however, not be sufficient to result in any
reduction of the principal balance of such Asset until after the period when
such payments may be increased.
The Securities will be entitled to payment only from the assets of the
related Trust Fund and will not be entitled to payments in respect of the assets
of any other trust fund established by the Depositor. If specified in the
related prospectus supplement, the assets of a Trust Fund will consist of
securities representing beneficial ownership interests in, or indebtedness of,
another trust fund that contains the Assets.
MORTGAGE LOANS
General
Each Mortgage Loan will generally be secured by a lien on (i) a one-to
four-family residential property or a security interest in shares issued by a
cooperative housing corporation (a "SINGLE FAMILY PROPERTY" and the related
Mortgage Loan a "SINGLE FAMILY MORTGAGE LOAN") or (ii) a primarily residential
property which consists of five or more residential dwelling units, and which
may include limited retail, office or other commercial space (a "MULTIFAMILY
PROPERTY" and the related Mortgage Loan a "MULTIFAMILY MORTGAGE LOAN"). Single
Family Properties and Multifamily Properties are sometimes referred to herein
collectively as "MORTGAGED PROPERTIES." To the extent specified in the related
prospectus supplement, the Mortgage Loans will be secured by first and/or junior
mortgages or deeds of trust or other similar security instruments creating a
first or junior lien on Mortgaged Property. The Mortgaged Properties may include
stock, shares or membership certificates issued by private, nonprofit,
cooperative housing corporations, known as "COOPERATIVES," and in the related
proprietary leases or occupancy agreements granting exclusive rights to occupy
specific dwelling units in such Cooperatives' buildings. The Mortgaged
Properties may include leasehold interests in properties, the title to which is
held by third party lessors. The term of any such leasehold shall exceed the
term of the related mortgage note by at least five years or such other time
period specified in the related prospectus supplement. The Mortgage Loans may
include (i) closed-end and/or revolving home equity loans or certain balances
thereof ("HOME EQUITY LOANS") and/or (ii) secured home improvement installment
sales contracts and secured installment loan agreements ("HOME IMPROVEMENT
CONTRACTS"). In addition, the Mortgage Loans may include certain Mortgage Loans
evidenced by contracts ("LAND SALE CONTRACTS") for the sale of properties
pursuant to which the mortgagor promises to pay the amount due thereon to the
holder thereof with fee title to the related property held by such holder until
the mortgagor has made all of the payments required pursuant to such Land Sale
Contract, at which time fee title is conveyed to the mortgagor. The Originator
of each Mortgage Loan will have been a person other than the Depositor. The
related prospectus supplement will indicate if any person who originated the
Mortgage Loans (each an "ORIGINATOR") is an affiliate of the Depositor. If any
Originator or group of affiliated Originators originated 10% or more of the
Mortgage Loans in a Trust Fund, the applicable prospectus supplement will
disclose the identity of the Originator and, if such Originator or group of
affiliated Originators originated 20% or more of the Mortgage Loans, the
applicable prospectus supplement will provide information about the Originator's
form of organization and, to the extent material, a description of the
Originator's origination program and how long it has been engaged in originating
mortgage loans of the same type. The Mortgage Loans will be evidenced by
promissory notes (the "Mortgage Notes") secured by mortgages, deeds of trust or
other security instruments (the "MORTGAGES") creating a lien on the Mortgaged
Properties.
Combined Loan-to-Value Ratio
The "COMBINED LOAN-TO-VALUE RATIO" of a Mortgage Loan at any given time
is the ratio (expressed as a percentage) of (i) the sum of (a) the outstanding
principal balance of the Mortgage Loan at origination plus (b) in the case of a
second lien Mortgage Loan, the outstanding principal balance of the first lien
on the related Mortgaged Property at the date of origination of the Mortgage
Loan over (ii) the Value of the related Mortgaged Property. The "VALUE" of a
Mortgaged Property is generally the lesser of: (i) an amount determined by an
appraisal done at origination of the Mortgage Loan and (ii) other than in the
case of a refinanced Mortgage Loan, the purchase price
19
paid for the related Mortgaged Property by the Mortgagor with the proceeds of
the Mortgage Loan. The value of a Mortgaged Property as of the date of initial
issuance of the related Series of Securities may be less than the Value at
origination and will fluctuate from time to time based upon changes in economic
conditions and the real estate market.
Mortgage Loan Information in Prospectus Supplements
Each prospectus supplement will contain information, as of the dates
specified in such prospectus supplement and to the extent then applicable and
specifically known to the Depositor, with respect to the Mortgage Loans,
including (i) the aggregate outstanding principal balance and the largest,
smallest and average outstanding principal balance of the Mortgage Loans as of
the applicable cut-off date (the "CUT-OFF DATE") specified in the prospectus
supplement, (ii) the type of property securing the Mortgage Loans, (iii) the
occupancy status, (iv) the purpose, (v) the documentation type, (vi) the
weighted average (by principal balance) of the original and remaining terms to
maturity of the Mortgage Loans, (vii) the earliest and latest origination date
and maturity date of the Mortgage Loans, (viii) the range of the Loan-to-Value
Ratios at origination of the Mortgage Loans, (ix) the credit scores of the
Mortgagors, (x) the Mortgage Interest Rates or range of Mortgage Interest Rates
and the weighted average Mortgage Interest Rate borne by the Mortgage Loans,
(xi) the geographic distribution of the Mortgaged Properties, (xii) information
with respect to the prepayment provisions, if any, of the Mortgage Loans, (xiii)
with respect to Mortgage Loans with adjustable Mortgage Interest Rates ("ARM
LOANS"), the index, the frequency of the adjustment dates, the range of margins
added to the index, and the maximum Mortgage Interest Rate or monthly payment
variation at the time of any adjustment thereof and over the life of the ARM
Loan, (xiv) information regarding the payment characteristics of the Mortgage
Loans, including without limitation balloon payment and other amortization
provisions, (xv) the number of Mortgage Loans that are delinquent and the number
of days or ranges of the number of days such Mortgage Loans are delinquent and
(xvi) the material underwriting standards used for the Mortgage Loans. If
specific information respecting the Mortgage Loans is not known to the Depositor
at the time Securities are initially offered, more general information of the
nature described above will be provided in the prospectus supplement, and
specific information will be set forth in a report which will be available to
purchasers of the related Securities at or before the initial issuance thereof
and will be filed as part of a Current Report on Form 8-K with the Commission
after such initial issuance. Notwithstanding the foregoing, the characteristics
of the Mortgage Loans included in a Trust Fund will not vary by more than five
percent (by aggregate principal balance as of the Cut-off Date) from the
characteristics thereof that are described in the related prospectus supplement.
The related prospectus supplement will specify whether the Mortgage
Loans include (i) Home Equity Loans, which may be secured by Mortgages that are
junior to other liens on the related Mortgaged Property and/or (ii) Home
Improvement Contracts originated by a home improvement contractor and secured by
a Mortgage on the related Mortgaged Property that is junior to other liens on
the Mortgaged Property. The home improvements purchased with the Home
Improvement Contracts typically include replacement windows, house siding,
roofs, swimming pools, kitchen and bathroom remodeling goods, solar heating
panels, patios, decks, room additions and garages. The related prospectus
supplement will specify whether the Home Improvement Contracts are partially
insured under Title I of the National Housing Act of 1934 (the "NATIONAL HOUSING
ACT") and, if so, the limitations on such insurance. In addition, the related
prospectus supplement will specify whether the Mortgage Loans contain certain
Mortgage Loans evidenced by Land Sale Contracts.
Payment Provisions of the Mortgage Loans
All of the Mortgage Loans will provide for payments of principal,
interest or both, on due dates that occur monthly, quarterly or semi-annually or
at such other interval as is specified in the related prospectus supplement or
for payments in another manner described in the related prospectus supplement.
Each Mortgage Loan may provide for no accrual of interest or for accrual of
interest thereon at an interest rate (a "MORTGAGE INTEREST RATE") that is fixed
over its term or that adjusts from time to time, or that may be converted from
an adjustable to a fixed Mortgage Interest Rate or a different adjustable
Mortgage Interest Rate, or from a fixed to an adjustable Mortgage Interest Rate,
from time to time pursuant to an election or as otherwise specified on the
related Mortgage Note, in each case as described in the related prospectus
supplement. Each Mortgage Loan may provide for scheduled payments to maturity or
payments that adjust from time to time to accommodate changes in the Mortgage
Interest Rate or to reflect the occurrence of certain events or that adjust on
the basis of other methodologies, and may provide for
20
negative amortization or accelerated amortization, in each case as described in
the related prospectus supplement. Each Mortgage Loan may be fully amortizing or
require a balloon payment due on its stated maturity date, in each case as
described in the related prospectus supplement. Each Mortgage Loan may contain
prohibitions on prepayment (a "LOCK-OUT PERIOD" and, the date of expiration
thereof, a "LOCK-OUT DATE") or require payment of a premium or a yield
maintenance penalty (a "PREPAYMENT CHARGE") in connection with a prepayment, in
each case as described in the related prospectus supplement. In the event that
holders of any Class or Classes of Offered Securities will be entitled to all or
a portion of any Prepayment Charges collected in respect of Mortgage Loans, the
related prospectus supplement will specify the method or methods by which any
such amounts will be allocated. See "--Assets" above.
Revolving Credit Line Loans
As more fully described in the related prospectus supplement, the
Mortgage Loans may consist, in whole or in part, of revolving Home Equity Loans
or certain balances thereof ("REVOLVING CREDIT LINE LOANS"). Interest on each
Revolving Credit Line Loan, excluding introductory rates offered from time to
time during promotional periods, may be computed and payable monthly on the
average daily outstanding principal balance of such loan. From time to time
prior to the expiration of the related draw period specified in a Revolving
Credit Line Loan, principal amounts on such Revolving Credit Line Loan may be
drawn down (up to a maximum amount as set forth in the related prospectus
supplement) or repaid. If specified in the related prospectus supplement, new
draws by borrowers under the Revolving Credit Line Loans will automatically
become part of the Trust Fund described in such prospectus supplement. As a
result, the aggregate balance of the Revolving Credit Line Loans will fluctuate
from day to day as new draws by borrowers are added to the Trust Fund and
principal payments are applied to such balances and such amounts will usually
differ each day, as more specifically described in the related prospectus
supplement. Under certain circumstances, under a Revolving Credit Line Loan, a
borrower may, during the related draw period, choose an interest only payment
option, during which the borrower is obligated to pay only the amount of
interest which accrues on the loan during the billing cycle, and may also elect
to pay all or a portion of the principal. An interest only payment option may
terminate at the end of the related draw period, after which the borrower must
begin paying at least a minimum monthly portion of the average outstanding
principal balance of the loan.
UNSECURED HOME IMPROVEMENT LOANS
The Unsecured Home Improvement Loans may consist of conventional
unsecured home improvement loans and FHA insured unsecured home improvement
loans. The Unsecured Home Improvement Loans will bear interest at a fixed or
variable annual percentage rate.
Unsecured Home Improvement Loan Information in Prospectus Supplements
Each prospectus supplement will contain information, as of the dates
specified in such prospectus supplement and to the extent then applicable and
specifically known to the Depositor, with respect to the Unsecured Home
Improvement Loans, including (i) the aggregate outstanding principal balance and
the largest, smallest and average outstanding principal balance of the Unsecured
Home Improvement Loans as of the applicable Cut-Off Date, (ii) the weighted
average (by principal balance) of the original and remaining terms to maturity
of the Unsecured Home Improvement Loans, (iii) the earliest and latest
origination date and maturity date of the Unsecured Home Improvements Loans,
(iv) the interest rates or range of interest rates and the weighted average
interest rates borne by the Unsecured Home Improvement Loans, (v) the geographic
distributions of the Unsecured Home Improvement Loans, (vi) information with
respect to the prepayment provisions, if any, of the Unsecured Home Improvement
Loans, (vii) with respect to the Unsecured Home Improvement Loans with
adjustable interest rates ("ARM UNSECURED HOME IMPROVEMENT LOANS"), the index,
the frequency of the adjustment dates, the range of margins added to the index,
and the maximum interest rate or monthly payment variation at the time of any
adjustment thereof and over the life of the ARM Unsecured Home Improvement Loan,
(viii) information regarding the payment characteristics of the Unsecured Home
Improvement Loan, (ix) the number of Unsecured Home Improvement Loans that are
delinquent and the number of days or ranges of the number of days such Unsecured
Home Improvement Loans are delinquent, (x) the material underwriting standards
used for the Unsecured Home Improvement Loans and (xi) the credit scores of the
borrowers of the Unsecured Home Improvement Loans. If specific information
respecting the Unsecured Home Improvement Loans is not known to the Depositor at
the time
21
Securities are initially offered, more general information of the nature
described above will be provided in the prospectus supplement, and specific
information will be set forth in a report which will be available to purchasers
of the related Securities at or before the initial issuance thereof and will be
filed as part of a Current Report on Form 8-K with the Commission after such
initial issuance. Notwithstanding the foregoing, the characteristics of the
Unsecured Home Improvement Loans included in a Trust Fund will not vary by more
than five percent (by aggregate principal balance as of the Cut-off Date) from
the characteristics thereof that are described in the related prospectus
supplement.
CONTRACTS
General
To the extent provided in the related prospectus supplement, each
Contract will be secured by a security interest in a new or used manufactured
home (each, a "MANUFACTURED HOME"). Such prospectus supplement will specify the
states or other jurisdictions in which the Manufactured Homes are located as of
the related Cut-off Date. The method of computing the Loan-to-Value Ratio of a
Contract will be described in the related prospectus supplement.
Contract Information in Prospectus Supplements
Each prospectus supplement will contain certain information, as of the
dates specified in such prospectus supplement and to the extent then applicable
and specifically known to the Depositor, with respect to the Contracts,
including (i) the aggregate outstanding principal balance and the largest,
smallest and average outstanding principal balance of the Contracts as of the
applicable Cut-off Date, (ii) whether the Manufactured Homes were new or used as
of the origination of the related Contracts, (iii) the weighted average (by
principal balance) of the original and remaining terms to maturity of the
Contracts, (iv) the earliest and latest origination date and maturity date of
the Contracts, (v) the range of the Loan-to-Value Ratios at origination of the
Contracts, (vi) the Contract Rates or range of Contract Rates and the weighted
average Contract Rate borne by the Contracts, (vii) the state or states in which
most of the Manufactured Homes are located at origination, (viii) information
with respect to the prepayment provisions, if any, of the Contracts, (ix) with
respect to Contracts with adjustable Contract Rates ("ARM CONTRACTS"), the
index, the frequency of the adjustment dates, and the maximum Contract Rate or
monthly payment variation at the time of any adjustment thereof and over the
life of the ARM Contract, (x) the number of Contracts that are delinquent and
the number of days or ranges of the number of days such Contracts are
delinquent, (xi) information regarding the payment characteristics of the
Contracts, (xii) the material underwriting standards used for the Contracts, and
(xiii) the credit scores of the borrowers under the Contracts. If specific
information respecting the Contracts is not known to the Depositor at the time
Securities are initially offered, more general information of the nature
described above will be provided in the prospectus supplement, and specific
information will be set forth in a report which will be available to purchasers
of the related Securities at or before the initial issuance thereof and will be
filed as part of a Current Report on Form 8-K with the Commission after such
initial issuance. Notwithstanding the foregoing, the characteristics of the
Contracts included in a Trust Fund will not vary by more than five percent (by
aggregate principal balance as of the Cut-off Date) from the characteristics
thereof that are described in the related prospectus supplement.
Payment Provisions of the Contracts
All of the Contracts will provide for payments of principal, interest
or both, on due dates that occur monthly or at such other interval as is
specified in the related prospectus supplement or for payments in another manner
described in the prospectus supplement. Each Contract may provide for no accrual
of interest or for accrual of interest thereon at an annual percentage rate (a
"CONTRACT RATE") that is fixed over its term or that adjusts from time to time.
Each Contract may provide for scheduled payments to maturity or payments that
adjust from time to time to accommodate changes in the Contract Rate as
otherwise described in the related prospectus supplement. See "--Assets" above.
PRE-FUNDING ACCOUNT
22
To the extent provided in a prospectus supplement, a portion of the
proceeds of the issuance of Securities may be deposited into an account
maintained with the Trustee (a "PRE-FUNDING ACCOUNT"). In such event, the
Depositor will be obligated (subject only to the availability thereof) to sell
at a predetermined price, and the Trust Fund for the related Series of
Securities will be obligated to purchase (subject to the availability thereof),
additional Assets (the "SUBSEQUENT ASSETS") from time to time (as frequently as
daily) within the period (not to exceed three months if a REMIC election has
been made or one year in all other cases) specified in the related prospectus
supplement (the "PRE-FUNDING PERIOD") after the issuance of such Series of
Securities having an aggregate principal balance approximately equal to the
amount on deposit in the Pre-Funding Account (the "PRE-FUNDED AMOUNT") for such
Series on the date of such issuance. The Pre-Funded Amount with respect to a
Series will not exceed 50% of the aggregate initial Security Balance of the
related Securities. Any Subsequent Assets will be required to satisfy certain
eligibility criteria more fully set forth in the applicable Agreement, which
eligibility criteria will be consistent with the eligibility criteria of the
Assets initially included in the Trust Fund, subject to such exceptions as are
expressly stated in the prospectus supplement. For example, the Subsequent
Assets will be subject to the same underwriting standards, representations and
warranties as the Assets initially included in the Trust Fund. In addition,
certain conditions must be satisfied before the Subsequent Assets are
transferred into the Trust Fund such as the delivery to the Rating Agencies and
the Trustee of certain opinions of counsel.
Any portion of the Pre-Funded Amount remaining in the Pre-Funding
Account at the end of the Pre-Funding Period will be used to prepay one or more
Classes of Securities in the amounts and in the manner specified in the related
prospectus supplement. In addition, if specified in the related prospectus
supplement, the Depositor may be required to deposit cash into an account
maintained by the Trustee (the "CAPITALIZED INTEREST ACCOUNT") for the purpose
of assuring the availability of funds to pay interest with respect to the
Securities during the Pre-Funding Period. Any amount remaining in the
Capitalized Interest Account at the end of the Pre-Funding Period will be
remitted as specified in the related prospectus supplement.
ACCOUNTS
Each Trust Fund will include one or more accounts, established and
maintained on behalf of the Securityholders into which the person or persons
designated in the related prospectus supplement will, to the extent described
herein and in such prospectus supplement deposit all payments and collections
received or advanced with respect to the Assets and other assets in the Trust
Fund. Such an account may be maintained as an interest bearing or a non-interest
bearing account, and funds held therein may be held as cash or invested in
certain short-term, investment grade obligations, in each case as described in
the related prospectus supplement. See "Description of the Agreements--Material
Terms of the Pooling and Servicing Agreements and Underlying Servicing
Agreements--Collection Account and Related Accounts."
USE OF PROCEEDS
The Depositor will apply the net proceeds received from the sale of the
Securities to the purchase of Assets, or the repayment of the financing incurred
in such purchase. The Depositor expects to sell the Securities from time to
time, but the timing and amount of offerings of Securities will depend on a
number of factors, including the volume of Assets acquired by the Depositor,
prevailing interest rates, availability of funds and general market conditions.
YIELD CONSIDERATIONS
GENERAL
The yield on any Offered Security will depend on the price paid by the
holder of the Security (the "SECURITYHOLDER"), the Pass-Through Rate of the
Security, the receipt and timing of receipt of distributions on the Security and
the weighted average life of the Assets in the related Trust Fund (which may be
affected by prepayments, defaults, liquidations or repurchases). See "Risk
Factors--Risks Associated with the Securities--Rate of Prepayment on Assets May
Adversely Affect Average Lives and Yields on the Securities."
PASS-THROUGH RATE AND INTEREST RATE
23
Securities of any Class within a Series may have fixed, variable or
adjustable Pass-Through Rates or interest rates, which may or may not be based
upon the interest rates borne by the Assets in the related Trust Fund. The
prospectus supplement with respect to any Series of Securities will specify the
Pass-Through Rate or interest rate for each Class of such Securities or, in the
case of a variable or adjustable Pass-Through Rate or interest rate, the method
of determining the Pass-Through Rate or interest rate; the effect, if any, of
the prepayment of any Asset on the Pass-Through Rate or interest rate of one or
more Classes of Securities; and whether the distributions of interest on the
Securities of any Class will be dependent, in whole or in part, on the
performance of any obligor under a Cash Flow Agreement.
If so specified in the related prospectus supplement, the effective
yield to maturity to each holder of Securities entitled to payments of interest
will be below that otherwise produced by the applicable Pass-Through Rate or
interest rate and purchase price of such Security because, while interest may
accrue on each Asset during a certain period (each, an "INTEREST ACCRUAL
PERIOD"), the distribution of such interest will be made on a day which may be
several days, weeks or months following the period of accrual.
TIMING OF PAYMENT OF INTEREST
Each payment of interest on the Securities (or addition to the Security
Balance of a Class of Accrual Securities) on the monthly, quarterly or other
periodic date specified in the related prospectus supplement on which
distributions will be made to holders of Securities (a "DISTRIBUTION DAte") will
include interest accrued during the Interest Accrual Period for such
Distribution Date. As indicated above under "--Pass-Through Rate and Interest
Rate," if the Interest Accrual Period ends on a date other than the day before a
Distribution Date for the related Series, the yield realized by the holders of
such Securities may be lower than the yield that would result if the Interest
Accrual Period ended on such day before the Distribution Date.
PAYMENTS OF PRINCIPAL; PREPAYMENTS
The yield to maturity on the Securities will be affected by the rate of
principal payments on the Assets (including principal prepayments on Mortgage
Loans and Contracts resulting from both voluntary prepayments by the borrowers
and involuntary liquidations). The rate at which principal prepayments occur on
the Mortgage Loans and Contracts will be affected by a variety of factors,
including, without limitation, the terms of the Mortgage Loans and Contracts,
the level of prevailing interest rates, the availability of mortgage credit and
economic, demographic, geographic, tax, legal and other factors. In general,
however, if prevailing interest rates fall significantly below the Mortgage
Interest Rates on the Mortgage Loans comprising or underlying the Assets in a
particular Trust Fund, such Mortgage Loans are likely to be the subject of
higher principal prepayments than if prevailing rates remain at or above the
rates borne by such Mortgage Loans. In this regard, it should be noted that
certain Assets may consist of Mortgage Loans with different Mortgage Interest
Rates. The rate of principal payments on some or all of the Classes of
Securities of a Series will correspond to the rate of principal payments on the
Assets in the related Trust Fund and is likely to be affected by the existence
of Lock-out Periods and Prepayment Charge provisions of the Mortgage Loans
underlying or comprising such Assets, and by the extent to which the Servicer of
any such Mortgage Loan is able to enforce such provisions. Mortgage Loans with a
Lock-out Period or a Prepayment Charge provision, to the extent enforceable,
generally would be expected to experience a lower rate of principal prepayments
than otherwise identical Mortgage Loans without such provisions, with shorter
Lock-out Periods or with lower Prepayment Charges. Because of the depreciating
nature of manufactured housing, which limits the possibilities for refinancing,
and because the terms and principal amounts of manufactured housing contracts
are generally shorter and smaller than the terms and principal amounts of
mortgage loans secured by site-built homes, changes in interest rates have a
correspondingly smaller effect on the amount of the monthly payments on
manufactured housing contracts than on the amount of the monthly payments on
mortgage loans secured by site-built homes. Consequently, changes in interest
rates may play a smaller role in prepayment behavior of manufactured housing
contracts than they do in the prepayment behavior of loans secured by mortgage
on site-built homes. Conversely, local economic conditions and certain of the
other factors mentioned above may play a larger role in the prepayment behavior
of manufactured housing contracts than they do in the prepayment behavior of
loans secured by mortgages on site-built homes.
If the purchaser of a Security offered at a discount calculates its
anticipated yield to maturity based on an assumed rate of distributions of
principal that is faster than that actually experienced on the Assets, the
actual yield
24
to maturity will be lower than that so calculated. Conversely, if the purchaser
of a Security offered at a premium calculates its anticipated yield to maturity
based on an assumed rate of distributions of principal that is slower than that
actually experienced on the Assets, the actual yield to maturity will be lower
than that so calculated. In either case, if so provided in the prospectus
supplement for a Series of Securities, the effect on yield on one or more
Classes of the Securities of such Series of prepayments of the Assets in the
related Trust Fund may be mitigated or exacerbated by any provisions for
sequential or selective distribution of principal to such Classes.
When a full prepayment is made on a Mortgage Loan or a Contract, the
obligor generally is charged interest on the principal amount of the Mortgage
Loan or Contract so prepaid for the number of days in the month actually elapsed
up to the date of the prepayment. Generally, the effect of prepayments in full
will be to reduce the amount of interest paid in the following month to holders
of Securities entitled to payments of interest because interest on the principal
amount of any Mortgage Loan or Contract so prepaid will be paid only to the date
of prepayment rather than for a full month. A partial prepayment of principal is
generally applied so as to reduce the outstanding principal balance of the
related Mortgage Loan or Contract as of the Due Date in the month in which such
partial prepayment is received.
The timing of changes in the rate of principal payments on the Assets
may significantly affect an investor's actual yield to maturity, even if the
average rate of distributions of principal is consistent with an investor's
expectation. In general, the earlier a principal payment is received on the
Mortgage Loans and distributed on a Security, the greater the effect on such
investor's yield to maturity. The effect on an investor's yield of principal
payments occurring at a rate higher (or lower) than the rate anticipated by the
investor during a given period may not be offset by a subsequent like decrease
(or increase) in the rate of principal payments.
The Securityholder will bear the risk of being able to reinvest
principal received in respect of a Security at a yield at least equal to the
yield on such Security.
PREPAYMENTS--MATURITY AND WEIGHTED AVERAGE LIFE
The rates at which principal payments are received on the Assets
included in or comprising a Trust Fund and the rate at which payments are made
from any credit support or Cash Flow Agreement for the related Series of
Securities may affect the ultimate maturity and the weighted average life of
each Class of such Series. Prepayments on the Mortgage Loans or Contracts
comprising or underlying the Assets in a particular Trust Fund will generally
accelerate the rate at which principal is paid on some or all of the Classes of
the Securities of the related Series.
If so provided in the prospectus supplement for a Series of Securities,
one or more Classes of Securities may have a final scheduled Distribution Date,
which is the date on or prior to which the stated principal amount (the
"SECURITY BALANCE") thereof is scheduled to be reduced to zero, calculated on
the basis of the assumptions applicable to such Series set forth therein.
Weighted average life refers to the average amount of time that will elapse from
the date of issue of a security until each dollar of principal of such security
will be repaid to the investor. The weighted average life of a Class of
Securities of a Series will be influenced by the rate at which principal on the
Assets is paid to such Class, which may be in the form of scheduled amortization
or prepayments (for this purpose, the term "prepayment" includes prepayments, in
whole or in part, and liquidations due to default).
In addition, the weighted average life of the Securities may be
affected by the varying maturities of the Assets in a Trust Fund. If any Assets
in a particular Trust Fund have actual terms to maturity less than those assumed
in calculating final scheduled Distribution Dates for the Classes of Securities
of the related Series, one or more Classes of such Securities may be fully paid
prior to their respective final scheduled Distribution Dates, even in the
absence of prepayments. Accordingly, the prepayment experience of the Assets
will, to some extent, be a function of the mix of Mortgage Interest Rates or
Contract Rates and maturities of the Mortgage Loans or Contracts comprising or
underlying such Assets. See "Description of the Trust Funds."
Prepayments on loans are also commonly measured relative to a
prepayment standard or model, such as the Constant Prepayment Rate ("CPR")
prepayment model. CPR represents a constant assumed rate of prepayment each
month relative to the then outstanding principal balance of a pool of loans for
the life of such loans.
25
Neither CPR nor any other prepayment model or assumption purports to be
a historical description of prepayment experience or a prediction of the
anticipated rate of prepayment of any pool of loans, including the Mortgage
Loans or Contracts underlying or comprising the Assets.
The prospectus supplement with respect to each Series of Securities may
contain tables, if applicable, setting forth the projected weighted average life
of each Class of Offered Securities of such Series and the percentage of the
initial Security Balance of each such Class that would be outstanding on
specified Distribution Dates based on the assumptions stated in such prospectus
supplement, including assumptions that prepayments on the Mortgage Loans
comprising or underlying the related Assets are made at rates corresponding to
various percentages of CPR or such other standard specified in such prospectus
supplement. Such tables and assumptions are intended to illustrate the
sensitivity of the weighted average life of the Securities to various prepayment
rates and will not be intended to predict or to provide information that will
enable investors to predict the actual weighted average life of the Securities.
It is unlikely that prepayment of any Mortgage Loans or Contracts comprising or
underlying the Assets for any Series will conform to any particular level of CPR
or any other rate specified in the related prospectus supplement.
OTHER FACTORS AFFECTING WEIGHTED AVERAGE LIFE
Type of Asset
If so specified in the related prospectus supplement, a number of
Mortgage Loans may have balloon payments due at maturity (which, based on the
amortization schedule of such Mortgage Loans, may be a substantial amount), and
because the ability of a mortgagor to make a balloon payment typically will
depend upon its ability either to refinance the loan or to sell the related
Mortgaged Property, there is a risk that a number of Balloon Payment Assets may
default at maturity. The ability to obtain refinancing will depend on a number
of factors prevailing at the time refinancing or sale is required, including,
without limitation, real estate values, the mortgagor's financial situation,
prevailing mortgage loan interest rates, the mortgagor's equity in the related
Mortgaged Property, tax laws and prevailing general economic conditions. The
applicable prospectus supplement will specify if the Depositor, the Servicer,
the Master Servicer, or any of their affiliates will be obligated to refinance
or repurchase any Mortgage Loan or to sell the Mortgaged Property. In the case
of defaults, recovery of proceeds may be delayed by, among other things,
bankruptcy of the mortgagor or adverse conditions in the market where the
property is located. In order to minimize losses on defaulted Mortgage Loans,
the Servicer may, to the extent and under the circumstances set forth in the
related prospectus supplement, be permitted to modify Mortgage Loans that are in
default or as to which a payment default is reasonably foreseeable. Any
defaulted balloon payment or modification that extends the maturity of a
Mortgage Loan will tend to extend the weighted average life of the Securities
and may thereby lengthen the period of time elapsed from the date of issuance of
a Security until it is retired.
With respect to certain Mortgage Loans, including ARM Loans, the
Mortgage Interest Rate at origination may be below the rate that would result if
the index and margin relating thereto were applied at origination. With respect
to certain Contracts, the Contract Rate may be "stepped up" during its term or
may otherwise vary or be adjusted. Under the applicable underwriting standards,
the mortgagor or obligor under each Mortgage Loan or Contract generally will be
qualified on the basis of the Mortgage Interest Rate or Contract Rate in effect
at origination. The repayment of any such Mortgage Loan or Contract may thus be
dependent on the ability of the mortgagor or obligor to make larger level
monthly payments following the adjustment of the Mortgage Interest Rate or
Contract Rate. In addition, certain Mortgage Loans may be subject to temporary
buydown plans ("BUYDOWN MORTGAGE LOANS") pursuant to which the monthly payments
made by the mortgagor during the early years of the Mortgage Loan will be less
than the scheduled monthly payments thereon (the "BUYDOWN PERIOD"). The periodic
increase in the amount paid by the mortgagor of a Buydown Mortgage Loan during
or at the end of the applicable Buydown Period may create a greater financial
burden for the mortgagor, who might not have otherwise qualified for a mortgage,
and may accordingly increase the risk of default with respect to the related
Mortgage Loan.
The Mortgage Interest Rates on certain ARM Loans subject to negative
amortization generally adjust monthly and their amortization schedules adjust
less frequently. During a period of rising interest rates as well as immediately
after origination (initial Mortgage Interest Rates are generally lower than the
sum of the applicable index at origination and the related margin over such
index at which interest accrues), the amount of interest
26
accruing on the principal balance of such Mortgage Loans may exceed the amount
of the minimum scheduled monthly payment thereon. As a result, a portion of the
accrued interest on negatively amortizing Mortgage Loans may be added to the
principal balance thereof and will bear interest at the applicable Mortgage
Interest Rate. The addition of any such deferred interest to the principal
balance of any related Class or Classes of Securities will lengthen the weighted
average life thereof and may adversely affect yield to holders thereof,
depending upon the price at which such Securities were purchased. In addition,
with respect to certain ARM Loans subject to negative amortization, during a
period of declining interest rates, it might be expected that each minimum
scheduled monthly payment on such a Mortgage Loan would exceed the amount of
scheduled principal and accrued interest on the principal balance thereof, and
since such excess will be applied to reduce the principal balance of the related
Class or Classes of Securities, the weighted average life of such Securities
will be reduced and may adversely affect yield to holders thereof, depending
upon the price at which such Securities were purchased.
As may be described in the related prospectus supplement, the
applicable Agreement may provide that all or a portion of the principal
collected on or with respect to the related Mortgage Loans may be applied by the
related Trustee to the acquisition of additional Mortgage Loans during a
specified period (rather than used to fund payments of principal to
Securityholders during such period) with the result that the related securities
possess an interest-only period, also commonly referred to as a revolving
period, which will be followed by an amortization period. Any such interest-only
or revolving period may, upon the occurrence of certain events to be described
in the related prospectus supplement, terminate prior to the end of the
specified period and result in the earlier than expected amortization of the
related Securities.
In addition, and as may be described in the related prospectus
supplement, the related Agreement may provide that all or a portion of such
collected principal may be retained by the Trustee (and held in certain
temporary investments, including Mortgage Loans) for a specified period prior to
being used to fund payments of principal to Securityholders.
The result of such retention and temporary investment by the Trustee of
such principal would be to slow the amortization rate of the related Securities
relative to the amortization rate of the related Mortgage Loans, or to attempt
to match the amortization rate of the related Securities to an amortization
schedule established at the time such Securities are issued. Any such feature
applicable to any Securities may terminate upon the occurrence of events to be
described in the related prospectus supplement, resulting in the current funding
of principal payments to the related Securityholders and an acceleration of the
amortization of such Securities.
Termination
If so specified in the related prospectus supplement, a Series of
Securities may be subject to optional early termination through the auction or
repurchase of some or all of the Assets in the related Trust Fund by the party
specified therein (which may be a Securityholder), on any date on which the
aggregate principal balance of the Assets or the aggregate Security Balance of
the Securities of such Series declines to a percentage specified in the related
prospectus supplement (not to exceed 10%) of the aggregate initial principal
balance of such Assets or initial Security Balance of such Securities, as the
case may be, under the circumstances and in the manner set forth therein;
however, any such optional termination or redemption will be permitted only
pursuant to a "qualified liquidation," as defined under Section 860F of the
Internal Revenue Code of 1986, as amended. In addition, if so provided in the
related prospectus supplement, certain Classes of Securities may be purchased or
redeemed in the manner set forth therein. See "Description of the
Securities--Termination."
Defaults
The rate of defaults on the Assets will also affect the rate, timing
and amount of principal payments on the Assets and thus the yield on the
Securities. In general, defaults on mortgage loans or contracts are expected to
occur with greater frequency in their early years. The rate of default on
Mortgage Loans which are refinance or limited documentation mortgage loans, and
on Mortgage Loans with high Loan-to-Value Ratios, may be higher than for other
types of Mortgage Loans. Furthermore, the rate and timing of prepayments,
defaults and liquidations on the Mortgage Loans and Contracts will be affected
by the general economic condition of the region of the country in which the
related Mortgage Properties or Manufactured Homes are located. The risk of
delinquencies and loss is
27
greater and prepayments are less likely in regions where a weak or deteriorating
economy exists, as may be evidenced by, among other factors, increasing
unemployment or falling property values.
Foreclosures
The number of foreclosures or repossessions and the principal amount of
the Mortgage Loans or Contracts comprising or underlying the Assets that are
foreclosed or repossessed in relation to the number and principal amount of
Mortgage Loans or Contracts that are repaid in accordance with their terms will
affect the weighted average life of the Mortgage Loans or Contracts comprising
or underlying the Assets and that of the related Series of Securities.
Refinancing
At the request of a mortgagor, the Servicer may allow the refinancing
of a Mortgage Loan or Contract in any Trust Fund by accepting a prepayment in
full and permitting a new loan secured by a mortgage on the same property. In
the event of such a refinancing, the new loan would not be included in the
related Trust Fund and, therefore, such refinancing would have the same effect
as a prepayment in full of the related Mortgage Loan or Contract. A Servicer
may, from time to time, implement programs designed to encourage refinancing.
Such programs may include, without limitation, modifications of existing loans,
general or targeted solicitations, the offering of pre-approved applications,
reduced origination fees or closing costs, or other financial incentives. In
addition, Servicers may encourage the refinancing of Mortgage Loans or
Contracts, including defaulted Mortgage Loans or Contracts, that would permit
creditworthy borrowers to assume the outstanding indebtedness of such Mortgage
Loans or Contracts.
Due-on-Sale Clauses
Acceleration of mortgage payments as a result of certain transfers of
underlying Mortgaged Property is another factor affecting prepayment rates that
may not be reflected in the prepayment standards or models used in the relevant
prospectus supplement. A number of the Mortgage Loans comprising or underlying
the Assets may include "due-on-sale clauses" that allow the holder of the
Mortgage Loans to demand payment in full of the remaining principal balance of
the Mortgage Loans upon sale, transfer or conveyance of the related Mortgaged
Property. With respect to any Mortgage Loans, the Servicer will generally
enforce any due-on-sale clause to the extent it has knowledge of the conveyance
or proposed conveyance of the underlying Mortgaged Property and it is entitled
to do so under applicable law; provided, however, that the Servicer will not
take any action in relation to the enforcement of any due-on-sale provision
which would adversely affect or jeopardize coverage under any applicable
insurance policy. See "Certain Legal Aspects of Mortgage Loans--Due-on-Sale
Clauses" and "Description of the Agreements--Material Terms of the Pooling and
Servicing Agreements and Underlying Servicing Agreements--Due-on-Sale
Provisions." The Contracts, in general, prohibit the sale or transfer of the
related Manufactured Homes without the consent of the Servicer and permit the
acceleration of the maturity of the Contracts by the Servicer upon any such sale
or transfer that is not consented to. It is expected that the Servicer will
permit most transfers of Manufactured Homes and not accelerate the maturity of
the related Contracts. In certain cases, the transfer may be made by a
delinquent obligor in order to avoid a repossession of the Manufactured Home. In
the case of a transfer of a Manufactured Home after which the Servicer desires
to accelerate the maturity of the related Contract, the Servicer's ability to do
so will depend on the enforceability under state law of the "due-on-sale
clause." See "Certain Legal Aspects of the Contracts--Transfers of Manufactured
Homes; Enforceability of Due-on-Sale Clauses."
THE DEPOSITOR
The Depositor is a direct wholly-owned subsidiary of Banc of America
Mortgage Capital Corporation and was incorporated in the State of Delaware on
July 23, 1997. The principal executive offices of the Depositor are located at
214 North Tryon Street, Charlotte, North Carolina 28255. Its telephone number is
(704) 386-2400.
The Depositor will have limited obligations and rights under each
Agreement after the Closing Date for any Series.
28
The Depositor and any director, officer, employee or agent of the
Depositor shall be indemnified by the Trust Fund and held harmless against any
loss, liability or expense incurred in connection with any legal action relating
to the applicable Agreement or the Securities, other than any loss, liability or
expense related to any specific Asset or Assets and any loss, liability or
expense incurred by reason of willful misfeasance, bad faith or negligence in
the performance of its duties under the applicable Agreement or by reason of
reckless disregard of its obligations and duties under such Agreement.
To the extent Bank of America is not the Sponsor of a Series,
information regarding the Depositor's securitization program will be provided in
the related prospectus supplement.
The Depositor does not have, nor is it expected in the future to have,
any significant assets.
THE SPONSOR
Bank of America, National Association ("BANK OF AMERICA") or another
entity which will be named in the applicable prospectus supplement will act as
the Sponsor of a particular Series of Securities.
The Depositor's securitization program principally is used to finance
portfolios of sub-prime mortgage loans secured by first or junior liens on one-
to four-family residential properties acquired by Bank of America or its
affiliates from third parties. The Depositor's securitization program may also
be used by third parties that are not Bank of America affiliates to securitize
mortgage loans on a "rent-a-shelf" basis, whereby a third party transfers the
mortgage loans to the Depositor simultaneously with the transfer by the
Depositor of the mortgage loans to the applicable Trust and issuance of the
related Series of Securities. In that event, the unaffiliated third party,
rather than Bank of America, will be the Sponsor of the transaction.
The table below sets forth the aggregate Security Balance of Securities
issued in Trusts formed by the Depositor during the periods indicated:
2001 2002 2003 2004 2005
- ------------- --------------- --------------- --------------- ---------------
$ 232,345,000 $ 2,024,400,000 $ 1,863,910,000 $ 7,125,266,000 $ 7,281,256,000
Bank of America is an indirect wholly-owned subsidiary of Bank of
America Corporation. Bank of America is engaged in a general consumer banking,
commercial banking, and trust business, offering a wide range of commercial,
corporate, international, financial market, retail and fiduciary banking
services. Bank of America is a national banking association chartered by the
Office of the Comptroller of the Currency (the "OCC") and is subject to the
regulation, supervision and examination of the OCC.
Bank of America and its affiliates have been active in the
securitization market since inception. Bank of America has sponsored publicly
offered securitization transactions since 1977. Bank of America and its
affiliates have been involved with the origination of auto loans, student loans,
home equity loans, credit card receivables, manufactured housing contracts,
residential mortgage loans and commercial mortgage loans, as well as less
traditional asset classes. Bank of America and its affiliates have also
participated in a variety of collateralized loan obligation transactions,
synthetic securitizations, and asset-backed commercial paper programs. Bank of
America and its affiliates have served as sponsors, issuers, dealers, and
servicers in a wide array of securitization transactions. Bank of America
currently does not rely on securitization as a material funding source.
An affiliate of Bank of America owns all of the Depositor's equity.
Banc of America Securities LLC, which may act as an underwriter of the
Securities, is an affiliate of Bank of America and assists Bank of America and
the Depositor in connection with the selection of mortgage loans for various
transactions. See "Method of Distribution" in the applicable prospectus
supplement.
Bank of America's headquarters and its executive offices are located at
101 South Tryon Street, Charlotte, North Carolina 28255, and the telephone
number is (704) 386-5478.
29
More information about the Sponsor's material roles and duties for a
Series of Securities will be described in the applicable prospectus supplement.
DESCRIPTION OF THE SECURITIES
GENERAL
A separate common law trust will serve as the Issuing Entity and will
issue the asset-backed certificates (the "CERTIFICATES") of a series (each, a
"SERIES") (including any Class of Certificates not offered hereby). The
Certificates will represent the entire beneficial ownership interest in the
trust fund (the "TRUST" or the "TRUST FUND") created pursuant to the applicable
Agreement. If a Series of Securities includes asset-backed notes (the "NOTES"
and, together with the Certificates, the "SECURITIES"), such Notes will
represent indebtedness of the related Trust Fund and will be issued and secured
pursuant to an Indenture. Each Series of Securities will consist of one or more
classes (each, a "CLASS") of Securities that may (i) provide for the accrual of
interest thereon based on fixed, variable or adjustable rates; (ii) be senior
(the "SENIOR CERTIFICATES" or the "SENIOR NOTES" and, collectively, "SENIOR
SECURITIES") or subordinate (the "SUBORDINATED CERTIFICATES" or the "SENIOR
NOTES" and, collectively, "SUBORDINATED SECURITIES") to one or more other
Classes of Securities in respect of certain distributions on the Securities;
(iii) be entitled either to (A) principal distributions, with disproportionately
low, nominal or no interest distributions or (B) interest distributions, with
disproportionately low, nominal or no principal distributions (collectively,
"STRIP SECURITIES"); (iv) provide for distributions of accrued interest thereon
commencing only following the occurrence of certain events, such as the
retirement of one or more other Classes of Securities of such Series
(collectively, "ACCRUAL SECURITIES"); (v) provide for payments of principal as
described in the related prospectus supplement, from all or only a portion of
the Assets in such Trust Fund, to the extent of available funds, in each case as
described in the related prospectus supplement; and/or (vi) provide for
distributions based on a combination of two or more components thereof with one
or more of the characteristics described in this paragraph including a Strip
Security component. If so specified in the related prospectus supplement,
distributions on one or more Classes of a Series of Securities may be limited to
collections from a designated portion of the Assets in the related Trust Fund
(each such portion of Assets, an "ASSET GROUP"). Any such Classes may include
Classes of Securities of a Series offered pursuant to this prospectus and a
related prospectus supplement (the "OFFERED SECURITIES" ).
Each Class of Offered Securities of a Series will be issued in minimum
denominations corresponding to the Security Balances or, in the case of certain
Classes of Strip Securities, notional amounts or percentage interests specified
in the related prospectus supplement. The transfer of any Offered Securities may
be registered and such Securities may be exchanged without the payment of any
service charge payable in connection with such registration of transfer or
exchange, but the Depositor or the Trustee or any agent thereof may require
payment of a sum sufficient to cover any tax or other governmental charge. One
or more Classes of Securities of a Series may be issued in fully registered,
certificated form ("DEFINITIVE SECURITIES") or in book-entry form ("BOOK-ENTRY
SECURITIES"), as provided in the related prospectus supplement. See "Risk
Factors--Risks Associated with the Securities-- Book-Entry System for Certain
Classes of Securities May Decrease Liquidity and Delay Payment" and "Description
of the Securities--Book-Entry Registration and Definitive Securities."
Definitive Securities will be exchangeable for other Securities of the same
Class and Series of a like aggregate Security Balance, notional amount or
percentage interest but of different authorized denominations. See "Risk
Factors--Risks Associated with the Securities--Securities May Not be Liquid."
DISTRIBUTIONS
Distributions on the Securities of each Series will be made by or on
behalf of the Trustee on each Distribution Date as specified in the related
prospectus supplement from the Available Distribution Amount for such Series and
such Distribution Date. Distributions (other than the final distribution) will
be made to the persons in whose names the Securities are registered at the close
of business on the date specified in the related prospectus supplement (the
"RECORD DATE"), and the amount of each distribution will be determined as of the
close of business on the date specified in the related prospectus supplement
(the "DETERMINATION DATE"). All distributions with respect to each Class of
Securities on each Distribution Date will be allocated pro rata among the
outstanding Securityholders in such Class or by random selection or as described
in the related prospectus supplement. Payments will be made either by wire
transfer in immediately available funds to the account of a Securityholder at a
30
bank or other entity having appropriate facilities therefor, if such
Securityholder has so notified the Trustee or other person required to make such
payments no later than the date specified in the related prospectus supplement
(and, if so provided in the related prospectus supplement, holds Securities in
the requisite amount specified therein), or by check mailed to the address of
the person entitled thereto as it appears on the security register; provided,
however, that the final distribution in retirement of the Securities will be
made only upon presentation and surrender of the Securities at the location
specified in the notice to Securityholders of such final distribution.
AVAILABLE DISTRIBUTION AMOUNT
All distributions on the Securities of each Series on each Distribution
Date will be made from the Available Distribution Amount described below, in
accordance with the terms described in the related prospectus supplement.
Generally, the "AVAILABLE DISTRIBUTION AMOUNT" for each Distribution Date equals
the sum of the following amounts:
(i) the total amount of all cash on deposit in the related
Collection Account as of the corresponding Determination Date, exclusive of:
(a) all scheduled payments of principal and interest
collected but due on a date subsequent to the related Collection Period
(a "COLLECTION PERIOD" with respect to any Distribution Date generally
will commence on the second day of the month in which the immediately
preceding Distribution Date occurs, or the day after the Cut-off Date
in the case of the first Collection Period, and will end on the first
day of the month of the related Distribution Date),
(b) all prepayments, together with related payments of
the interest thereon and related Prepayment Charges, all proceeds of
any insurance policies to be maintained in respect of each Asset (to
the extent such proceeds are not applied to the restoration of the
Asset or released in accordance with the normal servicing procedures of
a Servicer, subject to the terms and conditions applicable to the
related Asset) (collectively, "INSURANCE PROCEEDS"), all other amounts
received and retained in connection with the liquidation of Assets in
default in the Trust Fund ("LIQUIDATION PROCEEDS"), and other
unscheduled recoveries received subsequent to the related Collection
Period,
(c) all amounts in the Collection Account that are due or
reimbursable to the Depositor, the Trustee, an Asset Seller, a
Servicer, the Master Servicer or any other entity as specified in the
related prospectus supplement or that are payable in respect of
certain expenses of the related Trust Fund, and
(d) all amounts received for a repurchase of an Asset
from the Trust Fund for defective documentation or a breach of
representation or warranty received subsequent to the related
Collection Period;
(ii) if the related prospectus supplement so provides, interest or
investment income on amounts on deposit in the Collection Account, including any
net amounts paid under any Cash Flow Agreements;
(iii) all advances made by a Servicer or the Master Servicer or any
other entity as specified in the related prospectus supplement with respect to
such Distribution Date;
(iv) if and to the extent the related prospectus supplement so
provides, amounts paid by a Servicer or any other entity as specified in the
related prospectus supplement with respect to interest shortfalls resulting from
prepayments during the related Prepayment Period; and
(v) to the extent not on deposit in the related Collection Account
as of the corresponding Determination Date, any amounts collected under, from or
in respect of any credit support with respect to such Distribution Date.
31
As described below, the entire Available Distribution Amount will be
distributed among the related Securities (including any Securities not offered
hereby) on each Distribution Date, and accordingly will be released from the
Trust Fund and will not be available for any future distributions.
The related prospectus supplement for a Series of Securities will
describe any variation in the calculation of the Available Distribution Amount
for such Series.
DISTRIBUTIONS OF INTEREST ON THE SECURITIES
Each Class of Securities (other than Classes of Strip Securities that
have no Pass-Through Rate or interest rate) may have a different Pass-Through
Rate or interest rate, which will be a fixed, variable or adjustable rate at
which interest will accrue on such Class or a Component thereof (the
"PASS-THROUGH RATE"). The related prospectus supplement will specify the
Pass-Through Rate or interest rate for each Class or component or, in the case
of a variable or adjustable Pass-Through Rate or interest rate, the method for
determining the Pass-Through Rate or interest rate. The related prospectus
supplement will specify whether interest on any Class of Securities will be
calculated either on the basis of a 360-day year consisting of twelve 30-day
months or on the basis of the actual number of days in the Interest Accrual
Period and on a 360-day year or another method specified in the such prospectus
supplement.
Distributions of interest in respect of the Securities of any Class
will be made on each Distribution Date (other than any Class of Accrual
Securities, which will be entitled to distributions of accrued interest
commencing only on the Distribution Date, or under the circumstances, specified
in the related prospectus supplement, and any Class of Strip Securities that are
not entitled to any distributions of interest) based on the Accrued Security
Interest for such Class and such Distribution Date, subject to the sufficiency
of the portion of the Available Distribution Amount allocable to such Class on
such Distribution Date. Prior to the time interest is distributable on any Class
of Accrual Securities, the amount of Accrued Security Interest otherwise
distributable on such Class will be added to the Security Balance thereof on
each Distribution Date. With respect to each Class of Securities and each
Distribution Date (other than certain Classes of Strip Securities), "ACCRUED
SECURITY INTEREST" will be equal to interest accrued during the related Interest
Accrual Period on the outstanding Security Balance thereof immediately prior to
the Distribution Date, at the applicable Pass-Through Rate or interest rate,
reduced as described below. Accrued Security Interest on certain Classes of
Strip Securities will be equal to interest accrued during the related Interest
Accrual Period on the outstanding notional amount thereof immediately prior to
each Distribution Date, at the applicable Pass-Through Rate or interest rate,
reduced as described below, or interest accrual in the manner described in the
related prospectus supplement. The method of determining the notional amount for
a certain Class of Strip Securities will be described in the related prospectus
supplement. Reference to notional amount is solely for convenience in certain
calculations and does not represent the right to receive any distributions of
principal. Accrued Security Interest on a Series of Securities generally will be
reduced in the event of prepayment interest shortfalls, which are shortfalls in
collections of interest for a full Interest Accrual Period resulting from
prepayments prior to the due date in such Interest Accrual Period on the
Mortgage Loans or Contracts comprising or underlying the Assets in the Trust
Fund for such Series. The particular manner in which such shortfalls are to be
allocated among some or all of the Classes of Securities of that Series will be
specified in the related prospectus supplement. The related prospectus
supplement will also describe the extent to which the amount of Accrued Security
Interest that is otherwise distributable on (or, in the case of Accrual
Securities, that may otherwise be added to the Security Balance of) a Class of
Offered Securities may be reduced as a result of any other contingencies,
including delinquencies, losses and deferred interest on or in respect of the
Mortgage Loans or Contracts comprising or underlying the Assets in the related
Trust Fund. Any reduction in the amount of Accrued Security Interest otherwise
distributable on a Class of Securities by reason of the allocation to such Class
of a portion of any deferred interest on the Mortgage Loans or Contracts
comprising or underlying the Assets in the related Trust Fund will generally
result in a corresponding increase in the Security Balance of such Class. See
"Risk Factors--Risk Associated with the Securities--Rate of Prepayment on
Mortgage Loans May Adversely Affect Average Lives and Yields on the Securities"
and "Yield Considerations."
DISTRIBUTIONS OF PRINCIPAL OF THE SECURITIES
The Securities of each Series, other than certain Classes of Strip
Securities, will have a Security Balance which, at any time, will equal the then
maximum amount that the holder will be entitled to receive in respect of
32
principal out of the future cash flow on the Assets and other assets included in
the related Trust Fund. The outstanding Security Balance of a Security will be
reduced to the extent of distributions of principal thereon from time to time
and, if and to the extent so provided in the related prospectus supplement, by
the amount of losses incurred in respect of the related Assets, may be increased
in respect of deferred interest on the related Mortgage Loans to the extent
provided in the related prospectus supplement and, in the case of Accrual
Securities prior to the Distribution Date on which distributions of interest are
required to commence, will be increased by any related Accrued Security
Interest. If so specified in the related prospectus supplement, the initial
aggregate Security Balance of all Classes of Securities of a Series will be
greater than the outstanding aggregate principal balance of the related Assets
as of the applicable Cut-off Date. The initial aggregate Security Balance of a
Series and each Class thereof will be specified in the related prospectus
supplement. Distributions of principal will be made on each Distribution Date to
the Class or Classes of Securities in the amounts and in accordance with the
priorities specified in the related prospectus supplement. Certain Classes of
Strip Securities with no Security Balance are not entitled to any distributions
of principal.
CATEGORIES OF CLASSES OF SECURITIES
The Securities of any Series may be comprised of one or more Classes.
Such Classes, in general, fall into different categories. The following chart
identifies and generally defines certain of the more typical categories. The
prospectus supplement for a Series of Securities may identify the Classes which
comprise such Series by reference to the following categories or another
category specified in the applicable prospectus supplement.
Categories of Classes Definition
PRINCIPAL TYPES
Accretion Directed Class A Class that receives principal
payments from the accreted interest from specified
Accrual Classes. An Accretion Directed Class also
may receive principal payments from principal paid
on the Assets for the related Series.
Component Class A Class consisting of two or more specified
components (each, a "COMPONENT") as described in the
applicable prospectus supplement. The Components of
a Class may have different principal and/or interest
payment characteristics but together constitute a
single Class and do not represent severable
interests. Each Component may be identified as
falling into one or more of the categories in this
chart.
Lockout Class A senior Class that is designed not to participate
in or to participate to a limited extent in (i.e.,
to be "locked out" of), for a specified period, the
receipt of (1) principal prepayments on the Assets
that are allocated disproportionately to the senior
Classes of such Series as a group pursuant to a
"shifting interest" structure and/or (2) scheduled
principal payments on the Assets that are allocated
to the senior Classes as a group. A Lockout Class
will typically not be entitled to receive, or will
be entitled to receive only a restricted portion of,
distributions or principal prepayments and/or
scheduled principal payments, as applicable, for a
period of several years, during which time all or a
portion of such principal payments that it would
otherwise be entitled to receive in the absence of a
"lockout" structure will be distributed in reduction
of the principal balances of other senior Classes.
Lockout Classes are designed to minimize weighted
average life volatility during the lockout period.
33
Notional Amount Class A Class having no principal balance and bearing
interest on the related notional amount. The
notional amount is used for purposes of the
determination of interest distributions.
Pass-Through Class A Class of Senior Securities that is entitled to
receive all or a specified percentage of the
principal payments that are distributable to the
Senior Securities or applicable group of Senior
Securities (other than any Ratio Strip Class) in the
aggregate on each Distribution Date until the
Security Balances of all the Senior Securities or
applicable group of Senior Securities are reduced to
zero and that is not designated as a Sequential Pay
Class.
Planned Amortization Class A Class that is designed to receive principal
(also sometimes referred payments using a predetermined principal balance
to as a "PAC") schedule derived by assuming two constant prepayment
rates for the underlying Assets. These two rates are
the endpoints for the "structuring range" for the
Planned Amortization Class. The Planned Amortization
Classes in any Series of Securities may be
subdivided into different categories (e.g., Planned
Amortization Class I ("PAC I"), Planned Amortization
Class II ("PAC II") and so forth) derived using
different structuring ranges and/or payment
priorities. A PAC is designed to provide protection
against volatility of weighted average life if
prepayments occur at a constant rate within the
structuring range.
Ratio Strip Class A Class that is entitled to receive a constant
proportion, or "ratio strip," of the principal
payments on the underlying Assets.
Scheduled Amortization A Class that is designed to receive principal
Class payments using a predetermined principal balance
schedule but is not designated as a Planned
Amortization Class or Targeted Amortization Class.
The schedule is derived by assuming either two
constant prepayment rates or a single constant
prepayment rate for the underlying Assets. In the
former case, the two rates are the endpoints for the
"structuring range" for the Scheduled Amortization
Class and such range generally is narrower than that
for a Planned Amortization Class. Typically, the
Support Class(es) for the applicable Series of
Securities generally will represent a smaller
percentage of the Scheduled Amortization Class than
a Support Class generally would represent in
relation to a Planned Amortization Class or a
Targeted Amortization Class. A Scheduled
Amortization Class is generally less sensitive to
weighted average life volatility as a result of
prepayments than a Support Class but more sensitive
than a Planned Amortization Class or a Targeted
Amortization Class.
Senior Securities Classes that are entitled to receive payments of
principal and interest on each Distribution Date
prior to the Classes of Subordinated Securities.
Sequential Pay Class A Class that is entitled to receive principal
payments in a prescribed sequence, that does not
have a predetermined principal balance schedule and
that, in most cases, is entitled to receive payments
of principal continuously from the first
Distribution Date on which it receives principal
until it is retired. A single
34
Class is entitled to receive principal payments
before or after other Classes in the same Series of
Securities may be identified as a Sequential Pay
Class.
Subordinated Securities Classes that are entitled to receive payments of
principal and interest on each Distribution Date
only after the Senior Securities and certain Classes
of Subordinated Securities with higher priority of
distributions have received their full principal and
interest entitlements.
Super Senior Class A Class of Senior Securities that will
not bear its share of certain losses or is not
allocated certain losses after the Classes of
Subordinated Securities are no longer outstanding
and one or more specified Classes of Senior
Securities bear such losses.
Super Senior Support Class A Class of Senior Securities that bears certain
losses allocated to one or more Classes of Senior
Securities or is allocated certain losses while one
or more Classes of Senior Securities are not
allocated losses.
Support Class (also A Class that is entitled to receive principal
sometimes referred to payments on any Distribution Date
as a "COMPANION CLASS") only if scheduled payments have been made on
specified Planned Amortization Classes, Targeted
Amortization Classes and/or Scheduled Amortization
Classes.
Targeted Amortization A Class that is designed to receive principal
Class (also sometimes payments using a predetermined principal balance
referred to as a "TAC") schedule derived by assuming a single constant
prepayment rate for the underlying Assets. A TAC is
designed to provide some protection against
shortening of weighted average life if prepayments
occur at a rate exceeding the assumed constant
prepayment rate used to derive the principal
balances schedule of such Class.
INTEREST TYPES
Accrual Class A Class that accretes the amount of accrued interest
otherwise distributable on such Class, which amount
will be added as principal to the principal balance
of such Class on each applicable Distribution Date.
Such accretion may continue until some specified
event has occurred or until such Accrual Class is
retired.
Fixed Rate Class A Class with an interest rate that is fixed
throughout the life of the Class.
Floating Rate Class A Class with an interest rate that resets
periodically based upon a designated index and that
varies directly with changes in such index.
Interest Only Class A Class that is entitled to receive some or all of
the interest payments made on the Assets and little
or no principal. Interest Only Classes have either
no principal balance, a nominal principal balance or
a notional amount. A nominal principal balance
represents actual principal that will be paid on the
Class. It is referred to as nominal since it is
extremely small compared
35
to other Classes. A notional amount is the amount
used as a reference to calculate the amount of
interest due on an Interest Only Class that is not
entitled to any distributions in respect of
principal.
Inverse Floating A Class with an interest rate that resets
Rate Class periodically based upon a designated index and that
varies inversely with changes in such index and with
changes in the interest rate payable on the related
Floating Rate Class.
Prepayment Charge Class A Class that is only entitled to penalties or
premiums, if any, due in connection with a full or
partial prepayment of an Asset.
Principal Only Class A Class that does not bear interest and is entitled
to receive only distributions in respect of
principal.
Step Coupon Class A Class with a fixed interest rate that is reduced
to a lower fixed rate after a specific period of
time. The difference between the initial interest
rate and the lower interest rate will be supported
by a reserve fund established on the Closing Date.
Variable Rate Class A Class with an interest rate that resets
periodically and is calculated by reference to the
rate or rates of interest applicable to the Assets.
COMPONENTS
To the extent specified in the related prospectus supplement,
distribution on a Class of Securities may be based on a combination of two or
more different Components as described under "--General" above. To such extent,
the descriptions set forth under "--Distributions of Interest on the Securities"
and "--Distributions of Principal of the Securities" above also relate to
Components of such a Class of Securities. In such case, reference in such
sections to Security Balance and Pass-Through Rate or interest rate refer to the
principal balance, if any, of any such Component and the Pass-Through Rate or
interest rate, if any, on any such Component, respectively.
DISTRIBUTIONS ON THE SECURITIES OF PREPAYMENT CHARGES
If so provided in the related prospectus supplement, Prepayment Charges
that are collected on the Mortgage Loans in the related Trust Fund will be
distributed on each Distribution Date to the Class or Classes of Securities
entitled thereto in accordance with the provisions described in such prospectus
supplement.
ALLOCATION OF LOSSES AND SHORTFALLS
If so provided in the prospectus supplement for a Series of Securities
consisting of one or more Classes of Subordinated Securities, on any
Distribution Date in respect of which losses or shortfalls in collections on the
Assets have been incurred, the amount of such losses or shortfalls will be borne
first by a Class of Subordinated Securities in the priority and manner and
subject to the limitations specified in such prospectus supplement. See
"Description of Credit Support" for a description of the types of protection
that may be included in a Trust Fund against losses and shortfalls on Assets
comprising such Trust Fund.
ADVANCES IN RESPECT OF DELINQUENCIES
With respect to any Series of Securities evidencing an interest in a
Trust Fund, if so provided in the related prospectus supplement, the Servicer or
another entity described therein will be required as part of its servicing
responsibilities to advance on or before each Distribution Date its own funds or
funds held in the Collection Account that are not included in the Available
Distribution Amount for such Distribution Date, in an amount equal to the
36
aggregate of payments of principal (other than any balloon payments) and
interest (net of related servicing fees and Retained Interest) that were due on
the Assets in such Trust Fund during the related Collection Period and were
delinquent on the related Determination Date, subject to the Servicer's (or
another entity's) good faith determination that such advances will be
reimbursable from Related Proceeds (as defined below). In the case of a Series
of Securities that includes one or more Classes of Subordinated Securities and
if so provided in the related prospectus supplement, the Servicer's (or another
entity's) advance obligation may be limited only to the portion of such
delinquencies necessary to make the required distributions on one or more
Classes of Senior Securities and/or may be subject to the Servicer's (or another
entity's) good faith determination that such advances will be reimbursable not
only from Related Proceeds but also from collections on other Assets otherwise
distributable on one or more Classes of such Subordinated Securities. See
"Description of Credit Support."
Advances are intended to maintain a regular flow of scheduled interest
and principal payments to holders of the Class or Classes of Securities entitled
thereto, rather than to guarantee or insure against losses. Advances of the
Servicer's (or another entity's) funds will be reimbursable only out of related
recoveries on the Assets (including amounts received under any form of credit
support) respecting which such advances were made (as to any Assets, "RELATED
PROCEEDS") and from any other amounts specified in the related prospectus
supplement, including out of any amounts otherwise distributable on one or more
Classes of Subordinated Securities of such Series; provided, however, that any
such advance will be reimbursable from any amounts in the Collection Account
prior to any distributions being made on the Securities to the extent that the
Servicer (or such other entity) shall determine, based on its estimation of the
value of the Mortgaged Property or Manufactured Home in relation to the sum of
the unpaid principal balance of the related Asset, accrued interest, the amount
of previously unreimbursed Advances and anticipated disposition expenses, that
such advance (a "NONRECOVERABLE ADVANCE") is not ultimately recoverable from
Related Proceeds or, if applicable, from collections on other Assets otherwise
distributable on such Subordinated Securities. If advances have been made by the
Servicer from excess funds in the Collection Account, the Servicer is required
to replace such funds in the Collection Account on any future Distribution Date
to the extent that funds in the Collection Account on such Distribution Date are
less than payments required to be made to Securityholders on such date. If so
specified in the related prospectus supplement, the obligations of the Servicer
(or another entity) to make advances may be secured by an advance facility, a
cash advance reserve fund, a surety bond, a letter of credit or another form of
limited guaranty. If applicable, information regarding the characteristics of,
and the identity of any obligor on, any such surety bond, will be set forth in
the related prospectus supplement.
If specified in the related prospectus supplement, the Master Servicer
or the Trustee will be required to make advances, subject to certain conditions
described in the prospectus supplement, in the event of a Servicer default.
REPORTS TO SECURITYHOLDERS
With each distribution to holders of any Class of Securities of a
Series, the Servicer, the Master Servicer or the Trustee, as provided in the
related prospectus supplement, will forward or cause to be forwarded to each
such holder, to the Depositor and to such other parties as may be specified in
the applicable Agreement, a statement generally setting forth, in each case to
the extent applicable and available:
(i) the Record Date, Interest Accrual Period, Determination Date
and Distribution Date;
(ii) the amount of such distribution to holders of Securities of
such Class applied to reduce the Security Balance thereof;
(iii) the amount of such distribution to holders of Securities of
such Class allocable to Accrued Security Interest;
(iv) the aggregate Security Balance or notional amount, as the case
may be, of each Class of Securities (including any Class of Securities not
offered hereby) at the beginning and at the close of business on such
Distribution Date, separately identifying any reduction in such Security Balance
due to the allocation of any loss and increase in the Security Balance of a
Class of Accrual Securities in the event that Accrued Security Interest has been
added to such balance;
37
(v) if the distribution to holders of Securities is less than the
full amount that would be distributable if there were sufficient funds
available, the total amount of the shortfall, the interest portion of the
shortfall and the principal portion of the shortfall;
(vi) the amount of such distribution allocable to Prepayment
Charges;
(vii) the amount of related servicing compensation and such other
customary information as is required to enable Securityholders to prepare their
tax returns;
(viii) the amount by which the servicing fee for the related
Prepayment Period has been reduced by interest shortfalls due to prepayments;
(ix) the aggregate amount of advances included in such
distribution, the aggregate amount of unreimbursed advances at the close of
business on such Distribution Date and the amount of advances reimbursed since
the previous Distribution Date;
(x) the aggregate principal balance of the Assets at the close of
business on such Distribution Date;
(xi) with respect to any Mortgage Loan or Contract liquidated
during the related Collection Period, (a) the portion of such liquidation
proceeds payable or reimbursable to a Servicer (or any other entity) in respect
of such Mortgage Loan and (b) the amount of any loss to Securityholders;
(xii) the number and aggregate principal amounts of Assets (A)
delinquent (exclusive of Assets in foreclosure or bankruptcy), (B) in
foreclosure, as of the close of business on the last day of the calendar month
preceding the Distribution Date and (C) in bankruptcy as of the close of
business on the last day of the calendar month preceding the Distribution Date.
(xiii) with respect to collateral acquired by the Trust Fund through
foreclosure or otherwise (a "REO PROPERTY") relating to a Mortgage Loan or
Contract and included in the Trust Fund as of the end of the related Collection
Period, the date of acquisition;
(xiv) with respect to each REO Property relating to a Mortgage Loan
or Contract and included in the Trust Fund as of the end of the related
Collection Period, (a) the book value, (b) the principal balance of the related
Mortgage Loan or Contract immediately following such Distribution Date
(calculated as if such Mortgage Loan or Contract were still outstanding taking
into account certain limited modifications to the terms thereof specified in the
applicable Agreement), (c) the aggregate amount of unreimbursed servicing
expenses and unreimbursed advances in respect thereof and (d) if applicable, the
aggregate amount of interest accrued and payable on related servicing expenses
and related advances;
(xv) with respect to any such REO Property sold during the related
Collection Period (a) the aggregate amount of sale proceeds, (b) the portion of
such sales proceeds payable or reimbursable to the Master Servicer in respect of
such REO Property or the related Mortgage Loan or Contract and (c) the amount of
any loss to Securityholders in respect of the related Mortgage Loan;
(xvi) the aggregate amount of principal prepayments made during the
related Collection Period;
(xvii) to each holder of a Security entitled to the benefits of
payments under any form of credit enhancement:
(a) the amounts so distributed under the form of credit
enhancement on the applicable Distribution Date; and
(b) the amount of coverage remaining under the form of
credit enhancement, after giving effect to any payments thereunder and
other amounts charged thereto on the Distribution Date;
38
(xviii) any payments made or accrued relating to credit enhancement
provided by a party, identifying the general purpose of the payments and the
party receiving the payments;
(xix) the aggregate unpaid Accrued Security Interest, if any, on
each Class of Securities at the close of business on such Distribution Date;
(xx) the Pass-Through Rate or interest rate applicable to such
Distribution Date, and, if available, the immediately succeeding Distribution
Date, as calculated in accordance with the method specified in the related
prospectus supplement;
(xxi) the number and total principal balance of the Assets, the
weighted average Mortgage Interest Rate or Contract Rate and weighted average
remaining term to maturity of the Assets and cumulative prepayment amounts;
(xxii) any material modifications, extensions or waivers to the Asset
terms, fees, penalties or payments since the previous Distribution Date or
cumulatively since the Closing Date;
(xxiii) any material breaches of representations and warranties
relating to the Assets or material breaches of transaction covenants;
(xxiv) any expenses or indemnification amounts paid by the related
Trust Fund, the specific purpose of each payment and the parties to whom these
payments were made;
(xxv) during the Pre-Funding Period, the remaining Pre-Funded Amount
and the portion of the Pre-Funding Amount used to acquire Subsequent Assets
since the preceding Distribution Date;
(xxvi) during the Pre-Funding Period, the amount remaining in the
Capitalized Interest Account;
(xxvii) whether any performance or servicing triggers were met; and
(xxviii) the aggregate amount of payments by the obligors of (a)
default interest, (b) late charges and (c) assumption and modification fees
collected during the related Collection Period.
In addition, the Servicer, the Master Servicer or the Trustee, as
provided in the related prospectus supplement, will include in the statement any
information specific to the Classes of Securities offered by the applicable
prospectus supplement and, within a reasonable period of time after the end of
each calendar year, shall furnish to each Securityholder of record at any time
during the calendar year such information required by the Code and applicable
regulations thereunder to enable Securityholders to prepare their tax returns.
See "Description of the Securities--Book-Entry Registration and Definitive
Securities."
TERMINATION
The obligations created by the applicable Agreement for each Series of
Securities will terminate upon the payment to Securityholders of that Series of
all amounts held in the Collection Account or by a Servicer, the Master
Servicer, if any, or the Trustee and required to be paid to them pursuant to
such Agreement following the earlier of (i) the final payment or other
liquidation of the last Asset subject thereto or the disposition of all property
acquired upon foreclosure of any Mortgage Loan or Contract subject thereto and
(ii) upon the reduction of the principal balance of all or a portion of the
assets of Trust Fund to a percentage specified in the applicable prospectus
supplement, the auction or purchase of some or all of such assets of the Trust
Fund by the party entitled to effect such termination, including a
Securityholder, under the circumstances and in the manner set forth in the
related prospectus supplement. In no event, however, will the Trust Fund
continue beyond the date specified in the related prospectus supplement. Written
notice of termination of the applicable Agreement will be given to each
Securityholder, and the final distribution will be made only upon presentation
and surrender of the Securities at the location to be specified in the notice of
termination.
39
DEFINITIVE FORM
If so specified in the related prospectus supplement, Securities of a
Series may be issued as Definitive Securities. Distributions of principal of,
and interest on, Definitive Securities will be made directly to holders of
Definitive Securities in accordance with the procedures set forth in the
Agreement. The Definitive Securities of a Series offered hereby and by means of
the applicable prospectus supplement will be transferable and exchangeable at
the office or agency maintained by the Trustee or such other entity for such
purpose set forth in the applicable prospectus supplement. No service charge
will be made for any transfer or exchange of Definitive Securities, but the
Trustee or such other entity may require payment of a sum sufficient to cover
any tax or other governmental charge in connection with such transfer or
exchange.
In the event that an election is made to treat the Trust Fund (or one
or more pools of segregated assets therein) as a REMIC, the Residual Securities
thereof will be issued as Definitive Securities. No legal or beneficial interest
in all or a portion of any Residual Security may be transferred without the
receipt by the transferor and the Trustee of an affidavit described under
"--Taxation of Owners of Residual Securities--Tax-Related Restrictions on
Transfer of Residual Securities."
BOOK-ENTRY REGISTRATION AND DEFINITIVE SECURITIES
Persons acquiring beneficial ownership interests ("BENEFICIAL OWNERS")
in the Book-Entry Securities will hold their Securities through DTC in the
United States, or Clearstream or Euroclear (in Europe) if they are participants
of those systems (the "PARTICIPANTS"), or indirectly through organizations which
are participants in those systems (the "INDIRECT PARTICIPANTS"). Each Class of
the Book-Entry Securities of a Series initially will be represented by one or
more physical certificates registered in the name of Cede & Co., as nominee of
DTC, which will be the "holder" or "Securityholder" of those Securities, as
those terms are used in this prospectus and the applicable prospectus supplement
for a Series. No Beneficial Owner of a Book-Entry Security will be entitled to
receive a Definitive Security representing that person's interest in the
Book-Entry Security, except as set forth below. Unless and until Definitive
Securities are issued under the limited circumstances described below, all
references to actions taken by Securityholders or holders shall, in the case of
the Book-Entry Securities, refer to actions taken by DTC upon instructions from
its DTC Participants, and all references in this prospectus and the applicable
prospectus supplement for a Series to distributions, notices, reports and
statements to Securityholders or holders shall, in the case of the Book-Entry
Securities, refer to distributions, notices, reports and statements to DTC or
Cede & Co., as the registered holder of the Book-Entry Securities, as the case
may be, for distribution to Beneficial Owners in accordance with DTC procedures.
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 those positions in customers' securities accounts in the depositaries'
names on the books of DTC. Citibank will act as depositary for Clearstream and
JPMorgan Chase Bank, National Association will act as depositary for Euroclear
(in those capacities, individually the "RELEVANT DEPOSITARY" and collectively
the "EUROPEAN DEPOSITARIES"). Investors may hold beneficial interest in the
Book-Entry Securities in minimum denominations of $1,000.
The Beneficial Owner's ownership of a Book-Entry Security will be
recorded on the records of the brokerage firm, bank, thrift institution or other
financial intermediary (each, a "FINANCIAL INTERMEDIARY") that maintains the
beneficial owner's account for that purpose. In turn, the Financial
Intermediary's ownership of a Book-Entry Security will be recorded on the
records of DTC (or of a participating firm that acts as agent for the Financial
Intermediary, whose interest will in turn be recorded on the records of DTC, if
the beneficial owner's Financial Intermediary is not a DTC Participant, and on
the records of Clearstream or Euroclear, as appropriate).
Beneficial Owners will receive all distributions of principal of, and
interest on, the Book-Entry Securities from the Trustee through DTC and
Participants. While the Book-Entry Securities are outstanding (except under the
circumstances described below), under the rules, regulations and procedures
creating and affecting DTC and its operations (the "RULES"), DTC is required to
make book-entry transfers among Participants on whose behalf it acts with
respect to the Book-Entry Securities and is required to receive and transmit
distributions of principal of, and interest on, the Book-Entry Securities.
Participants and Indirect Participants with whom Beneficial Owners have accounts
for their Book-Entry Securities are similarly required to make book-entry
transfers and receive and transmit these distributions on behalf of their
respective Beneficial Owners. Accordingly, although Beneficial
40
Owners will not possess certificates representing their respective interests in
the Book-Entry Securities, the Rules provide a mechanism by which Beneficial
Owners will receive distributions and will be able to transfer their interest.
Securityholders will not receive or be entitled to receive certificates
representing their respective interests in the Book-Entry Securities, except
under the limited circumstances described below. Unless and until Definitive
Securities are issued, Securityholders who are not Participants may transfer
ownership of Book-Entry Securities only through Participants and Indirect
Participants by instructing Participants and Indirect Participants to transfer
Book-Entry Securities, by book-entry transfer, through DTC, for the account of
the purchasers of the Book-Entry Securities, which account is maintained with
their respective Participants. Under the Rules and in accordance with DTC's
normal procedures, transfers of ownership of Book-Entry Securities will be
executed through DTC and the accounts of the respective Participants at DTC will
be debited and credited. Similarly, the Participants and Indirect Participants
will make debits or credits, as the case may be, on their records on behalf of
the selling and purchasing Securityholders.
Because of time zone differences, credits of securities received in
Clearstream or Euroclear as a result of a transaction with a Participant will be
made during subsequent securities settlement processing and dated the business
day following the DTC settlement date. These credits or any transactions in
securities settled during this processing will be reported to the relevant
Euroclear or Clearstream Participants on that following business day. Cash
received in Clearstream or Euroclear as a result of sales of securities by or
through a Clearstream Participant or Euroclear Participant to a DTC Participant
will be received with value on the DTC settlement date but will be available in
the relevant Clearstream or Euroclear cash account only as of the business day
following settlement in DTC. For information with respect to tax documentation
procedures relating to the Securities see "--Certain U.S. Federal Income Tax
Documentation Requirements" below and "Federal Income Tax
Consequences--REMICs--Taxation of Certain Foreign Investors" and "--Backup
Withholding."
Transfers between Participants will occur in accordance with the 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
accordance with the Rules on behalf of the relevant European international
clearing system by the Relevant Depositary; however, these cross-market
transfers will require delivery of instructions to the relevant European
international clearing system by the counterparty in the system in accordance
with its rules and procedures and within established deadlines (European time).
The relevant European international clearing system will, if the transaction
meets its settlement requirements, deliver instructions to the Relevant
Depositary to take action to effect final settlement on its behalf by delivering
or receiving securities in DTC, and making or receiving payment in accordance
with normal procedures for same day funds settlement applicable to DTC.
Clearstream Participants and Euroclear Participants may not deliver instructions
directly to the European Depositaries.
The Depository Trust Company ("DTC") is a limited purpose trust company
organized under the laws of the State of New York, a member of the Federal
Reserve System, a "clearing corporation" within the meaning of the New York
Uniform Commercial Code and a "clearing agency" registered pursuant to Section
17A of the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"). DTC
performs services for its Participants, some of which (and/or their
representatives) own DTC. In accordance with its normal procedures, DTC is
expected to record the positions held by each DTC Participant in the Book-Entry
Securities, whether held for its own account or as a nominee for another person.
In general, beneficial ownership of Book-Entry Securities will be subject to the
Rules, as in effect from time to time.
Clearstream International, a Luxembourg limited liability company, was
formed in January 2000 through the merger of Cedel International and Deutsche
Boerse Clearing.
Clearstream is registered as a bank in Luxembourg and is subject to
regulation by the Luxembourg Monetary Authority, which supervises Luxembourg
banks.
41
Clearstream holds securities for its Participants and facilitates the
clearance and settlement of securities transactions by electronic book-entry
transfers between their accounts. Clearstream provides various services,
including safekeeping, administration, clearance and settlement of
internationally traded securities and securities lending and borrowing.
Clearstream also deals with domestic securities markets in several countries
through established depository and custodial relationships. Clearstream has
established an electronic bridge with Euroclear Bank S.A./N.V. (which operates
Euroclear) in Brussels to facilitate settlement of trades between systems.
Clearstream currently accepts over 200,000 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 2,500 customers located in over 80 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 custodial
relationship with an account holder of Clearstream.
The Euroclear System was created in 1968 to hold securities for its
Participants and to clear and settle transactions between Euroclear Participants
through simultaneous electronic book-entry delivery against payment, thereby
eliminating the need for physical movement of certificates and any risk from
lack of simultaneous transfers of securities and cash. Transactions may be
settled in a variety of currencies, including United States dollars. Euroclear
provides various other services, including securities lending and borrowing and
interfaces with domestic markets in several countries generally similar to the
arrangements for cross-market transfers with DTC described above. Euroclear is
operated by Euroclear Bank S.A./N.V. (the "EUROCLEAR OPERATOR"). All operations
are conducted by the Euroclear Operator, and all Euroclear securities clearance
accounts and Euroclear cash accounts are accounts with the Euroclear Operator.
Euroclear plc establishes policy for Euroclear on behalf of Euroclear
Participants. Euroclear Participants include banks (including central banks),
securities brokers and dealers and other professional financial intermediaries.
Indirect access to Euroclear is also available to other firms that clear through
or maintain a custodial relationship with a Euroclear Participant, either
directly or indirectly.
Securities clearance accounts and cash accounts with the Euroclear
Operator are governed by the Terms and Conditions Governing Use of Euroclear and
the related Operating Procedures of the Euroclear System and applicable Belgian
law. These 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 of Euroclear only on behalf of Euroclear Participants, and
has no record of or relationship with persons holding through Euroclear
Participants.
Distributions on the Book-Entry Securities will be made on each
Distribution Date by the Trustee to Cede & Co., as nominee of DTC. DTC will be
responsible for crediting the amount of these distributions to the accounts of
the applicable DTC Participants in accordance with DTC's normal procedures. Each
DTC Participant will be responsible for disbursing these distributions to the
Beneficial Owners of the Book-Entry Securities that it represents and to each
Financial Intermediary for which it acts as agent. Each Financial Intermediary
will be responsible for disbursing funds to the Beneficial Owners of the
Book-Entry Securities that it represents.
Under a book-entry format, Beneficial Owners of the Book-Entry
Securities may experience some delay in their receipt of payments, since
payments will be forwarded by the Trustee to Cede & Co. Distributions with
respect to Securities held through Clearstream or Euroclear will be credited to
the cash accounts of Clearstream Participants or Euroclear Participants in
accordance with the relevant system's rules and procedures, to the extent
received by the Relevant Depositary. These distributions will be subject to tax
reporting in accordance with relevant United States tax laws and regulations.
See "Federal Income Tax Consequences--REMICs--Taxation of Certain Foreign
Investors" and "--Backup Withholding." Because DTC can only act on behalf of DTC
Participants, the ability of a Beneficial Owner to pledge Book-Entry Securities
to persons or entities that do not participate in the depository system, or
otherwise take actions regarding their Book-Entry Securities, may be limited due
to the lack of physical certificates for their Book-Entry Securities. In
addition, issuance of the Book-Entry Securities in book-entry form may reduce
the liquidity of the Book-Entry Securities in the secondary market since certain
potential investors may be unwilling to purchase Securities for which they
cannot obtain physical certificates.
42
DTC has advised the Depositor that, unless and until Definitive
Securities are issued, DTC will take any action the holders of the Book-Entry
Securities are permitted to take under the Pooling and Servicing Agreement only
at the direction of one or more DTC Participants to whose DTC accounts the
Book-Entry Securities are credited, to the extent that these actions are taken
on behalf of Financial Intermediaries whose holdings include the Book-Entry
Securities. Clearstream or the Euroclear Operator, as the case may be, will take
any other action permitted to be taken by a Securityholder under the Pooling and
Servicing Agreement on behalf of a Clearstream Participant or Euroclear
Participant only in accordance with its relevant rules and procedures and
subject to the ability of the Relevant Depositary to effect these actions on its
behalf through DTC. DTC may take actions, at the direction of the related
Participants, with respect to some Book-Entry Securities which conflict with
actions taken with respect to other Book-Entry Securities.
Definitive Securities will be issued to beneficial owners of the
Book-Entry Securities, or their nominees, rather than to DTC, only if (a) DTC
advises the Trustee in writing that DTC is no longer willing, qualified or able
to discharge properly its responsibilities as nominee and depository with
respect to the Book-Entry Securities and the Depositor or the Trustee is unable
to locate a qualified successor or (b) in the case of Securities of a Series
that receive distributions pursuant to request or random lot, if pro rata
distributions cannot be made through the facilities of DTC.
Upon the occurrence of any event described in the immediately preceding
paragraph, the Trustee will be required to notify the applicable beneficial
owners of the occurrence of the event and the availability through DTC of
Definitive Securities. Upon surrender by DTC of the global certificate or
certificates representing the Book-Entry Securities and instructions for
re-registration, the Trustee will issue Definitive Securities, and thereafter
the Trustee will recognize the holders of those Definitive Securities as
Securityholders under the Pooling and Servicing Agreement.
Although DTC, Clearstream and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Book-Entry Securities among
participants of DTC, Clearstream and Euroclear, they are under no obligation to
perform or continue to perform these procedures and these procedures may be
discontinued at any time.
In the event of the insolvency of DTC, a DTC Participant or an Indirect
DTC Participant in whose name Book-Entry Securities are registered, the ability
of the Beneficial Owners of the Book-Entry Securities to obtain timely payment
and, if the limits of applicable insurance coverage by the Securities Investor
Protection Corporation are exceeded or if the coverage is otherwise unavailable,
ultimate payment, of amounts distributable with respect to the Book-Entry
Securities may be impaired.
Secondary Market Trading
Since the purchaser determines the place of delivery, it is important
to establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
Trading between DTC Participants. Secondary market trading between DTC
Participants will be settled using the procedures applicable to prior mortgage
loan asset-backed certificates 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
Book-Entry 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 Book-Entry Securities against
payment. Payment will include interest accrued on the Book-Entry Securities from
and including the last coupon payment date to and
43
excluding the settlement date, on the basis of either a 360-day year comprised
of 30-day months or the actual number of days in the accrual period and a year
assumed to consist of 360 days, as applicable. For transactions settling on the
31st of the month, payment will include interest accrued to and excluding the
first day of the following month. Payment will then be made by the respective
Depositary of the DTC Participant's account against delivery of the Book-Entry
Securities. After settlement has been completed, the Book-Entry 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 Book-Entry Securities will accrue from, the value date (which would be the
preceding day when settlement occurred in New York). If settlement is not
completed 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 Book-Entry 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 Book-Entry Securities would incur overdraft charges for
one day, assuming they cleared the overdraft when the Book-Entry Securities were
credited to their accounts. However, interest on the Book-Entry Securities would
accrue from the value date. Therefore, in many cases the investment income on
the Book-Entry Securities earned during that one-day period may substantially
reduce or offset the amount of the overdraft charges, although this result will
depend on each 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 Book-Entry
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
Book-Entry 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 Book-Entry Securities to the DTC Participant's
account against payment. Payment will include interest accrued on the Book-Entry
Securities from and including the last coupon payment to and excluding the
settlement date on the basis of either a 360-day year comprised of 30-day months
or the actual number of days in the accrual period and a year assumed to consist
of 360 days, as applicable. For transactions settling on the 31st of the month,
payment will include interest accrued to and excluding the first day of the
following month. The payment will then be reflected in the account of the
Clearstream Participant or Euroclear Participant the following day, and receipt
of the cash proceeds in the Clearstream Participant's or Euroclear Participant's
account would be back-valued to the value date (which would be the preceding
day, when settlement occurred in New York). Should the Clearstream Participant
or Euroclear Participant have a line of credit with its respective clearing
system and elect to be in debt in anticipation of receipt of the sale proceeds
in its account, the back-valuation will extinguish any overdraft incurred over
that one-day period. If settlement is not completed on the intended value date
(i.e., the trade fails), receipt of the cash proceeds in the Clearstream
Participant's or Euroclear Participant's account would instead be valued as of
the actual settlement date.
Finally, day traders that use Clearstream or Euroclear and that
purchase Book-Entry 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:
44
(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 Book-Entry Securities in the U.S.
from a DTC Participant no later than one day prior to settlement,
which would give the Book-Entry Securities sufficient time to be
reflected in their Clearstream or Euroclear account in order to settle
the sale side of the trade; or
(c) staggering the value dates for the buy and sell
sides of the trade so that the value date for the purchase from the
DTC Participant is at least one day prior to the value date for the
sale to the Clearstream Participant or Euroclear Participant.
Certain U.S. Federal Income Tax Documentation Requirements. A
Beneficial Owner of Book-Entry Securities that is not a U.S. Person within the
meaning of Section 7701(a)(30) of the Code (a "NON-U.S. HOLDER") holding a
Book-Entry Security through Clearstream, Euroclear or DTC may be subject to U.S.
withholding tax unless it provides certain documentation to the Trustee, a
Paying Agent or any other entity required to withhold tax (any of the foregoing,
a "U.S. WITHHOLDING AGENT") establishing an exemption from withholding. A
Non-U.S. Holder may be subject to withholding unless each U.S. Withholding Agent
receives:
(i) from a Non-U.S. Holder that is classified as a corporation for
U.S. federal income tax purposes or is an individual, and is eligible for the
benefits of the portfolio interest exemption or an exemption (or reduced rate)
based on a treaty, a duly completed and executed IRS Form W-8BEN (or any
successor form);
(ii) from a Non-U.S. Holder that is eligible for an exemption on
the basis that the holder's income from the Book-Entry Securities is effectively
connected to its U.S. trade or business, a duly completed and executed IRS Form
W-8ECI (or any successor form);
(iii) from a Non-U.S. Holder that is classified as a partnership for
U.S. federal income tax purposes, a duly completed and executed IRS Form W-8IMY
(or any successor form) with all supporting documentation (as specified in the
U.S. Treasury regulations) required to substantiate exemptions from withholding
on behalf of its partners; certain partnerships may enter into agreements with
the IRS providing for different documentation requirements and it is recommended
that those partnerships consult their tax advisors regarding these certification
rules;
(iv) from a Non-U.S. Holder that is an intermediary (i.e., a person
acting as a custodian, a broker, nominee or otherwise as an agent for the
Beneficial Owner of Book-Entry Securities):
(a) if the intermediary is a "qualified intermediary"
within the meaning of Section 1.1441-1(e)(5)(ii) of the U.S. Treasury
regulations (a "QUALIFIED INTERMEDIARY"), a duly completed and
executed IRS Form W-8IMY (or any successor or substitute form):
(1) stating the name, permanent residence
address and employer identification number of the Qualified
Intermediary and the country under the laws of which the
Qualified Intermediary is created, incorporated or governed,
(2) certifying that the Qualified Intermediary
has provided, or will provide, a withholding statement as
required under Section 1.1441-1(e)(5)(v) of the U.S. Treasury
regulations,
(3) certifying that, with respect to accounts it
identifies on its withholding statement, the qualified
intermediary is not acting for its own account but is acting
as a qualified intermediary, and
(4) providing any other information,
certifications, or statements that may be required by the IRS
Form W-8IMY or accompanying instructions in addition to, or in
lieu of, the
45
information and certifications described in Section
1.1441-1(e)(3)(ii) or 1.1441-1(e)(5)(v) of the U.S. Treasury
regulations; or
(b) if the intermediary is not a Qualified Intermediary, a
duly completed and executed IRS Form W-8IMY (or any successor or
substitute form):
(1) stating the name and permanent residence
address of the non-Qualified Intermediary and the country
under the laws of which the non-Qualified Intermediary is
created, incorporated or governed,
(2) certifying that the non-Qualified
Intermediary is not acting for its own account,
(3) certifying that the non-Qualified
Intermediary has provided, or will provide, a withholding
statement that is associated with the appropriate IRS Forms
W-8 and W-9 required to substantiate exemptions from
withholding on behalf of the non-Qualified Intermediary's
beneficial owners, and
(4) providing any other information,
certifications or statements that may be required by the IRS
Form W-8IMY or accompanying instructions in addition to, or in
lieu of, the information, certifications, and statements
described in Section 1.1441-1(e)(3)(iii) or (iv) of the U.S.
Treasury regulations; or
(v) from a Non-U.S. Holder that is a trust, depending on whether
the trust is classified for U.S. federal income tax purposes as the beneficial
owner of Book-Entry Securities, either an IRS Form W-8BEN or W-8IMY; any
Non-U.S. Holder that is a trust should consult its tax advisors to determine
which of these forms it should provide.
All Non-U.S. Holders will be required to update the above-listed forms
and any supporting documentation in accordance with the requirements under the
U.S. Treasury regulations. These forms generally 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. Under certain circumstances, an IRS Form W-8BEN, if
furnished with a taxpayer identification number, remains in effect until the
status of the beneficial owner changes, or a change in circumstances makes any
information on the form incorrect.
In addition, all holders, including holders that are U.S. Persons,
holding Book-Entry Securities through Clearstream, Euroclear or DTC may be
subject to backup withholding unless the holder:
(a) provides the appropriate IRS Form W-8 (or any
successor or substitute form), duly completed and executed, if the
holder is a Non-U.S. Holder;
(b) provides a duly completed and executed IRS Form W-9,
if the Holder is a U.S. Person; or
(c) can be treated as a "exempt recipient" within the
meaning of Section 1.6049-4(c)(1)(ii) of the U.S. Treasury regulations
(e.g., a corporation or a financial institution such as a bank).
This summary does not deal with all of the aspects of U.S. federal
income tax withholding or backup withholding that may be relevant to investors
that are Non-U.S. Holders. Those holders are advised to consult their own tax
advisors for specific tax advice concerning their holding and disposing of
Book-Entry Securities.
MANDATORY AUCTION OF CERTIFICATES
If specified in the prospectus supplement for a series, one or more
Classes of Securities ("AUCTION SECURITIES") may be subject to a mandatory
auction. Prior to a Distribution Date specified in the applicable prospectus
supplement (the "AUCTION DISTRIBUTION DATE"), the Trustee or another party
specified in the prospectus
46
supplement, in its capacity as auction administrator (the "AUCTION
ADMINISTRATOR"), will solicit bids for the purchase of each Class of Auction
Securities then outstanding from third party investors.
On the Auction Distribution Date, the Auction Securities will be
transferred to third party investors, and upon this transfer the holders of each
class of Auction Securities will be entitled to receive an amount (the "PAR
PRICE") equal to the related Security Balance, plus, if applicable, accrued
interest on that Class Balance (following all distributions and the allocation
of Realized Losses on the Auction Distribution Date).
The Auction Administrator will enter into a swap agreement pursuant to
which the counterparty will agree to pay the excess, if any, of the Par Price
over the amounts received for a Class of Auction Securities in the auction. If
all or a portion of a Class of Auction Securities is not sold in the auction,
the counterparty will pay the Auction Administrator the Par Price (or portion of
the Par Price) of the unsold Securities. If the amount received in the auction
is greater than the Par Price, that excess will be paid by the Trust to the
counterparty to the swap agreement and will not be available for distribution to
Securityholders.
If the counterparty defaults on its obligations under the swap
agreement, no Securities of a Class of Auction Securities will be transferred to
third parties unless bids equal to or higher than the applicable Par Price (or
pro rata portion in the case of a bid for less than all of a Class) are
received. In addition, if the counterparty defaults and third party investors
bid an amount equal to or higher than the pro rata portion of the Par Price for
some, but not all, of a Class of Auction Securities, only a portion of the
Securities of such Class will be transferred to the successful bidders on the
Auction Distribution Date. If only a portion of a Class is transferred, each
holder of such Class will transfer only a pro rata portion of its Securities on
the Auction Distribution Date.
See "Risk Factors--Amounts Received from the Auction and the Swap
Agreement May Be Insufficient to Assure Completion of the Auction" in this
prospectus.
DESCRIPTION OF THE AGREEMENTS
AGREEMENTS APPLICABLE TO A SERIES
REMIC Securities, Grantor Trust Securities
Securities representing interests in a Trust Fund, or a portion
thereof, that the Trustee will elect to have treated as REMIC Securities or
Grantor Trust Securities will be issued, and the related Trust Fund will be
created, pursuant to a pooling and servicing agreement (a "Pooling and Servicing
Agreement") among the Depositor, the Trustee and the Servicer, Servicers or
Master Servicer, as applicable. The Assets of such Trust Fund will be
transferred to the Trust Fund and thereafter serviced in accordance with the
terms of the Pooling and Servicing Agreement. In the event there are multiple
Servicers of the Assets of such Trust Fund, each Servicer may perform its
servicing functions pursuant to a servicing agreement (each, an "Underlying
Servicing Agreement").
Securities That Are Partnership Interests for Tax Purposes and Notes
Partnership Securities that are partnership interests for tax purposes
will be issued, and the related Trust Fund will be created, pursuant to a
Pooling and Servicing Agreement.
A Series of Notes issued by a Trust Fund will be issued pursuant to an
indenture (the "INDENTURE") between the related Trust Fund and the Indenture
Trustee named in the related prospectus supplement. The Trust Fund will be
established pursuant to a deposit trust agreement (each, a "DEPOSIT TRUST
AGREEMENT") between the Depositor and an owner trustee specified in the
prospectus supplement relating to such Series of Notes. The Assets securing
payment on the Notes will be serviced in accordance with a servicing agreement
(each, an "INDENTURE SERVICING AGREEMENT") between the related Trust Fund as
issuer of the Notes, the Servicer and the Indenture Trustee. The Pooling and
Servicing Agreements, the Indenture Servicing Agreements, the Underlying
Servicing Agreements and the Indenture are referred to each as an "AGREEMENT."
MATERIAL TERMS OF THE POOLING AND SERVICING AGREEMENTS AND UNDERLYING SERVICING
AGREEMENTS
47
General
The following summaries describe the material provisions that may
appear in each Pooling and Servicing Agreement and Underlying Servicing
Agreement. The prospectus supplement for a Series of Securities will describe
the specific provisions of the applicable Agreement relating to such Series. The
provisions of each Agreement will vary depending upon the nature of the
Securities to be issued thereunder and the nature of the related Trust Fund. As
used herein with respect to any Series, the term "SECURITY" refers to all of the
Securities of that Series, whether or not offered hereby and by the related
prospectus supplement, unless the context otherwise requires. A form of a
Pooling and Servicing Agreement has been filed as an exhibit to the Registration
Statement of which this prospectus is a part.
The servicers (the "SERVICERS"), any master servicer (the "MASTER
SERVICER") and the trustee (the "TRUSTEE") or indenture trustee (the "INDENTURE
TRUSTEE"), as applicable, with respect to any Series of Securities will be named
in the related prospectus supplement. In the event there are multiple Servicers
for the Assets in a Trust Fund, a Master Servicer may perform certain
administration, calculation and reporting functions with respect to such Trust
Fund and supervise the related Servicers pursuant to a Pooling and Servicing
Agreement. With respect to Series involving a Master Servicer, references in
this prospectus to the Servicer will apply to the Master Servicer where
non-servicing obligations are described. If specified in the related prospectus
supplement, a securities administrator may be appointed pursuant to the Pooling
and Servicing Agreement for any Trust Fund to administer such Trust Fund.
Assignment of Assets; Repurchases
At the time of issuance of any Series of Securities, the Depositor will
assign (or cause to be assigned) to the designated Trustee the Assets to be
included in the related Trust Fund, together with all principal and interest to
be received on or with respect to such Assets after the Cut-off Date, other than
principal and interest due on or before the Cut-off Date and other than any
Retained Interest. The Trustee will, concurrently with such assignment, deliver
the Securities to the Depositor in exchange for the Assets and the other assets
comprising the Trust Fund for such Series. Each Asset will be identified in a
schedule appearing as an exhibit to the applicable Agreement. Such schedule will
include detailed information to the extent available and relevant (i) in respect
of each Mortgage Loan included in the related Trust Fund, including without
limitation, the state and zip code of the related Mortgaged Property and type of
such property, the Mortgage Interest Rate and, if applicable, the applicable
index, margin, adjustment date and any rate cap information, the original and
remaining term to maturity, the original and outstanding principal balance and
balloon payment, if any, the Loan-to-Value Ratio as of the date indicated and
payment and prepayment provisions, if applicable; and (ii) in respect of each
Contract included in the related Trust Fund, including without limitation the
outstanding principal amount and the Contract Rate.
With respect to each Mortgage Loan, the Depositor generally will
deliver or cause to be delivered to the Trustee (or a custodian for the Trustee)
certain loan documents, which will in most cases include the original Mortgage
Note endorsed, without recourse, in blank or to the order of the Trustee, the
original Mortgage (or a certified copy thereof) with evidence of recording
indicated thereon and an assignment of the Mortgage to the Trustee in recordable
form. Notwithstanding the foregoing, a Trust Fund may include Mortgage Loans
where the original Mortgage Note is not delivered to the Trustee if the
Depositor or Asset Seller delivers to the Trustee or a custodian for the Trustee
a copy or a duplicate original of the Mortgage Note, together with an affidavit
certifying that the original thereof has been lost or destroyed. With respect to
such Mortgage Loans, the Trustee (or its nominee) may not be able to enforce the
Mortgage Note against the related borrower. The Asset Seller or other entity
specified in the related prospectus supplement will be required to agree to
repurchase, or substitute for, each such Mortgage Loan that is subsequently in
default if the enforcement thereof or of the related Mortgage is materially
adversely affected by the absence of the original Mortgage Note. The applicable
Agreement will generally require the Depositor or another party specified in the
related prospectus supplement to promptly cause each such assignment of Mortgage
to be recorded in the appropriate public office for real property records,
unless (i) with respect to a particular state, the Trustee has received an
opinion of counsel acceptable to it that such recording is not required to make
the assignment effective against the parties to the Mortgage or subsequent
purchasers or encumbrancers of the Mortgaged Property or (ii) recordation in a
state is not required by the Rating Agencies rating the Series in order to
obtain the initial ratings on the Securities described in the related prospectus
supplement.
48
Notwithstanding the preceding paragraph, with respect to any Mortgage
Loan which has been recorded in the name of Mortgage Electronic Registration
Systems, Inc. ("MERS") or its designee, no mortgage assignment in favor of the
Trustee will be required to be prepared or delivered. Instead, the Master
Servicer and the applicable Servicer will be required to take all actions as are
necessary to cause the applicable Trust Fund to be shown as the owner of the
related Mortgage Loan on the records of MERS for purposes of the system of
recording transfers of beneficial ownership of mortgages maintained by MERS.
The Trustee (or a custodian) will review such Mortgage Loan documents
within a period of days specified in the related prospectus supplement after
receipt thereof, and the Trustee (or a custodian) will hold such documents in
trust for the benefit of the Securityholders. If any such document is found to
be missing or defective in any material respect, the Trustee (or such custodian)
shall immediately notify the Asset Seller, the Servicer, the Depositor and any
other entity specified in the related prospectus supplement. If the Asset Seller
or other entity specified in the related prospectus supplement cannot cure the
omission or defect within a specified number of days after receipt of such
notice, then the Asset Seller or other entity specified in the related
prospectus supplement will be obligated, within a specified number of days of
receipt of such notice, to repurchase the related Mortgage Loan from the Trustee
at a price equal to the sum of the unpaid principal balance thereof, plus unpaid
accrued interest at the interest rate for such Asset from the date as to which
interest was last paid to the due date in the Collection Period in which the
relevant purchase is to occur, plus any unpaid servicing fees and unreimbursed
advances that are payable to the Servicer or such other price as specified in
the related prospectus supplement (the "PURCHASE PRICE") or substitute for such
Mortgage Loan. There can be no assurance that an Asset Seller or other named
entity will fulfill this repurchase or substitution obligation, and neither the
Servicer nor the Depositor will be obligated to repurchase or substitute for
such Mortgage Loan if the Asset Seller or other named entity defaults on its
obligation. This repurchase or substitution obligation constitutes the sole
remedy available to the Securityholders or the Trustee for omission of, or a
material defect in, a constituent document.
Notwithstanding the preceding two paragraphs, the documents with
respect to Home Equity Loans, Home Improvement Contracts and Unsecured Home
Improvement Loans will be delivered to the Trustee (or a custodian) only to the
extent specified in the related prospectus supplement. Generally such documents
will be retained by the Servicer, which may also be the Asset Seller. In
addition, assignments of the related Mortgages to the Trustee will be recorded
only to the extent specified in the related prospectus supplement.
With respect to each Contract, the Servicer (which may also be the
Asset Seller) generally will maintain custody of the original Contract and
copies of documents and instruments related to each Contract and the security
interest in the Manufactured Home securing each Contract. In order to give
notice of the right, title and interest of the Trustee in the Contracts, the
Depositor will cause UCC-1 financing statements to be authorized by the related
Asset Seller identifying the Depositor as secured party and by the Depositor
identifying the Trustee as the secured party and, in each case, identifying all
Contracts as collateral. The Contracts will be stamped or otherwise marked to
reflect their assignment from the Company to the Trust Fund only to the extent
specified in the related prospectus supplement. Therefore, if, through
negligence, fraud or otherwise, a subsequent purchaser were able to take
physical possession of the Contracts without notice of such assignment, the
interest of the Trustee in the Contracts could be defeated. See "Certain Legal
Aspects of the Contracts."
While the Contract documents will not be reviewed by the Trustee or the
Servicer, if the Servicer finds that any such document is missing or defective
in any material respect, the Servicer will be required to immediately notify the
Depositor and the relevant Asset Seller or other entity specified in the related
prospectus supplement. If the Asset Seller or such other entity cannot cure the
omission or defect within a specified number of days after receipt of such
notice, then the Asset Seller or such other entity will be obligated, within a
specified number of days of receipt of such notice, to repurchase the related
Contract from the Trustee at the Purchase Price or substitute for such Contract.
There can be no assurance that an Asset Seller or such other entity will fulfill
this repurchase or substitution obligation, and neither the Servicer nor the
Depositor will be obligated to repurchase or substitute for such Contract if the
Asset Seller or such other entity defaults on its obligation. This repurchase or
substitution obligation constitutes the sole remedy available to the
Securityholders or the Trustee for omission of, or a material defect in, a
constituent document. To the extent specified in the related prospectus
supplement, in lieu of curing any omission or defect in the Asset or
repurchasing or substituting for such Asset, the Asset Seller may agree to cover
any losses suffered by the Trust Fund as a result of such breach or defect.
49
Representations and Warranties; Repurchases
To the extent provided in the related prospectus supplement the Asset
Seller, the Sponsor or the Depositor or any combination thereof will, with
respect to each Asset, make or assign certain representations and warranties, as
of a specified date (the person making such representations and warranties, the
"WARRANTING PARTY") covering, by way of example, the following types of matters:
(i) the accuracy of the information set forth for such Asset on the schedule of
Assets appearing as an exhibit to the applicable Agreement; (ii) in the case of
a Mortgage Loan, the existence of title insurance insuring the lien priority of
the Mortgage Loan or an opinion of counsel of the type customarily rendered in
the applicable jurisdiction in lieu of a title insurance policy and, in the case
of a Contract, that the Contract creates a valid first security interest in or
lien on the related Manufactured Home; (iii) the authority of the Warranting
Party to sell the Asset; (iv) the payment status of the Asset; (v) in the case
of a Mortgage Loan, the existence of customary provisions in the related
Mortgage Note and Mortgage to permit realization against the Mortgaged Property
of the benefit of the security of the Mortgage; and (vi) the existence of hazard
insurance coverage on the Mortgaged Property or Manufactured Home.
Any Warranting Party shall be an Asset Seller or an affiliate thereof
or such other person acceptable to the Depositor and shall be identified in the
related prospectus supplement.
Representations and warranties made in respect of an Asset may have
been made as of a date prior to the applicable Cut-off Date. A substantial
period of time may have elapsed between such date and the date of initial
issuance of the related Series of Securities evidencing an interest in such
Asset. In the event of a breach of any such representation or warranty, the
Warranting Party will be obligated to reimburse the Trust Fund for losses caused
by any such breach or either cure such breach or repurchase or replace the
affected Asset as described below. Since the representations and warranties may
not address events that may occur following the date as of which they were made,
the Warranting Party will have a reimbursement, cure, repurchase or substitution
obligation in connection with a breach of such a representation and warranty
only if the relevant event that causes such breach occurs prior to such date.
Although the Warranting Party would have no such obligations if the relevant
event that causes such breach occurs after such date, the Sponsor specified in
the applicable prospectus supplement will generally be required by the
applicable Rating Agencies to make representations and warranties that address
this gap period.
Each Agreement will provide that the Servicer and/or Trustee or such
other entity identified in the related prospectus supplement will be required to
notify promptly the relevant Warranting Party of any breach of any
representation or warranty made by it in respect of an Asset that materially and
adversely affects the value of such Asset or the interests therein of the
Securityholders. If such Warranting Party cannot cure such breach within a
specified period following the date on which such party was notified of such
breach, then such Warranting Party will be obligated to repurchase such Asset
from the Trustee within a specified period from the date on which the Warranting
Party was notified of such breach, at the Purchase Price therefor. If so
provided in the prospectus supplement for a Series, a Warranting Party, rather
than repurchase an Asset as to which a breach has occurred, will have the
option, within a specified period after initial issuance of such Series of
Securities, to cause the removal of such Asset from the Trust Fund and
substitute in its place one or more other Assets, as applicable, in accordance
with the standards described in the related prospectus supplement. This
reimbursement, repurchase or substitution obligation will constitute the sole
remedy available to Securityholders or the Trustee for a breach of
representation by a Warranting Party.
The Sponsor identified in the applicable prospectus supplement, if not
the Warranting Party, in addition to making representations and warranties
regarding the Assets covering any gap between the date the Warranting Party made
its representations and warranties and the Closing Date as described above, will
be obligated to repurchase such Asset from the Trustee within a specified period
from the date on which it is notified of a breach of its representations and
warranties if it cannot cure such breach but only to the extent the Warranting
Party is not also obligated to repurchase such Asset from the Trustee. Neither
the Depositor nor the Servicer (except to the extent the Depositor or the
Servicer is the Warranting Party) will be obligated to purchase or substitute
for an Asset if a Warranting Party defaults on its obligation to do so, and no
assurance can be given that Warranting Parties will carry out such obligations
with respect to the Assets.
A Servicer will make certain representations and warranties regarding
its authority to enter into, and its ability to perform its obligations under,
the applicable Agreement. A breach of any such representation of the
50
Servicer which materially and adversely affects the interests of the
Securityholders and which continues unremedied for the number of days specified
in the applicable Agreement after the giving of written notice of such breach to
the Servicer by the Trustee or the Depositor, or to the Servicer, the Depositor
and the Trustee by the holders of Securities evidencing not less than 25% of the
Voting Rights or such other percentage specified in the related prospectus
supplement, will constitute an Event of Default under such Agreement. See
"--Events of Default under the Agreements" and "--Rights Upon Event of Default
under the Agreements."
Collection Account and Related Accounts
General. The Servicer will, as to each Trust Fund, establish and
maintain or cause to be established and maintained one or more separate accounts
for the collection of payments on the related Assets (collectively, the
"COLLECTION ACCOUNT"), which must meet the requirements set forth in the
applicable prospectus supplement. A Collection Account may be maintained as an
interest bearing or a non-interest bearing account and, if interest bearing, the
funds held therein may be invested pending each succeeding Distribution Date in
certain investments acceptable to the applicable Rating Agencies. Any interest
or other income earned on funds in the Collection Account will generally be paid
to the Servicer or its designee as additional servicing compensation. The
Collection Account may be maintained with an institution that is an affiliate of
the Servicer, if applicable, provided that such institution meets the standards
imposed by the Rating Agency or Agencies. If permitted by the Rating Agency or
Agencies, a Collection Account may contain funds relating to more than one
Series of mortgage pass-through certificates and may contain other funds
respecting payments on mortgage loans belonging to the Servicer or serviced or
master serviced by it on behalf of others. The Trustee or a securities
administrator, if specified in the applicable prospectus supplement, will, as to
each Trust Fund, establish and maintain or cause to be established and
maintained a separate account into which it will deposit amounts remitted by the
Servicer or Master Servicer for distribution to Securityholders (the
"DISTRIBUTION ACCOUNT"), which must meet the requirements set forth in the
applicable prospectus supplement.
Deposits. A Servicer will deposit or cause to be deposited in the
Collection Account for one or more Trust Funds on a daily basis, or such other
period provided in the applicable Agreement, the following payments and
collections received, or advances made, by the Servicer or the Trustee or on its
behalf subsequent to the Cut-off Date (other than payments due on or before the
Cut-off Date, and exclusive of any amounts representing a Retained Interest):
(i) all payments on account of principal, including principal
prepayments, on the Assets;
(ii) all payments on account of interest on the Assets, including
any default interest collected, in each case net of any portion thereof retained
by a Servicer as its servicing compensation and net of any Retained Interest;
(iii) Liquidation Proceeds and Insurance Proceeds, together with the
net proceeds on a monthly basis with respect to any Assets acquired for the
benefit of Securityholders;
(iv) any amounts paid under any instrument or drawn from any fund
that constitutes credit support for the related Series of Securities as
described under "Description of Credit Support";
(v) any advances made as described under "Description of the
Securities--Advances in Respect of Delinquencies";
(vi) any amounts paid under any Cash Flow Agreement, as described
under "Cash Flow Agreements";
(vii) all proceeds of any Asset or, with respect to a Mortgage Loan,
property acquired in respect thereof purchased by the Depositor, the Sponsor,
any Asset Seller or any other specified person as described under "--Assignment
of Assets; Repurchases" and "--Representations and Warranties; Repurchases," all
proceeds of any defaulted Mortgage Loan purchased as described under
"--Realization Upon Defaulted Assets," and all proceeds of any Asset purchased
as described under "Description of the Securities--Termination";
51
(viii) any amounts paid by a Servicer to cover certain interest
shortfalls arising out of the prepayment of Assets in the Trust Fund as
described under "Description of the Agreements--Retained Interest; Servicing
Compensation and Payment of Expenses";
(ix) to the extent that any such item does not constitute
additional servicing compensation to a Servicer, any payments on account of
modification or assumption fees, late payment charges or Prepayment Charges on
the Assets;
(x) all payments required to be deposited in the Collection
Account with respect to any deductible clause in any blanket insurance policy
described under "--Hazard Insurance Policies";
(xi) any amount required to be deposited by a Servicer or the
Trustee in connection with losses realized on investments for the benefit of the
Servicer or the Trustee, as the case may be, of funds held in the Collection
Account; and
(xii) any other amounts required to be deposited in the Collection
Account as provided in the applicable Agreement and described in the related
prospectus supplement.
Withdrawals. A Servicer may, from time to time, make withdrawals from
the Collection Account for each Trust Fund for any of the following purposes:
(i) to remit to the Trustee or securities administrator for
deposit in the Distribution Account;
(ii) to reimburse a Servicer for unreimbursed amounts advanced as
described under "Description of the Securities--Advances in Respect of
Delinquencies," such reimbursement to be made out of amounts received which were
identified and applied by the Servicer as late collections of interest (net of
related servicing fees and Retained Interest) on and principal of the particular
Assets with respect to which the advances were made or out of amounts drawn
under any form of credit support with respect to such Assets;
(iii) to reimburse a Servicer for unpaid servicing fees earned and
certain unreimbursed servicing advances and expenses incurred with respect to
Assets and properties acquired in respect thereof, such reimbursement to be made
out of amounts that represent Liquidation Proceeds and Insurance Proceeds
collected on the particular Assets and properties, and net income collected on
the particular properties, with respect to which such fees were earned or such
expenses were incurred or out of amounts drawn under any form of credit support
with respect to such Assets and properties;
(iv) to reimburse a Servicer for any advances described in clause
(ii) above and any servicing expenses described in clause (iii) above which, in
the Servicer's good faith judgment, will not be recoverable from the amounts
described in clauses (ii) and (iii), respectively, such reimbursement to be made
from amounts collected on other Assets;
(v) if and to the extent described in the related prospectus
supplement, to pay a Servicer interest accrued on the advances described in
clause (ii) above and the servicing expenses described in clause (iii) above
while such advances and servicing expenses remain outstanding and unreimbursed;
(vi) to reimburse a Servicer, the Depositor, or any of their
respective directors, officers, employees and agents, as the case may be, for
certain expenses, costs and liabilities incurred thereby, as and to the extent
described under "--Certain Matters Regarding Servicers and the Master Servicer"
and "The Depositor";
(vii) if and to the extent described in the related prospectus
supplement, to pay the Trustee's fees;
(viii) to reimburse the Trustee or any of its directors, officers,
employees and agents, as the case may be, for certain expenses, costs and
liabilities incurred thereby, as and to the extent described under "--Certain
Matters Regarding the Trustee";
52
(ix) to pay a Servicer, as additional servicing compensation,
interest and investment income earned in respect of amounts held in the
Collection Account;
(x) to pay the person entitled thereto any amounts deposited in
the Collection Account that were identified and applied by the Servicer as
recoveries of Retained Interest;
(xi) to pay for costs reasonably incurred in connection with the
proper management and maintenance of any Mortgaged Property acquired for the
benefit of Securityholders by foreclosure or by deed in lieu of foreclosure or
otherwise, such payments to be made out of income received on such property;
(xii) if one or more elections have been made to treat the Trust
Fund or designated portions thereof as a REMIC, to pay any federal, state or
local taxes imposed on the Trust Fund or its assets or transactions, as and to
the extent described under "Federal Income Tax Consequences--REMICs--Taxes That
May Be Imposed on the REMIC Pool" or in the applicable prospectus supplement,
respectively;
(xiii) to pay for the cost of various opinions of counsel obtained
pursuant to the applicable Agreement for the benefit of Securityholders;
(xiv) to pay the person entitled thereto any amounts deposited in
the Collection Account in error, including amounts received on any Asset after
its removal from the Trust Fund whether by reason of purchase or substitution as
contemplated by "--Assignment of Assets; Repurchase" and "--Representations and
Warranties; Repurchases" or otherwise;
(xv) to make any other withdrawals permitted by the applicable
Agreement; and
(xvi) to clear and terminate the Collection Account at the
termination of the Trust Fund.
Other Collection Accounts. Notwithstanding the foregoing, if so
specified in the related prospectus supplement, the applicable Agreement for any
Series of Securities may provide for the establishment and maintenance of a
separate collection account into which the Servicer will deposit on a daily
basis the amounts described under "--Deposits" above for one or more Series of
Securities. Any amounts on deposit in any such collection account will be
withdrawn therefrom and deposited into the appropriate Collection Account by a
time specified in the related prospectus supplement. To the extent specified in
the related prospectus supplement, any amounts which could be withdrawn from the
Collection Account as described under "--Withdrawals" above, may also be
withdrawn from any such collection account. The prospectus supplement will set
forth any restrictions with respect to any such collection account, including
investment restrictions and any restrictions with respect to financial
institutions with which any such collection account may be maintained.
Collection and Other Servicing Procedures. The Servicer is required to
make reasonable efforts to collect all scheduled payments under the Assets and
will follow or cause to be followed such collection procedures as it would
follow with respect to assets that are comparable to the Assets and held for its
own account, provided such procedures are consistent with (i) the terms of the
applicable Agreement and any related hazard insurance policy or instrument of
credit support, if any, included in the related Trust Fund described herein or
under "Description of Credit Support," (ii) applicable law and (iii) the general
servicing standard specified in the related prospectus supplement or, if no such
standard is so specified, its normal servicing practices (in either case, the
"SERVICING STANDARD"). In connection therewith, the Servicer will be permitted
in its discretion to waive any late payment charge or penalty interest in
respect of a late payment on an Asset, subject to the terms and conditions of
the applicable agreement.
Each Servicer will also be required to perform other customary
functions of a servicer of comparable assets, including maintaining hazard
insurance policies as described herein and in any related prospectus supplement,
and filing and settling claims thereunder; maintaining, to the extent required
by the applicable Agreement, escrow or impoundment accounts of obligors for
payment of taxes, insurance and other items required to be paid by any obligor
pursuant to the terms of the Assets; processing assumptions or substitutions in
those cases where the Servicer has determined not to enforce any applicable
due-on-sale clause; attempting to cure
53
delinquencies; supervising foreclosures or repossessions; inspecting and
managing Mortgaged Properties or Manufactured Homes under certain circumstances;
and maintaining accounting records relating to the Assets. The Servicer or such
other entity specified in the related prospectus supplement will be responsible
for filing and settling claims in respect of particular Assets under any
applicable instrument of credit support. See "Description of Credit Support."
The Servicer may agree to modify, waive or amend any term of any Asset
in a manner consistent with the Servicing Standard so long as the modification,
waiver or amendment is not materially adverse to Securityholders and will not
change the Mortgage Interest Rate or Contract Rate, defer or forgive the payment
thereof of any principal or interest payments, reduce the outstanding principal
amount (except for actual payments of principal) or extend the final maturity
date with respect to such Asset. If a REMIC election has been made for the Trust
Fund, such modification, waiver or amendment may not affect adversely the status
of any REMIC constituting part of the Trust Fund as a REMIC or cause any such
REMIC to be subject to a tax on "prohibited transactions" or "contributions"
pursuant to the REMIC Provisions. The Servicer also may agree to any
modification, waiver or amendment that would reduce the Principal Balance
thereof, extend the term of the Asset or reduce the Mortgage Interest Rate or
Contract rate by up to 50 basis points if, in its judgment, a material default
on the Asset has occurred or a payment default is reasonably foreseeable. The
Servicer is required to notify the Trustee in the event of any modification,
waiver or amendment of any Asset.
Notwithstanding the foregoing to the contrary, in the event of a
voluntary principal prepayment in full of a Mortgage Loan, a Servicer may not
waive any Prepayment Charge or portion thereof required by the terms of the
related Mortgage Note unless (i)(a) the Servicer determines that such waiver is
standard and customary in servicing similar mortgage loans, (b) such waiver
relates to a default or a reasonably foreseeable default and (c) would, in the
reasonable judgment of the Servicer, maximize recovery of Liquidation Proceeds
for such Mortgage Loan, taking into account the value of such Prepayment Charge,
or (ii) the enforceability thereof is limited (1) by bankruptcy, insolvency,
moratorium, receivership, or other similar law relating to creditors' rights
generally or (2) due to acceleration in connection with a foreclosure or other
involuntary payment. If the Servicer waives or does not collect all or a portion
of a Prepayment Charge relating to a voluntary Principal Prepayment in full due
to any action or omission of the Servicer, other than as provided above, the
Servicer generally will, on the date on which the principal prepayment in full
is remitted to the Trustee, deliver to the Trustee the amount of the Prepayment
Charge from its own funds for distribution in accordance with the terms of the
applicable Agreement.
In the case of Multifamily Mortgage Loans, a mortgagor's failure to
make required Mortgage Loan payments may mean that operating income is
insufficient to service the Mortgage Loan debt, or may reflect the diversion of
that income from the servicing of the Mortgage Loan debt. In addition, a
mortgagor under a Multifamily Mortgage Loan that is unable to make Mortgage Loan
payments may also be unable to make timely payment of all required taxes and
otherwise to maintain and insure the related Mortgaged Property. In general, the
Servicer will be required to monitor any Multifamily Mortgage Loan that is in
default, evaluate whether the causes of the default can be corrected over a
reasonable period without significant impairment of the value of the related
Mortgaged Property, initiate corrective action in cooperation with the mortgagor
if cure is likely, inspect the related Multifamily Property and take such other
actions as are consistent with the applicable Agreement. A significant period of
time may elapse before the Servicer is able to assess the success of any such
corrective action or the need for additional initiatives. The time within which
the Servicer can make the initial determination of appropriate action, evaluate
the success of corrective action, develop additional initiatives, institute
foreclosure proceedings and actually foreclose may vary considerably depending
on the particular Multifamily Mortgage Loan, the Multifamily Property, the
mortgagor, the presence of an acceptable party to assume the Multifamily
Mortgage Loan and the laws of the jurisdiction in which the Multifamily Property
is located.
Realization Upon Defaulted Assets
Generally, the Servicer is required to monitor any Assets which is in
default, initiate corrective action in cooperation with the mortgagor or obligor
if cure is likely, inspect the Asset and take such other actions as are
consistent with the Servicing Standard. A significant period of time may elapse
before the Servicer is able to assess the success of such corrective action or
the need for additional initiatives.
54
Any Agreement relating to a Trust Fund that includes Mortgage Loans or
Contracts may grant to the Servicer and/or the holder or holders of certain
Classes of Securities a right of first refusal to purchase from the Trust Fund
at a predetermined purchase price any such Mortgage Loan or Contract as to which
a specified number of scheduled payments thereunder are delinquent. Any such
right granted to the holder of an Offered Security will be described in the
related prospectus supplement. The related prospectus supplement will also
describe any such right granted to any person if the predetermined purchase
price is less than the Purchase Price described under "--Representations and
Warranties; Repurchases."
If so specified in the related prospectus supplement, the Servicer may
offer to sell any defaulted Mortgage Loan or Contract described in the preceding
paragraph and not otherwise purchased by any person having a right of first
refusal with respect thereto, if and when the Servicer determines, consistent
with the Servicing Standard, that such a sale would produce a greater recovery
on a present value basis than would liquidation through foreclosure,
repossession or similar proceedings. The applicable Agreement will provide that
any such offering be made in a commercially reasonable manner for a specified
period and that the Servicer accept the highest cash bid received from any
person (including itself, an affiliate of the Servicer or any Securityholder)
that constitutes a fair price for such defaulted Mortgage Loan or Contract. In
the absence of any bid determined in accordance with the applicable Agreement to
be fair, the Servicer shall proceed with respect to such defaulted Mortgage Loan
or Contract as described below. Any bid in an amount at least equal to the
Purchase Price described under "--Representations and Warranties; Repurchases"
will in all cases be deemed fair.
The Servicer, on behalf of the Trustee, may at any time institute
foreclosure proceedings, exercise any power of sale contained in any mortgage,
obtain a deed in lieu of foreclosure, or otherwise acquire title to a Mortgaged
Property securing a Mortgage Loan by operation of law or otherwise and may at
any time repossess and realize upon any Manufactured Home, if such action is
consistent with the Servicing Standard and a default on such Mortgage Loan or
Contract has occurred or, in the Servicer's judgment, is imminent.
If title to any Mortgaged Property is acquired by a Trust Fund as to
which a REMIC election has been made, the Servicer, on behalf of the Trust Fund,
will be required to sell the Mortgaged Property by the close of the third
calendar year after the year of acquisition, unless (i) the Internal Revenue
Service (the "IRS") grants an extension of time to sell such property or (ii)
the Trustee receives an opinion of independent counsel to the effect that the
holding of the property by the Trust Fund subsequent to the close of the third
calendar year after the year of the acquisition of the property by the Trust
Fund will not result in the imposition of a tax on the Trust Fund or cause the
Trust Fund to fail to qualify as a REMIC under the Code at any time that any
Securities are outstanding. Subject to the foregoing, the Servicer will be
required to (i) solicit bids for any Mortgaged Property so acquired in such a
manner as will be reasonably likely to realize a fair price for such property
and (ii) accept the first (and, if multiple bids are contemporaneously received,
the highest) cash bid received from any person that constitutes a fair price.
The limitations imposed by the applicable Agreement and the REMIC
Provisions of the Code (if a REMIC election has been made with respect to the
related Trust Fund) on the ownership and management of any Mortgaged Property
acquired on behalf of the Trust Fund may result in the recovery of an amount
less than the amount that would otherwise be recovered. See "Certain Legal
Aspects of Mortgage Loans--Foreclosure."
If recovery on a defaulted Asset under any related instrument of credit
support is not available, the Servicer nevertheless will be obligated to follow
or cause to be followed such normal practices and procedures as it deems
necessary or advisable to realize upon the defaulted Asset. If the proceeds of
any liquidation of the property securing the defaulted Asset are less than the
outstanding principal balance of the defaulted Asset plus interest accrued
thereon at the applicable interest rate, plus the aggregate amount of expenses
incurred by the Servicer in connection with such proceedings and which are
reimbursable under the applicable Agreement, the Trust Fund will realize a loss
in the amount of such difference. The Servicer will be entitled to withdraw or
cause to be withdrawn from the Collection Account out of the Liquidation
Proceeds recovered on any defaulted Asset, prior to the distribution of such
Liquidation Proceeds to Securityholders, amounts representing its normal
servicing compensation on the Security, unreimbursed servicing expenses and
advances incurred with respect to the Asset and any unreimbursed advances of
delinquent payments made with respect to the Asset.
If any property securing a defaulted Asset is damaged the Servicer is
not required to expend its own funds to restore the damaged property unless it
determines (i) that such restoration will increase the proceeds to
55
Securityholders on liquidation of the Asset after reimbursement of the Servicer
for its expenses and (ii) that such expenses will be recoverable by it from
related Insurance Proceeds or Liquidation Proceeds.
As servicer of the Assets, a Servicer, on behalf of itself, the Trustee
and the Securityholders, will present claims to the obligor under each
instrument of credit support, and will take such reasonable steps as are
necessary to receive payment or to permit recovery thereunder with respect to
defaulted Assets.
If a Servicer or its designee recovers payments under any instrument of
credit support with respect to any defaulted Assets, the Servicer will be
entitled to withdraw or cause to be withdrawn from the Collection Account out of
such proceeds, prior to distribution thereof to Securityholders, amounts
representing its normal servicing compensation on such Asset, unreimbursed
servicing expenses incurred with respect to the Asset and any unreimbursed
advances of delinquent payments made with respect to the Asset. See "--Hazard
Insurance Policies" and "Description of Credit Support."
Hazard Insurance Policies
Mortgage Loans. Generally, each Agreement for a Trust Fund comprised of
Mortgage Loans will require the Servicer to cause the mortgagor on each Mortgage
Loan to maintain a hazard insurance policy providing for such coverage as is
required under the related Mortgage or, if any Mortgage permits the holder
thereof to dictate to the mortgagor the insurance coverage to be maintained on
the related Mortgaged Property, then such coverage as is consistent with the
Servicing Standard. Such coverage will be in general in an amount equal to the
lesser of the principal balance owing on such Mortgage Loan (but not less than
the amount necessary to avoid the application of any co-insurance clause
contained in the hazard insurance policy) and the amount necessary to fully
compensate for any damage or loss to the improvements on the Mortgaged Property
on a replacement cost basis or such other amount specified in the related
prospectus supplement. The ability of the Servicer to assure that hazard
insurance proceeds are appropriately applied may be dependent upon its being
named as an additional insured under any hazard insurance policy and under any
other insurance policy referred to below, or upon the extent to which
information in this regard is furnished by mortgagors. All amounts collected by
the Servicer under any such policy (except for amounts to be applied to the
restoration or repair of the Mortgaged Property or released to the mortgagor in
accordance with the Servicer's normal servicing procedures, subject to the terms
and conditions of the related Mortgage and Mortgage Note) will be deposited in
the Collection Account. The applicable Agreement may provide that the Servicer
may satisfy its obligation to cause each mortgagor to maintain such a hazard
insurance policy by the Servicer's maintaining a blanket policy insuring against
hazard losses on the Mortgage Loans. If such blanket policy contains a
deductible clause, the Servicer will be required to deposit in the Collection
Account all sums that would have been deposited therein but for such clause.
In general, the standard form hazard insurance covers physical damage
to or destruction of the improvements of the property by fire, lightning,
explosion, smoke, windstorm and hail, subject to the conditions and exclusions
specified in each policy. Although the policies relating to the Mortgage Loans
will be underwritten by different insurers under different state laws in
accordance with different applicable state forms, and therefore will not contain
identical terms and conditions, the basic terms thereof are dictated by
respective state laws, and most such policies typically do not cover any
physical damage resulting from war, revolution, governmental actions, floods and
other water-related causes, earth movement (including earthquakes, landslides
and mudflows), wet or dry rot, vermin, domestic animals, riot, strike and civil
commotion, and certain other kinds of uninsured risks.
Each Agreement for a Trust Fund comprised of Mortgage Loans will
require the Servicer to cause the mortgagor on each Mortgage Loan to maintain
all such other insurance coverage with respect to the related Mortgaged Property
as is consistent with the terms of the related Mortgage and the Servicing
Standard, which insurance may typically include flood insurance (if the related
Mortgaged Property was located at the time of origination in a federally
designated flood area). Any cost incurred by the Servicer in maintaining any
such insurance policy will be reimbursable to it as a servicing advance as
described above under "--Collection Account and Related Accounts."
Under the terms of the Mortgage Loans, mortgagors will generally be
required to present claims to insurers under hazard insurance policies
maintained on the related Mortgaged Properties. The Servicer, on behalf of the
Trustee and Securityholders, is obligated to present or cause to be presented
claims under any blanket insurance
56
policy insuring against hazard losses on Mortgaged Properties securing the
Mortgage Loans. However, the ability of the Servicer to present or cause to be
presented such claims is dependent upon the extent to which information in this
regard is furnished to the Servicer by mortgagors.
Contracts
Generally, the terms of the applicable Agreement for a Trust Fund
comprised of Contracts will require the Servicer to cause to be maintained with
respect to each Contract one or more hazard insurance policies which provide, at
a minimum, the same coverage as a standard form fire and extended coverage
insurance policy that is customary for manufactured housing, issued by a company
authorized to issue such policies in the state in which the Manufactured Home is
located, and in an amount which is not less than the maximum insurable value of
such Manufactured Home or the principal balance due from the obligor on the
related Contract, whichever is less; provided, however, that the amount of
coverage provided by each such hazard insurance policy shall be sufficient to
avoid the application of any co-insurance clause contained therein. When a
Manufactured Home's location was, at the time of origination of the related
Contract, within a federally designated special flood hazard area, the Servicer
shall cause such flood insurance to be maintained, which coverage shall be at
least equal to the minimum amount specified in the preceding sentence or such
lesser amount as may be available under the federal flood insurance program.
Each hazard insurance policy caused to be maintained by the Servicer shall
contain a standard loss payee clause in favor of the Servicer and its successors
and assigns. If any obligor is in default in the payment of premiums on its
hazard insurance policy or policies, the Servicer shall pay such premiums out of
its own funds, and may add separately such premium to the obligor's obligation
as provided by the Contract, but may not add such premium to the remaining
principal balance of the Contract.
The Servicer may maintain, in lieu of causing individual hazard
insurance policies to be maintained with respect to each Manufactured Home, and
shall maintain, to the extent that the related Contract does not require the
obligor to maintain a hazard insurance policy with respect to the related
Manufactured Home, one or more blanket insurance policies covering losses on the
obligor's interest in the Contracts resulting from the absence or insufficiency
of individual hazard insurance policies. The Servicer shall pay the premium for
such blanket policy on the basis described therein and shall pay any deductible
amount with respect to claims under such policy relating to the Contracts.
Fidelity Bonds and Errors and Omissions Insurance
Each Agreement will require that the Servicer obtain and maintain in
effect a fidelity bond or similar form of insurance coverage (which may provide
blanket coverage) or any combination thereof insuring against loss occasioned by
fraud, theft or other intentional misconduct of the officers, employees and
agents of the Servicer. The applicable Agreement may allow the Servicer to
self-insure against loss occasioned by the errors and omissions of the officers,
employees and agents of the Servicer so long as certain criteria set forth in
such Agreement are met.
Due-on-Sale Provisions
The Mortgage Loans may contain clauses requiring the consent of the
mortgagee to any sale or other transfer of the related Mortgaged Property, or
due-on-sale clauses entitling the mortgagee to accelerate payment of the
Mortgage Loan upon any sale, transfer or conveyance of the related Mortgaged
Property. The Servicer will generally enforce any due-on-sale clause to the
extent it has knowledge of the conveyance or proposed conveyance of the
underlying Mortgaged Property and it is entitled to do so under applicable law;
provided, however, that the Servicer will not take any action in relation to the
enforcement of any due-on-sale provision which would adversely affect or
jeopardize coverage under any applicable insurance policy. Any fee collected by
or on behalf of the Servicer for entering into an assumption agreement will be
retained by or on behalf of the Servicer as additional servicing compensation.
See "Certain Legal Aspects of Mortgage Loans--Due-on-Sale Clauses." The
Contracts may also contain such clauses. The Servicer will generally permit such
transfer so long as the transferee satisfies the Servicer's then applicable
underwriting standards. The purpose of such transfers is often to avoid a
default by the transferring obligor. See "Certain Legal Aspects of the
Contracts--Transfers of Manufactured Homes; Enforceability of "Due-on-Sale"
Clauses."
57
Retained Interest; Servicing Compensation and Payment of Expenses
The prospectus supplement for a Series of Securities will specify
whether there will be any Retained Interest in the Assets, and, if so, the
initial owner thereof. If so, the Retained Interest will be established on a
loan-by-loan basis and will be specified on an exhibit to the applicable
Agreement. A "RETAINED INTEREST" in an Asset represents a specified portion of
the interest payable thereon. The Retained Interest will be deducted from
mortgagor payments as received and will not be part of the related Trust Fund.
The Servicer's primary servicing compensation with respect to a Series
of Securities will come from the periodic payment to it of a portion of the
interest payment on each Asset or such other amount specified in the related
prospectus supplement. Since any Retained Interest and a Servicer's primary
compensation are percentages of the principal balance of each Asset, such
amounts will decrease in accordance with the amortization of the Assets. The
Servicing Fee or range of Servicing Fees relating to the Assets underlying the
Securities of a Series will be specified in an expense table in the applicable
prospectus supplement. The prospectus supplement with respect to a Series of
Securities evidencing interests in a Trust Fund that includes Mortgage Loans or
Contracts may provide that, as additional compensation, the Servicer may retain
all or a portion of assumption fees, modification fees, late payment charges or
Prepayment Charges collected from mortgagors and any interest or other income
which may be earned on funds held in the Collection Account or any account
established by a Servicer pursuant to the applicable Agreement.
The Servicer may, to the extent provided in the related prospectus
supplement, pay from its servicing compensation certain expenses incurred in
connection with its servicing and managing of the Assets, including, without
limitation, payment of the fees and disbursements of the Trustee and independent
accountants, payment of expenses incurred in connection with distributions and
reports to Securityholders, and payment of any other expenses described in the
related prospectus supplement. Certain other expenses, including certain
expenses relating to defaults and liquidations on the Assets and, to the extent
so provided in the related prospectus supplement, interest thereon at the rate
specified therein may be borne by the Trust Fund.
If and to the extent provided in the related prospectus supplement, the
Servicer may be required to apply a portion of the servicing compensation
otherwise payable to it in respect of any Collection Period to certain interest
shortfalls resulting from the voluntary prepayment of any Assets in the related
Trust Fund during such period prior to their respective due dates therein.
Evidence as to Compliance
Each Servicer and Master Servicer will deliver annually to the Trustee
or Master Servicer, as applicable, on or before the date specified in the
applicable Agreement, an officer's certificate stating that (i) a review of the
Servicer's or Master Servicer's activities during the preceding calendar year
and of performance under the applicable Agreement has been made under the
supervision of the officer, and (ii) to the best of the officer's knowledge,
based on the review, the Servicer or Master Servicer has fulfilled all its
obligations under the applicable Agreement throughout the year, or, if there has
been a default in the fulfillment of any obligation, specifying the default
known to the officer and the nature and status of the default.
In addition, each party that participates in the servicing and
administration of more than 5% of the Assets comprising a Trust will deliver
annually to the Depositor and the Trustee, a report (an "ASSESSMENT OF
COMPLIANCE") that assesses compliance by that party with the servicing criteria
set forth in Item 1122(d) of Regulation AB (17 CFR 229.1122) and that contains
the following:
o a statement of the party's responsibility for assessing
compliance with the servicing criteria applicable to it;
o a statement that the party used the criteria in Item 1122(d) of
Regulation AB to assess compliance with the applicable servicing
criteria;
58
o the party's assessment of compliance with the applicable
servicing criteria during and as of the end of the prior calendar
year, setting forth any material instance of noncompliance
identified by the party; and
o a statement that a registered public accounting firm has issued
an Attestation Report on the party's Assessment of Compliance
with the applicable servicing criteria during and as of the end
of the prior calendar year.
Each party which is required to deliver an Assessment of Compliance
will also be required to simultaneously deliver a report (an "ATTESTATION
REPORT") of a registered public accounting firm, prepared in accordance with the
standards for attestation engagements issued or adopted by the Public Company
Accounting Oversight Board, that expresses an opinion, or states that an opinion
cannot be expressed, concerning the party's assessment of compliance with the
applicable servicing criteria.
Certain Matters Regarding Servicers and the Master Servicer
The Servicers and Master Servicer under each Agreement will be named in
the related prospectus supplement. The entities serving as Servicer or Master
Servicer may be affiliates of the Depositor and may have other normal business
relationships with the Depositor or the Depositor's affiliates. Reference herein
to the Servicer shall be deemed to be to the Master Servicer, if applicable.
The applicable Agreement will provide that the Servicer may resign from
its obligations and duties thereunder only (i) upon a determination that its
duties under such Agreement are no longer permissible under applicable law or
are in material conflict by reason of applicable law with any other activities
carried on by it, the other activities of the Servicer so causing such a
conflict being of a type and nature carried on by the Servicer at the date of
such Agreement or (ii) upon satisfaction of the following conditions: (a) the
Servicer has proposed a successor servicer to the Trustee in writing and such
proposed successor servicer is reasonably acceptable to the Trustee; and (b)
each Rating Agency shall have delivered a letter to the Trustee, prior to the
appointment of the successor servicer, stating that the proposed appointment of
such successor servicer as Servicer will not result in a reduction of the
then-current ratings of the Securities. No such resignation will become
effective until the Trustee or a successor servicer has assumed the Servicer's
obligations and duties under the applicable Agreement.
Each Agreement will further provide that neither any Servicer nor any
director, officer, employee, or agent of a Servicer will be under any liability
to the related Trust Fund or Securityholders for any action taken, or for
refraining from the taking of any action, in good faith pursuant to the
applicable Agreement; provided, however, that neither of any Servicer nor any
such person will be protected against any breach of a representation, warranty
or covenant made in such Agreement, or against any liability specifically
imposed thereby, or against any liability which would otherwise be imposed by
reason of willful misfeasance, bad faith or negligence in the performance of
obligations or duties thereunder or by reason of reckless disregard of
obligations and duties thereunder. In addition, each Agreement will provide that
no Servicer will be under any obligation to appear in, prosecute or defend any
legal action which is not incidental to its responsibilities under the
applicable Agreement and which in its opinion may involve it in any expense or
liability. Any such Servicer may, however, in its discretion undertake any such
action which it may deem necessary or desirable with respect to the applicable
Agreement and the rights and duties of the parties thereto and the interests of
the Securityholders thereunder. In such event, the legal expenses and costs of
such action and any liability resulting therefrom will be expenses, costs and
liabilities of the Securityholders, and such Servicer will be entitled to be
reimbursed therefor from the Collection Account.
Any person into which the Servicer or the Depositor may be merged or
consolidated, or any person resulting from any merger or consolidation to which
the Servicer or the Depositor is a party, or any person succeeding to the
business of the Servicer or the Depositor, will be the successor of the Servicer
or the Depositor, as the case may be, under the applicable Agreement.
Special Servicers
If and to the extent specified in the related prospectus supplement, a
special servicer (a "SPECIAL SERVICER") may be a party to the applicable
Agreement or may be appointed by the Servicer or another specified party to
59
perform certain specified duties in respect of servicing the related Mortgage
Loans that would otherwise be performed by the Servicer (for example, the
workout and/or foreclosure of defaulted Mortgage Loans). The rights and
obligations of any Special Servicer will be specified in the related Agreement.
The Servicer will be liable for the performance of a Special Servicer only if,
and to the extent, set forth in such Agreement. Each Special Servicer will be
required to deliver, to the extent applicable, the documents described under
"--Evidence as to Compliance."
Events of Default under the Agreements
Events of default under the applicable Agreement will generally include
(i) any failure by the Servicer to remit to the Trustee for distribution to
Securityholders, any required payment that continues after a grace period, if
any; (ii) any failure by the Servicer duly to observe or perform in any material
respect any of its other covenants or obligations under the applicable Agreement
which continues unremedied for 30 days after written notice of such failure has
been given to the Servicer by the Trustee or the Depositor, or to the Servicer,
the Depositor and the Trustee by Securityholders evidencing not less than 25% of
the Voting Rights; (iii) any breach of a representation or warranty made by the
Servicer under the applicable Agreement which materially and adversely affects
the interests of Securityholders and which continues unremedied for 30 days
after written notice of such breach has been given to the Servicer by the
Trustee or the Depositor, or to the Servicer, the Depositor and the Trustee by
the holders of Securities evidencing not less than 25% of the Voting Rights;
(iv) certain events of insolvency, readjustment of debt, marshaling of assets
and liabilities or similar proceedings and certain actions by or on behalf of
the Servicer indicating its insolvency or inability to pay its obligations; and
(v) if specified in the applicable prospectus supplement, a delinquency
percentage exceeding a percentage specified in the related prospectus
supplement. Material variations to the foregoing events of default (other than
to shorten cure periods or eliminate notice requirements) will be specified in
the related prospectus supplement..
The manner of determining the "VOTING RIGHTS" of a Security or Class or
Classes of Securities will be specified in the related prospectus supplement.
Rights Upon Event of Default under the Agreements
So long as an event of default under an Agreement remains unremedied,
the Depositor or the Trustee may, and at the direction of holders of Securities
generally evidencing not less than 51% of the Voting Rights, the Trustee shall
terminate all of the rights and obligations of the Servicer under the applicable
Agreement and in and to the Mortgage Loans (other than as a Securityholder or as
the owner of any Retained Interest), whereupon the Trustee will succeed to all
of the responsibilities, duties and liabilities of the Servicer under the
applicable Agreement (except that if the Trustee is prohibited by law from
obligating itself to make advances regarding delinquent Assets, or if the
related prospectus supplement so specifies, then the Trustee will not be
obligated to make such advances) and will be entitled to similar compensation
arrangements. In the event that the Trustee is unwilling or unable so to act, it
may or, at the written request of the holders of Securities generally entitled
to at least 51% of the Voting Rights, it shall appoint, or petition a court of
competent jurisdiction for the appointment of, a loan servicing institution
acceptable to the Rating Agency with a net worth at the time of such appointment
of at least $15,000,000 (or such other amount specified in the related
prospectus supplement) to act as successor to the Servicer under the applicable
Agreement. Pending such appointment, the Trustee is obligated to act in such
capacity. The Trustee and any such successor may agree upon the servicing
compensation to be paid, which in no event may be greater than the compensation
payable to the Servicer under the applicable Agreement.
The Trustee or a successor servicer is entitled to be reimbursed for
its costs in effecting a servicing transfer from the predecessor servicer. In
the event that the predecessor servicer fails to reimburse the Trustee or
successor servicer, the Trustee or successor servicer will be entitled to
reimbursement from the assets of the related Trust.
The holders of Securities representing generally at least 66 2/3% of
the Voting Rights allocated to the respective Classes of Securities affected by
any event of default will be entitled to waive such event of default; provided,
however, that an Event of Default involving a failure to distribute a required
payment to Securityholders described in clause (i) under "--Events of Default
under the Agreements" may be waived only by all of the Securityholders. Upon any
such waiver of an event of default, such event of default shall cease to exist
and shall be deemed to have been remedied for every purpose under the applicable
Agreement.
60
No Securityholders will have the right under any Agreement to institute
any proceeding with respect thereto unless such holder previously has given to
the Trustee written notice of default and unless the holders of Securities
generally evidencing not less than 25% of the Voting Rights have made written
request upon the Trustee to institute such proceeding in its own name as Trustee
thereunder and have offered to the Trustee reasonable indemnity, and the Trustee
for 60 days has neglected or refused to institute any such proceeding. The
Trustee, however, is under no obligation to exercise any of the trusts or powers
vested in it by any Agreement or to make any investigation of matters arising
thereunder or to institute, conduct or defend any litigation thereunder or in
relation thereto at the request, order or direction of any of the
Securityholders covered by such Agreement, unless such Securityholders have
offered to the Trustee reasonable security or indemnity against the costs,
expenses and liabilities which may be incurred therein or thereby.
Amendment
Each Agreement may be amended by the parties thereto, without the
consent of any Securityholders covered by the applicable Agreement, (i) to cure
any ambiguity or mistake, (ii) to correct, modify or supplement any provision
therein which may be inconsistent with any other provision therein or with the
related prospectus supplement, (iii) to make any other provisions with respect
to matters or questions arising under the applicable Agreement which are not
materially inconsistent with the provisions thereof, or (iv) to comply with any
requirements imposed by the Code; provided that, in the case of clause (iii),
such amendment will not adversely affect in any material respect the interests
of any Securityholders covered by the applicable Agreement as evidenced either
by an opinion of counsel to such effect or the delivery to the Trustee of
written notification from each Rating Agency that provides, at the request of
the Depositor, a rating for the Offered Securities of the related Series to the
effect that such amendment or supplement will not cause such Rating Agency to
lower or withdraw the then current rating assigned to such Securities. Each
Agreement may also be amended by the Depositor, the Servicer and the Trustee,
with the consent of the Securityholders affected thereby generally evidencing
not less than 51% of the Voting Rights, for any purpose; provided, however, no
such amendment may (i) reduce in any manner the amount of, or delay the timing
of, payments received or advanced on Assets which are required to be distributed
on any Security without the consent of the Securityholder or (ii) reduce the
consent percentages described in this paragraph without the consent of all the
Securityholders covered by such Agreement then outstanding. However, with
respect to any Series of Securities as to which a REMIC election is to be made,
the Trustee will not consent to any amendment of the applicable Agreement unless
it shall first have received an opinion of counsel to the effect that such
amendment will not result in the imposition of a tax on the related Trust Fund
or cause the related Trust Fund to fail to qualify as a REMIC at any time that
the related Securities are outstanding.
The Trustee
The Trustee under each Agreement will be named in the related
prospectus supplement. The commercial bank, national banking association,
banking corporation or trust company serving as Trustee may have a banking
relationship with the Depositor and its affiliates, with any Servicer and its
affiliates and with any Master Servicer and its affiliates. With respect to
certain Series of Securities, a securities administrator will perform certain
duties and functions normally performed by the Trustee. Any securities
administrator will be a party to the applicable Agreement and will be named in
the applicable prospectus supplement. Any securities administrator will have
obligations and rights similar to the Trustee as described in this Prospectus.
Duties of the Trustee
The Trustee will make no representations as to the validity or
sufficiency of any Agreement, the Securities or any Asset or related document
and is not accountable for the use or application by or on behalf of any
Servicer of any funds paid to the Master Servicer or its designee in respect of
the Securities or the Assets, or deposited into or withdrawn from the Collection
Account or any other account by or on behalf of the Servicer. If no Event of
Default has occurred and is continuing, the Trustee is required to perform only
those duties specifically required under the applicable Agreement. However, upon
receipt of the various certificates, reports or other instruments required to be
furnished to it, the Trustee is required to examine such documents and to
determine whether they conform to the requirements of the applicable Agreement.
61
Certain Matters Regarding the Trustee
The Trustee and any director, officer, employee or agent of the Trustee
shall be reimbursed by the Trust Fund for all reasonable expenses, disbursements
and advances incurred or made by the Trustee in accordance with any of the
provisions of the applicable Agreement (including the reasonable compensation
and the expenses and disbursements of its counsel and of all persons not
regularly in its employ) except any such expense, disbursement or advance as may
arise from its negligence or bad faith or which is the responsibility of
Securityholders or the Trustee under the Agreement. In addition, the Trustee and
its officers, directors, employees and agents shall be indemnified by the Trust
Fund from, and held harmless against, any and all losses, liabilities, damages,
claims or expenses incurred in connection with any legal action relating to the
applicable Agreement or the Securities, other than any loss, liability or
expense incurred by reason of willful misfeasance, bad faith or negligence of
the Trustee in the performance of its duties thereunder or by reason of the
Trustee's reckless disregard of obligations and duties thereunder.
Resignation and Removal of the Trustee
The Trustee may at any time resign from its obligations and duties
under an Agreement by giving written notice thereof to the Depositor, the
Servicer and all Securityholders. Upon receiving such notice of resignation, the
Depositor is required promptly to appoint a successor trustee acceptable to the
Servicer. If no successor trustee shall have been so appointed and have accepted
appointment within 30 days after the giving of such notice of resignation, the
resigning Trustee may petition any court of competent jurisdiction for the
appointment of a successor trustee.
If at any time the Trustee shall cease to be eligible to continue as
such under the applicable Agreement, or if at any time the Trustee shall become
incapable of acting, or shall be adjudged bankrupt or insolvent, or a receiver
of the Trustee or of its property shall be appointed, or any public officer
shall take charge or control of the Trustee or of its property or affairs for
the purpose of rehabilitation, conservation or liquidation, or if a change in
the financial condition of the Trustee has adversely affected or will adversely
affect the rating on any Class of the Securities, then the Depositor may remove
the Trustee and appoint a successor trustee acceptable to the Servicer.
Securityholders of any Series generally entitled to at least 51% of the Voting
Rights for such Series may at any time remove the Trustee without cause and
appoint a successor trustee.
Any costs associated with the appointment of a successor trustee are
required to be paid by the predecessor Trustee and, if not paid, will be
reimbursed to the person incurring such costs from the assets of the related
Trust Fund. Notwithstanding the foregoing, if the predecessor Trustee has been
removed by a vote of the holders of the Securities as provided in the paragraph
above, any costs associated with the appointment of a successor trustee will be
reimbursed to the party incurring such costs from the assets of the related
Trust Fund.
Any resignation or removal of the Trustee and appointment of a
successor trustee shall not become effective until acceptance of appointment by
the successor trustee.
MATERIAL TERMS OF THE INDENTURE
General
The following summary describes the material provisions that may appear
in each Indenture. The prospectus supplement for a Series of Notes will describe
the specific provisions of the Indenture relating to such Series. The provisions
of each Indenture will vary depending upon the nature of the Securities to be
issued thereunder and the nature of the related Trust Fund. A form of an
Indenture has been filed as an exhibit to the Registration Statement of which
this prospectus is a part.
Events of Default
Events of default under the Indenture for each Series of Notes will
generally include: (i) a default for thirty (30) days or more in the payment of
any principal of or interest on any Note of such Series; (ii) failure to perform
any other covenant of the Trust in the Indenture which continues for a period of
sixty (60) days after notice thereof
62
is given in accordance with the procedures described in the related prospectus
supplement; (iii) any representation or warranty made by the Trust in the
Indenture or in any certificate or other writing delivered pursuant thereto or
in connection therewith with respect to or affecting such Series having been
incorrect in a material respect as of the time made, and such breach is not
cured within sixty (60) days after notice thereof is given in accordance with
the procedures described in the related prospectus supplement; (iv) certain
events of bankruptcy, insolvency, receivership or liquidation of the Depositor
or the Trust; or (v) any other event of default provided with respect to Notes
of that Series.
If an event of default with respect to the Notes of any Series at the
time outstanding occurs and is continuing, either the Indenture Trustee or the
Securityholders of a majority of the then aggregate outstanding amount of the
Notes of such Series may declare the principal amount (or, if the Notes of that
Series are Accrual Securities, such portion of the principal amount as may be
specified in the terms of that Series, as provided in the related prospectus
supplement) of all the Notes of such Series to be due and payable immediately.
Such declaration may, under certain circumstances, be rescinded and annulled by
the Securityholders of a majority in aggregate outstanding amount of the Notes
of such Series.
If, following an event of default with respect to any Series of Notes,
the Notes of such Series have been declared to be due and payable, the Indenture
Trustee may, in its discretion, notwithstanding such acceleration, elect to
maintain possession of the collateral securing the Notes of such Series and to
continue to apply distributions on such collateral as if there had been no
declaration of acceleration if such collateral continues to provide sufficient
funds for the payment of principal of and interest on the Notes of such Series
as they would have become due if there had not been such a declaration. In
addition, the Indenture Trustee may not sell or otherwise liquidate the
collateral securing the Notes of a Series following an event of default, other
than a default in the payment of any principal or interest on any Note of such
Series for thirty (30) days or more, unless (a) the Securityholders of 100% of
the then aggregate outstanding amount of the Notes of such Series consent to
such sale, (b) the proceeds of such sale or liquidation are sufficient to pay in
full the principal of and accrued interest, due and unpaid, on the outstanding
Notes of such Series at the date of such sale or (c) the Indenture Trustee
determines that such collateral would not be sufficient on an ongoing basis to
make all payments on such Notes as such payments would have become due if such
Notes had not been declared due and payable, and the Indenture Trustee obtains
the consent of the Securityholders of 66 2/3% of the then aggregate outstanding
amount of the Notes of such Series.
In the event that the Indenture Trustee liquidates the collateral in
connection with an event of default involving a default for thirty (30) days or
more in the payment of principal of or interest on the Notes of a Series, the
Indenture provides that the Indenture Trustee will have a prior lien on the
proceeds of any such liquidation for unpaid fees and expenses. As a result, upon
the occurrence of such an event of default, the amount available for
distribution to the Securityholders would be less than would otherwise be the
case. However, the Indenture Trustee may not institute a proceeding for the
enforcement of its lien except in connection with a proceeding for the
enforcement of the lien of the Indenture for the benefit of the Securityholders
after the occurrence of such an event of default.
To the extent provided in the related prospectus supplement, in the
event the principal of the Notes of a Series is declared due and payable, as
described above, the Securityholders of any such Notes issued at a discount from
par may be entitled to receive no more than an amount equal to the unpaid
principal amount thereof less the amount of such discount which is unamortized.
Subject to the provisions of the Indenture relating to the duties of
the Indenture Trustee, in case an event of default shall occur and be continuing
with respect to a Series of Notes, the Indenture Trustee shall be under no
obligation to exercise any of the rights or powers under the Indenture at the
request or direction of any of the Securityholders of such Series, unless such
holders offered to the Indenture Trustee security or indemnity satisfactory to
it against the costs, expenses and liabilities which might be incurred by it in
complying with such request or direction. Subject to such provisions for
indemnification and certain limitations contained in the Indenture, the
Securityholders of a majority of the then aggregate outstanding amount of the
Notes of such Series shall have the right to direct the time, method and place
of conducting any proceeding for any remedy available to the Indenture Trustee
or exercising any trust or power conferred on the Indenture Trustee with respect
to the Notes of such Series, and the Securityholders of a majority of the then
aggregate outstanding amount of the Notes of such Series may, in certain cases,
waive any default with respect thereto, except a default in the payment of
principal or
63
interest or a default in respect of a covenant or provision of the Indenture
that cannot be modified without the waiver or consent of all the Securityholders
of the outstanding Notes of such Series affected thereby.
Discharge of Indenture
The Indenture will be discharged with respect to a Series of Notes
(except with respect to certain continuing rights specified in the Indenture)
upon the delivery to the Indenture Trustee for cancellation of all the Notes of
such Series or, with certain limitations, upon deposit with the Indenture
Trustee of funds sufficient for the payment in full of all of the Notes of such
Series.
In addition to such discharge with certain limitations, the Indenture
will provide that, if so specified with respect to the Notes of any Series, the
related Trust Fund will be discharged from any and all obligations in respect of
the Notes of such Series (except for certain obligations relating to temporary
Notes and exchange of Notes, to register the transfer of or exchange Notes of
such Series, to replace stolen, lost or mutilated Notes of such Series, to
maintain paying agencies and to hold monies for payment in trust) upon the
deposit with the Indenture Trustee, in trust, of money and/or direct obligations
of or obligations guaranteed by the United States of America which through the
payment of interest and principal in respect thereof in accordance with their
terms will provide money in an amount sufficient to pay the principal of and
each installment of interest on the Notes of such Series on the maturity date
for such Notes and any installment of interest on such Notes in accordance with
the terms of the Indenture and the Notes of such Series. In the event of any
such defeasance and discharge of Notes of such Series, holders of Notes of such
Series would be able to look only to such money and/or direct obligations for
payment of principal and interest, if any, on their Notes until maturity.
Indenture Trustee's Annual Report
The Indenture Trustee for each Series of Notes will be required to mail
each year to all related Securityholders a brief report relating to its
eligibility and qualification to continue as Indenture Trustee under the related
Indenture, any amounts advanced by it under the Indenture, the amount, interest
rate and maturity date of certain indebtedness owing by such Trust to the
applicable Indenture Trustee in its individual capacity, the property and funds
physically held by such Indenture Trustee as such and any action taken by it
that materially affects such Notes and that has not been previously reported.
The Indenture Trustee
The Indenture Trustee for a Series of Notes will be specified in the
related prospectus supplement. The Indenture Trustee for any Series may resign
at any time, in which event the Depositor will be obligated to appoint a
successor trustee for such Series. The Depositor may also remove any such
Indenture Trustee if such Indenture Trustee ceases to be eligible to continue as
such under the related Indenture or if such Indenture Trustee becomes insolvent.
In such circumstances the Depositor will be obligated to appoint a successor
trustee for the applicable Series of Notes. Any resignation or removal of the
Indenture Trustee and appointment of a successor trustee for any Series of Notes
does not become effective until acceptance of the appointment by the successor
trustee for such Series.
The bank or trust company serving as Indenture Trustee may have a
banking relationship with the Depositor or any of its affiliates, a Servicer or
any of its affiliates or the Master Servicer or any of its affiliates.
DESCRIPTION OF CREDIT SUPPORT
Credit enhancement may be provided with respect to any Series of
Securities only in one or more of the methods described below. The applicable
prospectus supplement will describe the material terms of such credit
enhancement, including any limits on the timing or amount of such credit
enhancement or any conditions that must be met before such credit enhancement
may be accessed. If the provider of the credit enhancement is liable or
contingently liable to provide payments representing 10% or more of the cash
flow supporting any offered Class of Securities, the applicable prospectus
supplement will disclose the name of the provider, the organizational form of
the provider, the general character of the business of the provider and the
financial information required by Item
64
1114(b)(2) of Regulation AB (17 CFR 229.1114). Copies of the limited guarantee,
financial guaranty insurance policy, surety bond, letter of credit, pool
insurance policy, mortgagor bankruptcy bond, special hazard insurance policy or
Cash Flow Agreement, if any, relating to a Series of Securities will be filed
with the Commission as an exhibit to a Current Report on Form 8-K.
SUBORDINATION
If provided in the applicable prospectus supplement, one or more
Classes of Senior Securities will be entitled to receive all or a
disproportionate percentage of the payments of principal that are received from
borrowers in advance of their scheduled due dates and are not accompanied by
amounts representing scheduled interest due after the months of those payments
or of other unscheduled principal receipts or recoveries in the percentages and
under the circumstances or for the periods specified in the applicable
prospectus supplement. This type of allocation of principal prepayments or other
unscheduled receipts or recoveries relating to principal to this Class or these
Classes of Senior Securities will have the effect of accelerating the
amortization of these Senior Securities while increasing the interests evidenced
by the Subordinated Securities in the 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.
If specified in the applicable prospectus supplement, the rights of the
holders of the Subordinated Securities of a Series of Securities for which
credit enhancement is provided through subordination to receive distributions
with respect to the Assets in the related Trust Fund will be subordinated to the
rights of the holders of the Senior Securities of the same Series. This
subordination is intended to enhance the likelihood of regular receipt by
holders of Senior Securities of the full amount of scheduled monthly payments of
principal and interest due them and to provide limited protection to the holders
of the Senior Securities against losses due to obligor defaults.
The protection afforded to the holders of Senior Securities of a Series
of Securities for which credit enhancement is provided by the subordination
feature described above will be effected by (i) the preferential right of these
holders to receive, prior to any distribution being made to the related
Subordinated Securities on each Distribution Date, current distributions on the
related Assets of principal and interest due them on each Distribution Date out
of the funds available for distribution on that date in the related Distribution
Account, (ii) by the right of these holders to receive future distributions on
the Assets that would otherwise have been payable to the holders of Subordinated
Securities and/or (iii) by the prior allocation to the Subordinated Securities
of all or a portion of losses realized on the related Assets.
Losses realized on liquidated Assets (other than, if specified in the
applicable prospectus supplement, Excess Special Hazard Losses, Excess Fraud
Losses and Excess Bankruptcy Losses as described below) will be allocated to the
holders of Subordinated Securities through a reduction of the amount of
principal payments on the Assets to which these holders are entitled before any
corresponding reduction is made in respect of the Senior Security.
A "SPECIAL HAZARD LOSS" is a loss on a liquidated Asset occurring as a
result of a hazard not insured against under a standard hazard insurance policy
of the type described below under "Description of the Agreements--Material Terms
of the Pooling and Servicing Agreements and Underlying Servicing
Agreements--Hazard Insurance Policies." A "FRAUD LOSS" is a loss on a liquidated
Asset due to fraud in the origination of that Asset. A "BANKRUPTCY LOSS" is a
loss on a liquidated Asset attributable to certain actions which may be taken by
a bankruptcy court in connection with a Asset, including a reduction by a
bankruptcy court of the principal balance of or the interest rate on an Asset or
an extension of its maturity. Special Hazard Losses in excess of the amount
specified in the applicable prospectus supplement (the "SPECIAL HAZARD LOSS
AMOUNT"), if any, are "EXCESS SPECIAL HAZARD LOSSES." Fraud Losses in excess of
the amount specified in the applicable prospectus supplement (the "FRAUD LOSS
AMOUNT"), if any, are "EXCESS FRAUD LOSSES." Bankruptcy Losses in excess of the
amount specified in the applicable prospectus supplement (the "BANKRUPTCY LOSS
AMOUNT"), if any, are "EXCESS BANKRUPTCY LOSSES." Any Excess Special Hazard
Losses, Excess Fraud Losses or Excess Bankruptcy Losses for a Series will be
allocated on a pro rata basis among the related Classes of Senior and
Subordinated Securities. An allocation of a loss on a "pro rata" basis among two
or more Classes of Securities means an allocation on a pro rata basis to each of
those Classes of Securities on the basis of their then-outstanding Security
Balances in the case of the principal portion of a loss or based on accrued
interest in the case of an interest portion of a loss.
65
Since the Special Hazard Loss Amount, Fraud Loss Amount and Bankruptcy
Loss Amount, if any, for a Series of Securities are each expected to be less
than the amount of principal payments on the Assets to which the holders of the
Subordinated Securities of the Series are initially entitled (the amount of
principal payments being subject to reduction, as described above, as a result
of allocation of losses on liquidated Assets that are not Special Hazard Losses,
Fraud Losses or Bankruptcy Losses), the holders of Subordinated Securities of
that Series will bear the risk of Special Hazard Losses, Fraud Losses and
Bankruptcy Losses to a lesser extent than they will bear other losses on
liquidated Assets.
Although the subordination feature described above is intended to
enhance the likelihood of timely payment of principal and interest to the
holders of Senior Securities, shortfalls could result in certain circumstances.
For example, a shortfall in the payment of principal otherwise due the holders
of Senior Securities could occur if losses realized on the Assets in a Trust
Fund were exceptionally high and were concentrated in a particular month.
The holders of Subordinated Securities will not be required to refund
any amounts previously properly distributed to them, regardless of whether there
are sufficient funds on a subsequent Distribution Date to make a full
distribution to holders of each Class of Senior Securities of the same Series.
LIMITED GUARANTEE
If specified in the prospectus supplement for a Series of Securities,
credit enhancement may be provided in the form of a limited guarantee issued by
a guarantor named in that prospectus supplement. The limited guarantee may cover
deficiencies in amounts otherwise payable on some or all of the Securities of a
Series. The limited guarantee may cover timely distributions of interest or full
distributions of principal or both on the basis of a schedule of principal
distributions set forth in or determined in the manner specified in the related
prospectus supplement. The limited guarantee may provide additional protection
against losses on the Assets included in a Trust Fund, provide payment of
administrative expenses, or establish a minimum reinvestment rate on the
payments made on the Assets or principal payment rate on the Assets. A limited
guarantee will be limited in amount to the dollar amount or percentage of the
principal balance of the Assets or Securities specified in the applicable
prospectus supplement.
FINANCIAL GUARANTY INSURANCE POLICY OR SURETY BOND
If specified in the prospectus supplement for a Series of Securities,
credit enhancement may be provided in the form of a financial guaranty insurance
policy or a surety bond issued by one or more insurers named in that prospectus
supplement. The financial guaranty insurance policy will guarantee, with respect
to one or more Classes of Securities of the related Series, timely distributions
of interest and ultimate distributions of principal at the dates set forth in or
determined in the manner specified in the prospectus supplement. If specified in
the prospectus supplement, the financial guaranty insurance policy will also
guarantee against any payment made to a Securityholder that is subsequently
recovered as a preferential transfer under the Bankruptcy Code.
LETTER OF CREDIT
If specified in the prospectus supplement for a Series of Securities,
credit enhancement may be provided by a letter of credit issued by a bank or
other financial institution specified in the applicable prospectus supplement.
Under the letter of credit, the provider will be obligated to pay up to an
aggregate fixed dollar amount, net of previous drawings on the letter, equal to
the percentage specified in the prospectus supplement of the unpaid principal
balance of the Assets or of one or more Classes of Securities. If specified in
the prospectus supplement, the letter of credit may permit drawings in the event
of losses not covered by insurance policies or other credit support, such as
losses arising from damage not covered by standard hazard insurance policies,
losses resulting from the bankruptcy of a borrower and the application of
certain provisions of the Bankruptcy Code, or losses resulting from denial of
insurance coverage due to misrepresentations in connection with the origination
of an Asset. The amount available under the letter of credit will, in all cases,
be reduced to the extent of the unreimbursed payments previously paid. The
obligations of the provider under the letter of credit for each Series of
Securities will expire at the earlier of the date specified in the prospectus
supplement or the termination of the Trust.
66
POOL INSURANCE POLICY
If specified in the prospectus supplement relating to a Series of
Securities, credit enhancement may be provided by a mortgage pool insurance
policy for the Mortgage Loans in the related Trust Fund. Each mortgage pool
insurance policy, in accordance with the limitations described in this
prospectus and in the prospectus supplement, if any, will cover all or a portion
of any loss by reason of default on a Mortgage Loan in an amount equal to a
percentage specified in the applicable prospectus supplement of the unpaid
principal balance of the Mortgage Loans. As described under "Material Terms of
the Pooling and Servicing Agreements and Underlying Servicing
Agreements--Due-on-Sale Provisions," the Servicer or the Master Servicer, as the
case may be, generally will be required to use its best efforts to maintain the
mortgage pool insurance policy and to present claims to the pool insurer. The
mortgage pool insurance policies, however, are not blanket policies against
loss, since claims may only be made respecting particular defaulted Mortgage
Loans and only upon satisfaction of specified conditions precedent described
below. The mortgage pool insurance policies will generally not cover losses due
to a failure to pay or denial of a claim under a primary mortgage insurance
policy, regardless of the reason for nonpayment.
As more specifically provided in the related prospectus supplement,
each mortgage pool insurance policy will provide for conditions under which
claims may be presented and covered under the policy. Upon satisfaction of these
conditions, the pool insurer will have the option either (a) to purchase the
property securing the defaulted Mortgage Loan at a price equal to its unpaid
principal balance plus accrued and unpaid interest at the applicable Mortgage
Interest Rate to the date of purchase plus certain Advances, or (b) to pay the
amount by which the sum of the unpaid principal balance of the defaulted
Mortgage Loan plus accrued and unpaid interest at the Mortgage Interest Rate to
the date of payment of the claim plus certain Advances exceeds the proceeds
received from an approved sale of the Mortgaged Property, in either case net of
certain amounts paid or assumed to have been paid under any related primary
mortgage insurance policy.
Securityholders may experience a shortfall in the amount of interest
payable on the related Securities in connection with the payment of claims under
a mortgage pool insurance policy because the pool insurer is only required to
remit unpaid interest through the date a claim is paid rather than through the
end of the month in which the claim is paid. In addition, Securityholders may
also experience losses with respect to the related Securities in connection with
payments made under a mortgage pool insurance policy to the extent that the
related Servicer expends funds to cover unpaid real estate taxes or to repair
the related Mortgaged Property in order to make a claim under a mortgage pool
insurance policy, as those amounts will not be covered by payments under the
policy and will be reimbursable to the related Servicer from funds otherwise
payable to the Securityholders. If any Mortgaged Property securing a defaulted
Mortgage Loan is damaged and proceeds, if any from the related hazard insurance
policy or applicable special hazard insurance policy are insufficient to restore
the damaged property to a condition sufficient to permit recovery under the
mortgage pool insurance policy, a Servicer will generally not be required to
expend its own funds to restore the damaged property unless it determines that
(a) restoration will increase the proceeds to one or more Classes of Securities
on liquidation of the Mortgage Loan after reimbursement of the related Servicer
for its expenses and (b) the expenses will be recoverable by it through
Liquidation Proceeds or insurance proceeds.
A mortgage pool insurance policy and some primary mortgage insurance
policies will generally not insure against loss sustained by reason of a default
arising from, among other things, fraud or negligence in the origination or
servicing of a Mortgage Loan, including misrepresentation by the mortgagor, the
seller or other persons involved in the origination of the Mortgage Loan,
failure to construct a mortgaged property in accordance with plans and
specifications or bankruptcy, unless as specified in the related prospectus
supplement, an endorsement to the mortgage pool insurance policy provides for
insurance against that type of loss.
The original amount of coverage under each mortgage pool insurance
policy will be reduced over the life of the related Series of Securities by the
aggregate 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 includes some expenses incurred by the related Servicer or Master
Servicer as well as accrued interest on delinquent Mortgage Loans to the date of
payment of the claim. Accordingly, if aggregate net claims paid under any
mortgage pool insurance policy reach the original policy limit, coverage under
that mortgage pool insurance policy will be exhausted and any further losses
will be borne by the related Securities, to the extent not covered by other
credit enhancements.
67
SPECIAL HAZARD INSURANCE POLICY
Any insurance policy covering Special Hazard Losses obtained for a
Trust will be issued by the insurer named in the related prospectus supplement.
Each special hazard insurance policy will be subject to limitations described in
this paragraph and in the related prospectus supplement, if any, and will
protect the related Securityholders from Special Hazard Losses. Aggregate claims
under a special hazard insurance policy will be limited to the amount set forth
in the related Pooling and Servicing Agreement or Indenture and will be subject
to reduction as described in the related Pooling and Servicing Agreement or
Indenture. A special hazard insurance policy will provide that no claim may be
paid unless hazard and, if applicable, flood insurance on the Mortgaged Property
securing the Mortgage Loan or Manufactured Home securing the Contract has been
kept in force and other protection and preservation expenses have been paid by
the related Servicer or Master Servicer, as the case may be.
In accordance with the foregoing limitations, a special hazard
insurance policy will provide that, where there has been damage to the Mortgaged
Property securing a foreclosed Mortgage Loan or Manufactured Home securing a
foreclosed Contract, title to which has been acquired by the insured, and to the
extent the damage is not covered by the hazard insurance policy or flood
insurance policy, if any, maintained by the obligor or the related Servicer or
Master Servicer, as the case may be, the insurer will pay the lesser of (i) the
cost of repair or replacement of the related Mortgaged Property or Manufactured
Home or (ii) upon transfer of the property to the insurer, the unpaid principal
balance of the Mortgage Loan or Contract Rate at the time of acquisition of the
related property by foreclosure or deed in lieu of foreclosure, plus accrued
interest at the Mortgage Interest Rate or Contract Rate to the date of claim
settlement and certain expenses incurred by the related Servicer or Master
Servicer, as the case may be, with respect to the related Mortgaged Property or
Manufactured Home.
If the Mortgaged Property or Manufactured Home is transferred to a
third party in a sale approved by the special hazard insurer, the amount that
the special hazard insurer will pay will be the amount under (ii) above reduced
by the net proceeds of the sale of the Mortgaged Property or Manufactured Home.
If the unpaid principal balance plus accrued interest and certain Advances is
paid by the special hazard insurer, the amount of further coverage under the
related special hazard insurance policy will be reduced by that amount less any
net proceeds from the sale of the Mortgaged Property or Manufactured Home. Any
amount paid as the cost of repair of the property will further reduce coverage
by that amount. Restoration of the property with the proceeds described under
(i) above will satisfy the condition under any mortgage pool insurance policy
that the property be restored before a claim under the policy may be validly
presented with respect to the defaulted Mortgage Loan secured by the related
Mortgaged Property or Contract secured by the related Manufactured Home. The
payment described under (ii) above will render presentation of a claim relating
to an Asset under the related mortgage pool insurance policy unnecessary.
Therefore, so long as a mortgage pool insurance policy remains in effect, the
payment by the insurer under a special hazard insurance policy of the cost of
repair or of the unpaid principal balance of the related Asset plus accrued
interest and certain Advances will not affect the total insurance proceeds paid
to Securityholders, but will affect the relative amounts of coverage remaining
under the related special hazard insurance policy and mortgage pool insurance
policy.
MORTGAGOR BANKRUPTCY BOND
If specified in the related prospectus supplement, a bankruptcy bond to
cover losses resulting from proceedings under the federal Bankruptcy Code with
respect to a Mortgage Loan will be issued by an insurer named in the prospectus
supplement. Each bankruptcy bond will cover, to the extent specified in the
related prospectus supplement, certain losses resulting from a reduction by a
bankruptcy court of scheduled payments of principal and interest on a Mortgage
Loan or a reduction by the court of the unpaid principal balance of a Mortgage
Loan and will cover certain unpaid interest on the amount of a principal
reduction from the date of the filing of a bankruptcy petition. The required
amount of coverage under each bankruptcy bond will be set forth in the related
prospectus supplement.
RESERVE FUND
If specified in the applicable prospectus supplement, credit
enhancement with respect to a Series of Securities may be provided by the
establishment of one or more reserve funds for the Series. Any reserve fund for
a Series may be funded (i) by a deposit of cash, U.S. Treasury securities or
instruments evidencing entitlements to
68
principal or interest payments, letters of credit, demand notes, certificates of
deposit or a combination of these in the aggregate amount specified in the
applicable prospectus supplement or (ii) by the deposit from time to time of
certain amounts received on or in respect of the related Assets, as specified in
the applicable prospectus supplement.
If specified in the prospectus supplement, reserve funds may be
established to provide limited protection, in an amount satisfactory to each
Rating Agency, against certain interest shortfalls arising from the timing of
principal prepayments, certain types of losses not covered by insurance policies
or other credit support, such as losses arising from damage not covered by
standard hazard insurance policies, losses resulting from the bankruptcy of a
borrower and the application of certain provisions of the Bankruptcy Code or
losses resulting from denial of insurance coverage due to fraud or
misrepresentation in connection with the origination of an Asset. Following each
Distribution Date amounts in a reserve fund in excess of any required reserve
fund amount may be released from the reserve fund under the conditions and to
the extent specified in the prospectus supplement and will not be available for
further application to the related Securities.
If specified in the prospectus supplement, any reinvestment income or
other gain from investments in certain investments acceptable to the applicable
Rating Agencies will be credited to the related reserve fund for the Series, and
any loss resulting from the investments will be charged to the reserve fund. The
reserve fund for a Series will not be a part of the Trust Fund.
Additional information concerning any reserve fund will be set forth in
the prospectus supplement, including the initial balance of the reserve fund,
the required reserve fund balance to be maintained, the purposes for which funds
in the reserve fund may be applied to make distributions to Securityholders and
use of investment earnings from the reserve fund, if any.
CROSS COLLATERALIZATION
If specified in the applicable 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 collateralization feature which requires that distributions be made
to certain Classes from Asset payments that would otherwise be distributed to
Subordinated Securities evidencing a beneficial ownership interest in other loan
groups within the same Trust Fund. As a result, the amount of credit enhancement
available to a Class of Securities against future losses on the Assets in which
that Class represents an interest may be reduced as the result of losses on a
group of Assets in which that Class has no interest. The applicable prospectus
supplement for a Series that includes a cross collateralization feature will
describe its specific operation.
OVERCOLLATERALIZATION
If specified in the related prospectus supplement, subordination
provisions of a Series may be used to accelerate to a limited extent the
amortization of one or more Classes of Securities relative to the amortization
of the related Assets. The accelerated amortization is achieved by the
application of certain excess interest to the payment of principal of one or
more Classes of Securities. This acceleration feature creates, with respect to
the Assets or a group of Assets, overcollateralization which results from the
excess of the aggregate principal balance of the related Assets, or group of
Assets, over the Security Balance of the related Class or Classes of Securities.
This acceleration may continue for the life of the related Securities, or may
have a shorter duration. In the case of limited acceleration, once the required
level of overcollateralization is reached, and subject to certain provisions
specified in the related prospectus supplement, this limited acceleration
feature may cease, unless necessary to maintain the required level of
overcollateralization.
EXCESS INTEREST
If specified in the related prospectus supplement, the Assets in a
Trust may generate more interest than is necessary to pay the interest earned on
the Classes of Securities each month. The excess interest may be used to
maintain overcollateralization, to pay interest that was previously earned but
not paid to certain Classes of Securities and to reimburse certain Classes of
Securities for losses and certain shortfalls that they experienced previously.
69
If specified in the applicable prospectus supplement, amounts received
by the Trustee under any Cash Flow Agreement described below under "Cash Flow
Agreements" may also be used to provide credit enhancement for one or more
Classes of Securities.
CASH FLOW AGREEMENTS
If specified in the prospectus supplement, the Trust Fund may include
cash flow agreements consisting only of one or more guaranteed investment
contracts, swap agreements or interest rate cap or floor agreements (also called
yield maintenance agreements), each of which agreements is intended to reduce
the effects of interest rate fluctuations on the assets or on one or more
Classes of Securities (each, a "CASH FLOW AGREEMENT"). The applicable prospectus
supplement will describe the name, organizational form and general character of
the business of the counterparty under any Cash Flow Agreement. In addition, the
prospectus supplement for the related Series of Securities will disclose the
significance percentage, calculated in accordance with Item 1115 of Regulation
AB (17 CFR 229.1115). To the extent this percentage is (a) 10% or more but less
than 20%, the related prospectus supplement will provide financial data required
by Item 301 of Regulation S-K (17 CFR 229.301) or (b) greater than 20%, the
related prospectus supplement will provide financial statements required by Item
1115(b)(2) of Regulation AB (17 CFR 229.1115) and, in either case, the related
prospectus supplement will contain a description of the operation and material
terms of the Cash Flow Agreement, including, without limitation, conditions to
payment or limits on the timing or amount of payments and material provisions
relating to the termination or substitution of the Cash Flow Agreement. Copies
of the Cash Flow Agreement, if any, relating to a Series of Securities will be
filed with the Commission as an exhibit to a Current Report on Form 8-K.
GUARANTEED INVESTMENT CONTRACTS
If specified in the related prospectus supplement, the Trustee on
behalf of the Trust may enter into one or more guaranteed investment contracts.
Guaranteed investment contracts are generally used to maximize the investment
income on funds held between Distribution Dates pending distribution to
Securityholders. Under a guaranteed investment contract, the issuer of the
contract, which is typically a highly rated financial institution, guarantees a
fixed or floating rate of interest over the life of the contract, as well as the
ultimate return of the principal. Any payments received from the issuer of the
contract by the Trust will be distributed to the related Class or Classes of
Securities as specified in the applicable prospectus supplement.
YIELD MAINTENANCE AGREEMENTS
If specified in the related prospectus supplement, the Trustee on
behalf of the Trust will enter into one or more yield maintenance agreements in
order to support the yield of one or more Classes of Securities. The
counterparty to a yield maintenance agreement will receive an upfront payment
and the Trust will have no ongoing payment obligations. Generally, if the index
specified in the applicable prospectus supplement, which index will be
one-month, three-month, six-month or one-year LIBOR, CMT, COFI, MTA or the Prime
Rate, exceeds a percentage for a particular date specified in the applicable
prospectus supplement, the counterparty to the yield maintenance agreement will
be required to pay to the Trustee an amount equal to that excess multiplied by a
notional amount or the Security Balance or Balances of one or more Classes of
Securities multiplied by one-twelfth. This amount may be adjusted to reflect the
actual number of days in the Interest Accrual Period for the related Class or
Classes of Securities and will be paid to the Class or Classes of Securities as
specified in the related prospectus supplement.
SWAP AGREEMENTS
If specified in the related prospectus supplement, the Trustee on
behalf of the Trust will enter into a swap agreement to support the yield on one
or more Classes of Securities. Under the swap agreement, the Trust will be
obligated to pay an amount equal to a certain percentage of a notional amount
set forth in the related prospectus supplement to the counterparty and the Trust
will be entitled to receive an amount equal to one-month, three-month, six-month
or one-year LIBOR, CMT, COFI, MTA or the Prime Rate on the notional amount from
the counterparty, until the swap agreement is terminated. Only the net amount of
the two obligations will be paid by the appropriate party. In the event that the
Trust is required to make a payment to the counterparty, that payment will be
paid on the related Distribution Date prior to distributions to Securityholders.
Generally, any payments received from the
70
counterparty by the Trust will be distributed to cover certain shortfalls as set
forth in the applicable prospectus supplement.
If specified in the related prospectus supplement, the Trustee on
behalf of the Trust will enter into one or more swap agreements to cover any
shortfalls on one or more Classes of Securities in the event those Securities
are auctioned to third party investors on a date specified in the related
prospectus supplement and the proceeds from the auction are less than the
outstanding Security Balance of the applicable Class or Classes of Securities
plus any accrued and unpaid interest. In the event the proceeds from the auction
are greater than the outstanding Security Balance or Security Balances of the
applicable Class or Classes of Securities plus any accrued and unpaid interest,
this excess will be paid to the counterparty or counterparties under the swap
agreement(s). See "Risk Factors -- Amounts Received from the Auction and the
Swap Agreement May Be Insufficient to Assure Completion of the Auction" and "--
Mandatory Auction of Securities" in this prospectus.
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS
The following discussion contains summaries, which are general in
nature, of certain legal aspects of loans secured by single-family or
multi-family residential properties. Because these legal aspects are governed
primarily by applicable state law(which laws may differ substantially), the
summaries do not purport to be complete nor to reflect the laws of any
particular state, nor to encompass the laws of all states in which the security
for the Mortgage Loans is situated. The summaries are qualified in their
entirety by reference to the applicable federal and state laws governing the
Mortgage Loans. See "Description of the Trust Funds--Assets."
GENERAL
All of the Mortgage Loans are loans evidenced by a note or bond and
secured by instruments granting a security interest in real property which may
be mortgages, deeds of trust, security deeds or deeds to secure debt, depending
upon the prevailing practice and law in the state in which the Mortgaged
Property is located. Mortgages, deeds of trust and deeds to secure debt are
herein collectively referred to as "mortgages." Any of the foregoing types of
mortgages will create a lien upon, or grant a title interest in, the subject
property, the priority of which will depend on the terms of the particular
security instrument, as well as separate, recorded, contractual arrangements
with others holding interests in the mortgaged property, the knowledge of the
parties to such instrument as well as the order of recordation of the instrument
in the appropriate public recording office. However, recording does not
generally establish priority over governmental claims for real estate taxes and
assessments and other charges imposed under governmental police powers.
TYPES OF MORTGAGE INSTRUMENTS
A mortgage either creates a lien against or constitutes a conveyance of
real property between two parties--a mortgagor (the borrower and usually the
owner of the subject property) and a mortgagee (the lender). In contrast, a deed
of trust is a three-party instrument, among a trustor (the equivalent of a
mortgagor), a trustee to whom the mortgaged property is conveyed, and a
beneficiary (the lender) for whose benefit the conveyance is made. As used in
this prospectus, unless the context otherwise requires, "mortgagor" includes the
trustor under a deed of trust and a grantor under a security deed or a deed to
secure debt. Under a deed of trust, the mortgagor grants the property,
irrevocably until the debt is paid, in trust, generally with a power of sale as
security for the indebtedness evidenced by the related note. A deed to secure
debt typically has two parties. By executing a deed to secure debt, the grantor
conveys title to, as opposed to merely creating a lien upon, the subject
property to the grantee until such time as the underlying debt is repaid,
generally with a power of sale as security for the indebtedness evidenced by the
related mortgage note. In case the mortgagor under a mortgage is a land trust,
there would be an additional party because legal title to the property is held
by a land trustee under a land trust agreement for the benefit of the mortgagor.
At origination of a mortgage loan involving a land trust, the mortgagor executes
a separate undertaking to make payments on the mortgage note. The mortgagee's
authority under a mortgage, the trustee's authority under a deed of trust and
the grantee's authority under a deed to secure debt are governed by the express
provisions of the mortgage, the law of the state in which the real property is
located, certain federal laws (including, without limitation, the Relief Act)
and, in some cases, in deed of trust transactions, the directions of the
beneficiary.
71
The Mortgages that encumber Multifamily Properties may contain an
assignment of rents and leases, pursuant to which the mortgagor assigns to the
lender the mortgagor's right, title and interest as landlord under each lease
and the income derived therefrom, while retaining a revocable license to collect
the rents for so long as there is no default. If the mortgagor defaults, the
license terminates and the lender is entitled to collect the rents. Local law
may require that the lender take possession of the property and/or obtain a
court-appointed receiver before becoming entitled to collect the rents.
INTEREST IN REAL PROPERTY
The real property covered by a mortgage, deed of trust, security deed
or deed to secure debt is most often the fee estate in land and improvements.
However, such an instrument may encumber other interests in real property such
as a tenant's interest in a lease of land or improvements, or both, and the
leasehold estate created by such lease. An instrument covering an interest in
real property other than the fee estate requires special provisions in the
instrument creating such interest or in the mortgage, deed of trust, security
deed or deed to secure debt, to protect the mortgagee against termination of
such interest before the mortgage, deed of trust, security deed or deed to
secure debt is paid. The Depositor, the Asset Seller or other entity specified
in the related prospectus supplement will make certain representations and
warranties in the applicable Agreement or certain representations and warranties
will be assigned to the Trustee with respect to any Mortgage Loans that are
secured by an interest in a leasehold estate. Such representation and
warranties, if applicable, will be set forth in the prospectus supplement.
CONDOMINIUMS
Certain of the Mortgage Loans may be loans secured by condominium
units. The condominium building may be a multi-unit building or buildings, or a
group of buildings whether or not attached to each other, located on property
subject to condominium ownership. Condominium ownership is a form of ownership
of real property as to which each owner is entitled to the exclusive ownership
and possession of his or her individual condominium unit. The owner also owns a
proportionate undivided interest in all parts of the condominium building (other
than the other individual condominium units) and all areas or facilities, if
any, for the common use of the condominium units. The condominium unit owners
appoint or elect the condominium association to govern the affairs of the
condominium.
COOPERATIVES
Certain of the Mortgage Loans may be cooperative loans. The Cooperative
either owns all the real property that comprises the project, including the land
and the apartment building comprised of separate dwelling units and common areas
or leases the land generally by a long term ground lease and owns the apartment
building. The Cooperative is directly responsible for project management and, in
most cases, payment of real estate taxes and hazard and liability insurance. If
there is a blanket mortgage on the property and/or underlying land, as is
generally the case, the Cooperative, as project mortgagor, is also responsible
for meeting these mortgage obligations. Ordinarily, the Cooperative incurs a
blanket mortgage in connection with the construction or purchase of the
Cooperative's apartment building. The interest of the occupants under
proprietary leases or occupancy agreements to which the Cooperative is a party
are generally subordinate to the interest of the holder of the blanket mortgage
in that building.
The Cooperative is owned by tenant stockholders who, through ownership
of stock, shares or membership certificates in the corporation, receive
proprietary leases or occupancy agreements which confer exclusive rights to
occupy specific units. Generally, a tenant stockholder of a Cooperative must
make a monthly payment to the Cooperative representing such tenant stockholder's
pro rata share of the Cooperative's payments for its blanket mortgage, real
property taxes, maintenance expenses and other capital or ordinary expenses. An
ownership interest in a Cooperative and accompanying rights is financed through
a cooperative share loan evidenced by a promissory note and secured by a
security interest in the occupancy agreement or proprietary lease and in the
related cooperative shares. The lender takes possession of the share certificate
and a counterpart of the proprietary lease or occupancy agreement, and typically
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
72
collateral or tenant stockholder as an individual as provided in the security
agreement covering the assignment of the proprietary lease or occupancy
agreement and the pledge of cooperative shares.
LEASEHOLDS
Mortgage Loans may be secured by a mortgage on a ground lease.
Leasehold mortgages are subject to certain considerations not associated with
mortgage loans secured by the fee estate of the mortgagor. The most significant
of these consideration is that the ground lease creating the leasehold estate
could terminate, leaving the leasehold mortgagee without its security. The
ground lease may terminate, if among other reasons, the ground lessee breaches
or defaults in its obligations under the ground lease or there is a bankruptcy
of the ground lessee or the ground lessor. This possibility may be minimized if
the ground lease contains certain provisions protective of the mortgagee, but
the ground leases that secure Mortgage Loans may not contain all of these
protective provisions, and mortgages may not contain the other protection
discussed in the next paragraph. Protective ground lease provisions include the
right of the leasehold mortgagee to receive notices from the ground lessor of
any defaults by the mortgagor; the right to cure those defaults, with adequate
cure periods; if a default is not susceptible of cure by the leasehold
mortgagee, the right to acquire the leasehold estate through foreclosure or
otherwise; the ability of the ground lease to be assigned to and by the
leasehold mortgagee or purchaser at a foreclosure sale and for the simultaneous
release of the ground lessee's liabilities under the new lease; and the right of
the leasehold mortgagee to enter into a new ground lease with the ground lessor
on the same terms and conditions as the old ground lease upon a termination.
In addition to the preceding protections, a leasehold mortgagee may
require that the ground lease or leasehold mortgage prohibit the ground lessee
from treating the ground lease as terminated in the event of the ground lessor's
bankruptcy and rejection of the ground lease by the trustee for the
debtor-ground lessor. As further protection, a leasehold mortgage may provide
for the assignment of the debtor-ground lessee's right to reject a lease
pursuant to Section 365 of the Bankruptcy Code, although the enforceability of
that clause has not been established. Without the protections described in the
preceding paragraph, a leasehold mortgagee may lose the collateral securing its
leasehold mortgage. In addition, terms and conditions of a leasehold mortgage
are subject to the terms and conditions of the ground lease. Although certain
rights given to a ground lessee can be limited by the terms of a leasehold
mortgage, the rights of a ground lessee or a leasehold mortgagee with respect
to, among other things, insurance, casualty and condemnation will be governed by
the provisions of the ground lease.
LAND SALE CONTRACTS
Under Land Sale Contracts the contract seller (hereinafter referred to
as the "CONTRACT LENDER") retains legal title to the property and enters into an
agreement with the contract purchaser (hereinafter referred to as the "CONTRACT
BORROWER") for the payment of the purchase price, plus interest, over the term
of the Land Sale Contract. Only after full performance by the borrower of the
contract is the contract lender obligated to convey title to the real estate to
the purchaser. As with mortgage or deed of trust financing, during the effective
period of the Land Sale Contract, the contract borrower is responsible for
maintaining the property in good condition and for paying real estate taxes,
assessments and hazard insurance premiums associated with the property.
The method of enforcing the rights of the contract lender under an
installment contract varies on a state-by-state basis depending upon the extent
to which state courts are willing, or able pursuant to state statute, to enforce
the contract strictly according to its terms. The terms of Land Sale Contracts
generally provide that upon default by the contract borrower, the borrower loses
his or her right to occupy the property, the entire indebtedness is accelerated,
and the buyer's equitable interest in the property is forfeited. The contract
lender in such a situation does not have to foreclose in order to obtain title
to the property, although in some cases a quiet title action is in order if the
contract borrower has filed the Land Sale Contract in local land records and an
ejectment action may be necessary to recover possession. In a few states,
particularly in cases of contract borrower default during the early years of a
Land Sale Contract, the courts will permit ejectment of the buyer and a
forfeiture of his or her interest in the property. However, most state
legislatures have enacted provisions by analogy to mortgage law protecting
borrowers under Land Sale Contracts from the harsh consequences of forfeiture.
Under such statues, a judicial contract may be reinstated upon full payment of
the default amount and the borrower may have a post-foreclosure statutory
redemption right. In other states, courts in equity may permit a contract
borrower with significant investment in the property under a Land Sale Contract
for the sale of real estate to share the proceeds of sale of the
73
property after the indebtedness is repaid or may otherwise refuse to enforce the
forfeiture clause. Nevertheless, generally speaking, the contract lender's
procedures for obtaining possession and clear title under a Land Sale Contract
for the sale of real estate in a given state are simpler and less time consuming
and costly than are the procedures for foreclosing and obtaining clear title to
a mortgaged property.
FORECLOSURE
General
Foreclosure is a legal procedure that allows the mortgagee to recover
its mortgage debt by enforcing its rights and available legal remedies under the
mortgage. If the mortgagor defaults in payment or performance of its obligations
under the note or mortgage, the mortgagee has the right to institute foreclosure
proceedings to sell the mortgaged property at public auction to satisfy the
indebtedness.
Foreclosure procedures with respect to the enforcement of a mortgage
vary from state to state. Two primary methods of foreclosing a mortgage are
judicial foreclosure and non-judicial foreclosure pursuant to a power of sale
granted in the mortgage instrument. There are several other foreclosure
procedures available in some states that are either infrequently used or
available only in certain limited circumstances, such as strict foreclosure.
Judicial Foreclosure
A judicial foreclosure proceeding is conducted in a court having
jurisdiction over the mortgaged property. Generally, the action is initiated by
the service of legal pleadings upon all parties having an interest of record in
the real property. Delays in completion of the foreclosure may occasionally
result from difficulties in locating defendants. When the lender's right to
foreclose is contested, the legal proceedings can be time-consuming. Upon
successful completion of a judicial foreclosure proceeding, the court generally
issues a judgment of foreclosure and appoints a referee or other officer to
conduct a public sale of the mortgaged property, the proceeds of which are used
to satisfy the judgment. Such sales are made in accordance with procedures that
vary from state to state.
Equitable Limitations on Enforceability of Certain Provisions
United States courts have traditionally imposed general equitable
principles to limit the remedies available to a mortgagee in connection with
foreclosure. These equitable principles are generally designed to relieve the
mortgagor from the legal effect of mortgage defaults, to the extent that such
effect is perceived as harsh or unfair. Relying on such principles, a court may
alter the specific terms of a loan to the extent it considers necessary to
prevent or remedy an injustice, undue oppression or overreaching, or may require
the lender to undertake affirmative and expensive actions to determine the cause
of the mortgagor's default and the likelihood that the mortgagor will be able to
reinstate the loan. In some cases, courts have substituted their judgment for
the lender's and have required that lenders reinstate loans or recast payment
schedules in order to accommodate mortgagors who are suffering from a temporary
financial disability. In other cases, courts have limited the right of the
lender to foreclose if the default under the mortgage is not monetary, e.g., the
mortgagor failed to maintain the mortgaged property adequately or the mortgagor
executed a junior mortgage on the mortgaged property. The exercise by the court
of its equity powers will depend on the individual circumstances of each case
presented to it. Finally, some courts have been faced with the issue of whether
federal or state constitutional provisions reflecting due process concerns for
adequate notice require that a mortgagor receive notice in addition to
statutorily-prescribed minimum notice. For the most part, these cases have
upheld the reasonableness of the notice provisions or have found that a public
sale under a mortgage providing for a power of sale does not involve sufficient
state action to afford constitutional protections to the mortgagor.
Non-Judicial Foreclosure/Power of Sale
Foreclosure of a deed of trust is generally accomplished by a
non-judicial trustee's sale pursuant to the power of sale granted in the deed of
trust. A power of sale is typically granted in a deed of trust. It may also be
contained in any other type of mortgage instrument. A power of sale allows a
non-judicial public sale to be conducted generally following a request from the
beneficiary/lender to the trustee to sell the property upon any
74
default by the mortgagor under the terms of the mortgage note or the mortgage
instrument and after notice of sale is given in accordance with the terms of the
mortgage instrument, as well as applicable state law. In some states, prior to
such sale, the trustee under a deed of trust must record a notice of default and
notice of sale and send a copy to the mortgagor and to any other party who has
recorded a request for a copy of a notice of default and notice of sale. In
addition, in some states the trustee must provide notice to any other party
having an interest of record in the real property, including junior lienholders.
A notice of sale must be posted in a public place and, in most states, published
for a specified period of time in one or more newspapers. The mortgagor or
junior lienholder may then have the right, during a reinstatement period
required in some states, to cure the default by paying the entire actual amount
in arrears (without acceleration) plus the expenses incurred in enforcing the
obligation. In other states, the mortgagor or the junior lienholder is not
provided a period to reinstate the loan, but has only the right to pay off the
entire debt to prevent the foreclosure sale. Generally, the procedure for public
sale, the parties entitled to notice, the method of giving notice and the
applicable time periods are governed by state law and vary among the states.
Foreclosure of a deed to secure debt is also generally accomplished by a
non-judicial sale similar to that required by a deed of trust, except that the
lender or its agent, rather than a trustee, is typically empowered to perform
the sale in accordance with the terms of the deed to secure debt and applicable
law.
Public Sale
A third party may be unwilling to purchase a mortgaged property at a
public sale because of the difficulty in determining the value of such property
at the time of sale, due to, among other things, redemption rights which may
exist and the possibility of physical deterioration of the property during the
foreclosure proceedings. For these reasons, it is common for the lender to
purchase the mortgaged property for an amount equal to or less than the
underlying debt and accrued and unpaid interest plus the expenses of
foreclosure. Generally, state law controls the amount of foreclosure costs and
expenses which may be recovered by a lender. Thereafter, subject to the
mortgagor's right in some states to remain in possession during a redemption
period, if applicable, the lender will become the owner of the property and have
both the benefits and burdens of ownership of the mortgaged property. For
example, the lender will become obligated to pay taxes, obtain casualty
insurance and to make such repairs at its own expense as are necessary to render
the property suitable for sale. The lender will commonly obtain the services of
a real estate broker and pay the broker's commission in connection with the sale
of the property. Depending upon market conditions, the ultimate proceeds of the
sale of the property may not equal the lender's investment in the property.
Moreover, a lender commonly incurs substantial legal fees and court costs in
acquiring a mortgaged property through contested foreclosure and/or bankruptcy
proceedings. Generally, state law controls the amount of foreclosure expenses
and costs, including attorneys' fees, that may be recovered by a lender.
A junior mortgagee may not foreclose on the property securing the
junior mortgage unless it forecloses subject to senior mortgages and any other
prior liens, in which case it may be obliged to make payments on the senior
mortgages to avoid their foreclosure. In addition, in the event that the
foreclosure of a junior mortgage triggers the enforcement of a "due-on-sale"
clause contained in a senior mortgage, the junior mortgagee may be required to
pay the full amount of the senior mortgage to avoid its foreclosure.
Accordingly, with respect to those Mortgage Loans, if any, that are junior
mortgage loans, if the lender purchases the property the lender's title will be
subject to all senior mortgages, prior liens and certain governmental liens.
The proceeds received by the referee or trustee from the sale are
applied first to the costs, fees and expenses of sale and then in satisfaction
of the indebtedness secured by the mortgage under which the sale was conducted.
Any proceeds remaining after satisfaction of senior mortgage debt are generally
payable to the holders of junior mortgages and other liens and claims in order
of their priority, whether or not the mortgagor is in default. Any additional
proceeds are generally payable to the mortgagor. The payment of the proceeds to
the holders of junior mortgages may occur in the foreclosure action of the
senior mortgage or a subsequent ancillary proceeding or may require the
institution of separate legal proceedings by such holders.
Rights of Redemption
The purposes of a foreclosure action are to enable the mortgagee to
realize upon its security and to bar the mortgagor, and all persons who have an
interest in the property which is subordinate to the mortgage being foreclosed,
from exercise of their "equity of redemption." The doctrine of equity of
redemption provides that, until the property covered by a mortgage has been sold
in accordance with a properly conducted foreclosure and
75
foreclosure sale, those having an interest which is subordinate to that of the
foreclosing mortgagee have an equity of redemption and may redeem the property
by paying the entire debt with interest. In addition, in some states, when a
foreclosure action has been commenced, the redeeming party must pay certain
costs of such action. Those having an equity of redemption must generally be
made parties and joined in the foreclosure proceeding in order for their equity
of redemption to be cut off and terminated.
The equity of redemption is a common-law (non-statutory) right which
exists prior to completion of the foreclosure, is not waivable by the mortgagor,
must be exercised prior to foreclosure sale and should be distinguished from the
post-sale statutory rights of redemption. In some states, after sale pursuant to
a deed of trust or foreclosure of a mortgage, the mortgagor and foreclosed
junior lienors are given a statutory period in which to redeem the property from
the foreclosure sale. In some states, statutory redemption may occur only upon
payment of the foreclosure sale price. In other states, redemption may be
authorized if the former mortgagor pays only a portion of the sums due. The
effect of a statutory right of redemption is to diminish the ability of the
lender to sell the foreclosed property. The exercise of a right of redemption
would defeat the title of any purchaser from a foreclosure sale or sale under a
deed of trust. Consequently, the practical effect of the redemption right is to
force the lender to maintain the property and pay the expenses of ownership
until the redemption period has expired. In some states, a post-sale statutory
right of redemption may exist following a judicial foreclosure, but not
following a trustee's sale under a deed of trust.
Under the REMIC Provisions currently in effect, property acquired by
foreclosure generally must not be held for more than three calendar years
following the year the Trust Fund acquired the property. With respect to a
Series of Securities for which an election is made to qualify the Trust Fund or
a part thereof as a REMIC, the applicable Agreement will permit foreclosed
property to be held for more than such period of time if the IRS grants an
extension of time within which to sell such property or independent counsel
renders an opinion to the effect that holding such property for such additional
period is permissible under the REMIC Provisions.
Cooperative Loans
The Cooperative shares owned by the tenant-stockholder and pledged to
the lender are, in almost all cases, subject to restrictions on transfer as set
forth in the Cooperative's certificate of incorporation and by-laws, as well as
the proprietary lease or occupancy agreement, and may be canceled by the
Cooperative for failure by the tenant-stockholder to pay rent or other
obligations or charges owed by such tenant-stockholder, including mechanics'
liens against the cooperative apartment building incurred by such
tenant-stockholder. The proprietary lease or occupancy agreement generally
permit the Cooperative to terminate such lease or agreement in the event an
obligor fails to make payments or defaults in the performance of covenants
required thereunder. Typically, the lender and the Cooperative enter into a
recognition agreement which establishes the rights and obligations of both
parties in the event of a default by the tenant-stockholder under the
proprietary lease or occupancy agreement will usually constitute a default under
the security agreement between the lender and the tenant-stockholder.
The recognition agreement generally provides that, in the event that
the tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the Cooperative will take no action to terminate such lease or
agreement until the lender has been provided with an opportunity to cure the
default. The recognition agreement typically provides that if the proprietary
lease or occupancy agreement is terminated, the Cooperative will recognize the
lender's lien against proceeds from the sale of the Cooperative apartment,
subject, however, to the Cooperative's right to sums due under such proprietary
lease or occupancy agreement. The total amount owed to the Cooperative by the
tenant-stockholder, which the lender generally cannot restrict and does not
monitor, could reduce the value of the collateral below the outstanding
principal balance of the Cooperative Loan and accrued and unpaid interest
thereon.
Recognition agreements also provide that in the event of a foreclosure
on a Cooperative Loan, the lender must obtain the approval or consent of the
Cooperative as required by the proprietary lease before transferring the
Cooperative shares or assigning the proprietary lease. Generally, the lender is
not limited in any rights it may have to dispossess the tenant-stockholders.
In some states, foreclosure on the Cooperative shares is accomplished
by a sale in accordance with the provisions of Article 9 of the Uniform
Commercial Code ("UCC") and the security agreement relating to those
76
shares. Article 9 of the UCC requires that a sale be conducted in a
"commercially reasonable" manner. Whether a foreclosure sale has been conducted
in a "commercially reasonable" manner will depend on the facts in each case. In
determining commercial reasonableness, a court will look to the notice given the
debtor and the method, manner, time, place and terms of the foreclosure.
Generally, a sale conducted according to the usual practice of banks selling
similar collateral will be considered reasonably conducted.
Article 9 of the UCC provides that the proceeds of the sale will be
applied first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to reimbursement
is subject to the right of the Cooperatives to receive sums due under the
proprietary lease or occupancy agreement. If there are proceeds remaining, the
lender must account to the tenant-stockholder for the surplus. Conversely, if a
portion of the indebtedness remains unpaid, the tenant-stockholder is generally
responsible for the deficiency.
In the case of foreclosure on a building which was converted from a
rental building to a building owned by a Cooperative under a non-eviction plan,
some states require that a purchaser at a foreclosure sale take the property
subject to rent control and rent stabilization laws which apply to certain
tenants who elected to remain in a building so converted.
JUNIOR MORTGAGES
Some of the Mortgage Loans may be secured by junior mortgages or deeds
of trust, which are subordinate to first or other senior mortgages or deeds of
trust held by other lenders. The rights of the Trust Fund as the holder of a
junior deed of trust or a junior mortgage are subordinate in lien and in payment
to those of the holder of the senior mortgage or deed of trust, including the
prior rights of the senior mortgagee or beneficiary to receive and apply hazard
insurance and condemnation proceeds and, upon default of the mortgagor, to cause
a foreclosure on the property. Upon completion of the foreclosure proceedings by
the holder of the senior mortgage or the sale pursuant to the deed of trust, the
junior mortgagee's or junior beneficiary's lien will be extinguished unless the
junior lienholder satisfies the defaulted senior loan or asserts its subordinate
interest in a property in foreclosure proceedings. See "--Foreclosure" herein.
Furthermore, because the terms of the junior mortgage or deed of trust
are subordinate to the terms of the first mortgage or deed of trust, in the
event of a conflict between the terms of the first mortgage or deed of trust and
the junior mortgage or deed of trust, the terms of the first mortgage or deed of
trust will generally govern. Upon a failure of the mortgagor or trustor to
perform any of its obligations, the senior mortgagee or beneficiary, subject to
the terms of the senior mortgage or deed of trust, may have the right to perform
the obligation itself. Generally, all sums so expended by the mortgagee or
beneficiary become part of the indebtedness secured by the mortgage or deed of
trust. To the extent a first mortgagee expends such sums, such sums will
generally have priority over all sums due under the junior mortgage.
RIGHTS OF REDEMPTION
The purposes of a foreclosure action are to enable the mortgagee to
realize upon its security and to bar the mortgagor, and all persons who have an
interest in the property which is subordinate to the mortgage being foreclosed,
from exercise of their "equity of redemption." The doctrine of equity of
redemption provides that, until the property covered by a mortgage has been sold
in accordance with a properly conducted foreclosure and foreclosure sale, those
having an interest which is subordinate to that of the foreclosing mortgagee
have an equity of redemption and may redeem the property by paying the entire
debt with interest. In addition, in some states, when a foreclosure action has
been commenced, the redeeming party must pay certain costs of such action. Those
having an equity of redemption must generally be made parties and joined in the
foreclosure proceeding in order for their equity of redemption to be cut off and
terminated.
The equity of redemption is a common-law (non-statutory) right which
exists prior to completion of the foreclosure, is not waivable by the mortgagor,
must be exercised prior to foreclosure sale and should be distinguished from the
post-sale statutory rights of redemption. In some states, after sale pursuant to
a deed of trust or foreclosure of a mortgage, the mortgagor and foreclosed
junior lienors are given a statutory period in which to redeem the property from
the foreclosure sale. In some states, statutory redemption may occur only upon
payment
77
of the foreclosure sale price. In other states, redemption may be authorized if
the former mortgagor pays only a portion of the sums due. The effect of a
statutory right of redemption is to diminish the ability of the lender to sell
the foreclosed property. The exercise of a right of redemption would defeat the
title of any purchaser from a foreclosure sale or sale under a deed of trust.
Consequently, the practical effect of the redemption right is to force the
lender to maintain the property and pay the expenses of ownership until the
redemption period has expired. In some states, a post-sale statutory right of
redemption may exist following a judicial foreclosure, but not following a
trustee's sale under a deed of trust.
ANTI-DEFICIENCY LEGISLATION, THE BANKRUPTCY CODE AND OTHER LIMITATIONS ON
LENDERS
Certain states have imposed statutory prohibitions which limit the
remedies of a beneficiary under a deed of trust or a mortgagee under a mortgage.
In some states, statutes limit the right of the beneficiary or mortgagee to
obtain a deficiency judgment against the borrower following foreclosure or sale
under a deed of trust. A deficiency judgment would be a personal judgment
against the former borrower equal in most cases to the difference between the
net amount realized upon the public sale of the real property and the amount due
to the lender. Other statutes require the beneficiary or mortgagee to exhaust
the security afforded under a deed of trust or mortgage by foreclosure in an
attempt to satisfy the full debt before bringing a personal action against the
borrower. Finally, other statutory provisions limit any deficiency judgment
against the former borrower following a judicial sale to the excess of the
outstanding debt over the fair market value of the property at the time of the
public sale. The purpose of these statutes is generally to prevent a beneficiary
or a mortgagee from obtaining a large deficiency judgment against the former
borrower as a result of low or no bids at the judicial sale.
In addition to anti-deficiency and related legislation, numerous other
federal and state statutory provisions, including the United States Bankruptcy
Code, 11 U.S.C. Sections 101 et seq. (the "BANKRUPTCY CODE"), and state laws
affording relief to debtors (together with the Bankruptcy Code, the "INSOLVENCY
LAWS") may interfere with or affect the ability of a secured mortgage lender to
obtain payment of a mortgage loan, to realize upon collateral and/or enforce a
deficiency judgment. For example, under the Bankruptcy Code, virtually all
actions (including foreclosure actions and deficiency judgment proceedings) are
automatically stayed upon the filing of a bankruptcy petition, and, usually, no
interest or principal payments are made during the course of the bankruptcy
case. Foreclosure of an interest in real property of a debtor in a case under
the Bankruptcy Code can typically occur only if the bankruptcy court vacates the
stay; an action the court may be reluctant to take, particularly if the debtor
has the prospect of restructuring his or her debts and the mortgage collateral
is not deteriorating in value. The delay and the consequences thereof caused by
such automatic stay can be significant. Also, under the Bankruptcy Code, the
filing of a petition in bankruptcy by or on behalf of a junior lienor (a
subordinate lender secured by a mortgage on the property) may stay a senior
lender from taking action to foreclose.
A homeowner may file for relief under the Bankruptcy Code under any of
three different chapters of the Bankruptcy Code. Under Chapter 7, the assets of
the debtor are liquidated and a lender secured by a lien may "bid in" (i.e., bid
up to the amount of the debt) at the sale of the asset. See "--Foreclosure." A
homeowner may also file for relief under Chapter 11 of the bankruptcy code and
reorganize his or her debts through his or her reorganization plan.
Alternatively, a homeowner may file for relief under Chapter 13 of the
Bankruptcy Code and address his or her debts in a rehabilitation plan. (Chapter
13 is often referred to as the "wage earner chapter" or "consumer chapter"
because most individuals seeking to restructure their debts file for relief
under Chapter 13 rather than under Chapter 11.)
The Bankruptcy Code permits a mortgage loan that is secured by property
that does not consist solely of the debtor's principal residence to be modified
without the consent of the lender provided certain substantive and procedural
safeguards are met. Under the Bankruptcy Code, the lender's security interest
may be reduced to the then-current value of the property as determined by the
court if the value is less than the amount due on the loan, thereby leaving the
lender as a general unsecured creditor for the difference between the value of
the collateral and the outstanding balance of the mortgage loan. A borrower's
unsecured indebtedness will typically be discharged in full upon payment of a
substantially reduced amount. Other modifications to a mortgage loan may include
a reduction in the amount of each scheduled payment, which reduction may result
from a reduction in the rate of interest, an alteration of the repayment
schedule, an extension of the final maturity date, and/or a reduction in the
outstanding balance of the secured portion of the loan. In certain
circumstances, subject to the court's approval, a
78
debtor in a case under Chapter 11 of the Bankruptcy Code may have the power to
grant liens senior to the lien of a mortgage.
A reorganization plan under Chapter 11 and a rehabilitation plan under
Chapter 13 of the Bankruptcy Code may each allow a debtor to cure a default with
respect to a mortgage loan on such debtor's residence by paying arrearages over
a period of time and to deaccelerate and reinstate the original mortgage loan
payment schedule, even though the lender accelerated the loan and a final
judgment of foreclosure had been entered in state court (provided no sale of the
property had yet occurred) prior to the filing of the debtor's petition under
the Bankruptcy Code. Under a Chapter 13 plan, curing of defaults must be
accomplished within the five year maximum term permitted for repayment plans,
such term commencing when the repayment plan becomes effective, while defaults
may be cured over a longer period of time under a Chapter 11 plan of
reorganization.
Generally, a repayment plan in a case under Chapter 13 may not modify
the claim of a mortgage lender if the borrower elects to retain the property,
the property is the borrower's principal residence and the property is the
lender's only collateral. Certain courts have allowed modifications when the
mortgage loan is secured both by the debtor's principal residence and by
collateral that is not "inextricably bound" to the real property, such as
appliances, machinery, or furniture. Certain courts have also allowed
modifications when the Mortgage Loan is fully unsecured at the time of
bankruptcy.
The general protection for mortgages secured only by the debtor's
principal residence is not applicable in a case under Chapter 13 if the last
payment on the original payment schedule is due before the final date for
payment under the debtor's Chapter 13 plan (which date could be up to five years
after the debtor emerges from bankruptcy). Under several recently decided cases,
the terms of such a loan can be modified in the manner described above. While
these decisions are contrary to the holding in a prior case by a senior
appellate court, it is possible that the later decisions will become the
accepted interpretation in view of the language of the applicable statutory
provision. If this interpretation is adopted by a court considering the
treatment in a Chapter 13 repayment plan of a Mortgage Loan, it is possible that
the Mortgage Loan could be modified.
State statutes and general principles of equity may also provide a
mortgagor with means to halt a foreclosure proceeding or sale and to force a
restructuring of a mortgage loan on terms a lender would not otherwise accept.
In a bankruptcy or similar proceeding of a mortgagor, action may be
taken seeking the recovery, as a preferential transfer or on other grounds, of
any payments made by the mortgagor under the related mortgage loan prior to the
bankruptcy or similar proceeding. Payments on long-term debt may be protected
from recovery as preferences if they are payments in the ordinary course of
business made on debts incurred in the ordinary course of business or if the
value of the collateral exceeds the debt at the time of payment. Whether any
particular payment would be protected depends upon the facts specific to a
particular transaction.
A trustee in bankruptcy, in some cases, may be entitled to collect its
costs and expenses in preserving or selling the mortgaged property ahead of
payment to the lender. Moreover, the laws of certain states also give priority
to certain tax and mechanics liens over the lien of a mortgage. Under the
Bankruptcy Code, if the court finds that actions of the mortgagee have been
unreasonable and inequitable, the lien of the related mortgage may be
subordinated to the claims of unsecured creditors.
The Bankruptcy Code provides priority to certain tax liens over the
lien of the mortgage. In addition, substantive requirements are imposed upon
mortgage lenders in connection with the origination and the servicing of
mortgage loans by numerous federal and some state consumer protection laws.
These laws include the federal Truth-in-Lending Act, Real Estate Settlement
Procedures Act, Equal Credit Opportunity Act, Fair Credit Billing Act, Fair
Credit Reporting Act, and related statutes. These federal laws impose specific
statutory liabilities upon lenders who originate mortgage loans and who fail to
comply with the provisions of the applicable laws. In some cases, this liability
may affect assignees of the Mortgage Loans.
ENFORCEABILITY OF CERTAIN PROVISIONS
79
Standard forms of note, mortgage and deed of trust generally contain
provisions obligating the borrower to pay a late charge if payments are not
timely made and in some circumstances may provide for prepayment fees or
penalties if the obligation is paid prior to maturity. In certain states, there
are or may be specific limitations upon late charges which a lender may collect
from a borrower for delinquent payments. Certain states also limit the amounts
that a lender may collect from a borrower as an additional charge if the loan is
prepaid.
Courts have imposed general equitable principles upon foreclosure.
These equitable principles are generally designed to relieve the borrower from
the legal effect of defaults under the loan documents. Examples of judicial
remedies that may be fashioned include judicial requirements that the lender
undertake affirmative and expensive actions to determine the causes for the
borrower's default and the likelihood that the borrower will be able to
reinstate the loan. In some cases, courts have substituted their judgment for
the lender's judgment and have required lenders to reinstate loans or recast
payment schedules to accommodate borrowers who are suffering from temporary
financial disability. In some cases, courts have limited the right of lenders to
foreclose if the default under the mortgage instrument is not monetary, such as
the borrower failing to adequately maintain the property or the borrower
executing a second mortgage or deed of trust affecting the property. In other
cases, some courts have been faced with the issue of whether federal or state
constitutional provisions reflecting due process concerns for adequate notice
require that borrowers under the deeds of trust receive notices in addition to
the statutorily-prescribed minimum requirements. For the most part, these cases
have upheld the notice provisions as being reasonable or have found that the
sale by a trustee under a deed of trust or under a mortgage having a power of
sale does not involve sufficient state action to afford constitutional
protections to the borrower.
ENVIRONMENTAL CONSIDERATIONS
A lender may be subject to unforeseen environmental risks when taking a
security interest in real or personal property. Property subject to such a
security interest may be subject to federal, state, and local laws and
regulations relating to environmental protection. Such laws may regulate, among
other things: emissions of air pollutants; discharges of wastewater or storm
water; generation, transport, storage or disposal of hazardous waste or
hazardous substances; operation, closure and removal of underground storage
tanks; removal and disposal of asbestos-containing materials; management of
electrical or other equipment containing polychlorinated biphenyls ("PCBS").
Failure to comply with such laws and regulations may result in significant
penalties, including civil and criminal fines. Under the laws of certain states,
environmental contamination on a property may give rise to a lien on the
property to ensure the availability and/or reimbursement of cleanup costs.
Generally all subsequent liens on such property are subordinated to such a lien
and, in some states, even prior recorded liens are subordinated to such liens
("SUPERLIENS"). In the latter states, the security interest of the Trustee in a
property that is subject to such Superlien could be adversely affected.
Under the federal Comprehensive Environmental Response, Compensation
and Liability Act, as amended ("CERCLA"), and under state law in certain states,
a secured party which takes a deed in lieu of foreclosure, purchases a mortgaged
property at a foreclosure sale, operates a mortgaged property or undertakes
certain types of activities that may constitute management of the mortgaged
property may become liable in certain circumstances for the costs of remedial
action ("CLEANUP COSTS") if hazardous wastes or hazardous substances have been
released or disposed of on the property. Such Cleanup Costs may be substantial.
CERCLA imposes strict, as well as joint and several liability for environmental
remediation and/or damage costs on several classes of "potentially responsible
parties," including current "owners and/or operators" of property, irrespective
of whether those owners or operators caused or contributed to the contamination
on the property. In addition, owners and operators of properties that generate
hazardous substances that are disposed of at other "off-site" locations may be
held strictly, jointly and severally liable for environmental remediation and/or
damages at those off-site locations. Many states also have laws that are similar
to CERCLA. Liability under CERCLA or under similar state law could exceed the
value of the property itself as well as the aggregate assets of the property
owner.
The law is unclear as to whether and under what precise circumstances
cleanup costs, or the obligation to take remedial actions, could be imposed on a
secured lender such as the Trust Fund. Under the laws of some states and under
CERCLA, a lender may be liable as an "owner or operator" for costs of addressing
releases or threatened releases of hazardous substances on a mortgaged property
if such lender or its agents or employees have "participated in the management"
of the operations of the borrower, even though the environmental damage or
threat was caused by a prior owner or current owner or operator or other third
party. Excluded from CERCLA's definition
80
of "owner or operator" is a person "who without participating in the management
of . . . [the] facility, holds indicia of ownership primarily to protect his
security interest" (the "SECURED-CREDITOR EXEMPTION"). This exemption for
holders of a security interest such as a secured lender applies only to the
extent that a lender seeks to protect its security interest in the contaminated
facility or property. Thus, if a lender's activities begin to encroach on the
actual management of such facility or property, the lender faces potential
liability as an "owner or operator" under CERCLA. Similarly, when a lender
forecloses and takes title to a contaminated facility or property, the lender
may incur potential CERCLA liability in various circumstances, including among
others, when it holds the facility or property as an investment (including
leasing the facility or property to a third party), fails to market the property
in a timely fashion or fails to properly address environmental conditions at the
property or facility.
The Resource Conservation and Recovery Act, as amended ("RCRA"),
contains a similar secured-creditor exemption for those lenders who hold a
security interest in a petroleum underground storage tank ("UST") or in real
estate containing a UST, or that acquire title to a petroleum UST or facility or
property on which such a UST is located. As under CERCLA, a lender may lose its
secured-creditor exemption and be held liable under RCRA as a UST owner or
operator if such lender or its employees or agents participate in the management
of the UST. In addition, if the lender takes title to or possession of the UST
or the real estate containing the UST, under certain circumstances the
secured-creditor exemption may be deemed to be unavailable.
A decision in May 1990 of the United States Court of Appeals for the
Eleventh Circuit in United States v. Fleet Factors Corp. very narrowly construed
CERCLA's secured-creditor exemption. The court's opinion suggested that a lender
need not have involved itself in the day-to-day operations of the facility or
participated in decisions relating to hazardous waste to be liable under CERCLA;
rather, liability could attach to a lender if its involvement with the
management of the facility were broad enough to support the inference that the
lender had the capacity to influence the borrower's treatment of hazardous
waste. The court added that a lender's capacity to influence such decisions
could be inferred from the extent of its involvement in the facility's financial
management. A subsequent decision by the United States Court of Appeals for the
Ninth Circuit in In re Bergsoe Metal Corp., apparently disagreeing with, but not
expressly contradicting, the Fleet Factors court, held that a secured lender had
no liability absent "some actual management of the facility" on the part of the
lender.
Court decisions have taken varying views of the scope of the
secured-creditor exemption, leading to administrative and legislative efforts to
provide guidance to lenders on the scope of activities that would trigger CERCLA
and/or RCRA liability. Until recently, these efforts have failed to provide
substantial guidance.
On September 28, 1996, Congress enacted, and on September 30, 1996 the
President signed into law the Asset Conservation Lender Liability and Deposit
Insurance Protection Act of 1996 (the "ASSET CONSERVATION ACT"). The Asset
Conservation Act was intended to clarify the scope of the secured creditor
exemption. This legislation more clearly defines the kinds of activities that
would constitute "participation in management" and that therefore would trigger
liability for secured parties under CERCLA. It also identified certain
activities that ordinarily would not trigger liability, provided, however, that
such activities did not otherwise rise to the level of "participation in
management." The Asset Conservation Act specifically reverses the Fleet Factors
"capacity to influence" standard. The Asset Conservation Act also provides
additional protection against liability in the event of foreclosure. However,
since the courts have not yet had the opportunity to interpret the new statutory
provisions, the scope of the additional protections offered by the Asset
Conservation Act is not fully defined. It also is important to note that the
Asset Conservation Act does not offer complete protection to lenders and that
the risk of liability remains.
If a secured lender does become liable, it may be entitled to bring an
action for contribution against the owner or operator who created the
environmental contamination or against some other liable party, but that person
or entity may be bankrupt or otherwise judgment-proof. It is therefore possible
that cleanup or other environmental liability costs could become a liability of
the Trust Fund and occasion a loss to the Trust Fund and to Securityholders in
certain circumstances. The new secured creditor amendments to CERCLA, also,
would not necessarily affect the potential for liability in actions by either a
state or a private party under other federal or state laws which may impose
liability on "owners or operators" but do not incorporate the secured-creditor
exemption.
Traditionally, residential mortgage lenders have not taken steps to
evaluate whether hazardous wastes or hazardous substances are present with
respect to any mortgaged property prior to the origination of the mortgage loan
or prior to foreclosure or accepting a deed-in-lieu of foreclosure. Neither the
Depositor nor any Servicer makes
81
any representations or warranties or assumes any liability with respect to:
environmental conditions of such Mortgaged Property; the absence, presence or
effect of hazardous wastes or hazardous substances on, near or emanating from
such Mortgaged Property; the impact on Securityholders of any environmental
condition or presence of any substance on or near such Mortgaged Property; or
the compliance of any Mortgaged Property with any environmental laws. In
addition, no agent, person or entity otherwise affiliated with the Depositor is
authorized or able to make any such representation, warranty or assumption of
liability relative to any such Mortgaged Property.
DUE-ON-SALE CLAUSES
The Mortgage Loans will generally contain due-on-sale clauses. These
clauses generally provide that the lender may accelerate the maturity of the
loan if the mortgagor sells, transfers or conveys the related Mortgaged
Property. The enforceability of due-on-sale clauses has been the subject of
legislation or litigation in many states and, in some cases, the enforceability
of these clauses was limited or denied. However, with respect to certain loans
the Garn-St. Germain Depository Institutions Act of 1982 preempts state
constitutional, statutory and case law that prohibits the enforcement of
due-on-sale clauses and permits lenders to enforce these clauses in accordance
with their terms, subject to certain limited exceptions. Due-on-sale clauses
contained in mortgage loans originated by federal savings and loan associations
of federal savings banks are fully enforceable pursuant to regulations of the
United States Federal Home Loan Bank Board, as succeeded by the Office of Thrift
Supervision, which preempt state law restrictions on the enforcement of such
clauses. Similarly, "due-on-sale" clauses in mortgage loans made by national
banks and federal credit unions are now fully enforceable pursuant to preemptive
regulations of the Comptroller of the Currency and the National Credit Union
Administration, respectively.
The Garn-St. Germain Act also sets forth nine specific instances in
which a mortgage lender covered by the act (including federal savings and loan
associations and federal savings banks) may not exercise a "due-on-sale" clause,
notwithstanding the fact that a transfer of the property may have occurred.
These include intra-family transfers, certain transfers by operation of law,
leases of fewer than three years and the creation of a junior encumbrance.
Regulations promulgated under the Garn-St. Germain Act also prohibit the
imposition of a prepayment charge upon the acceleration of a loan pursuant to a
due-on-sale clause. The inability to enforce a "due-on-sale" clause may result
in a mortgage that bears an interest rate below the current market rate being
assumed by a new home buyer rather than being paid off, which may affect the
average life of the Mortgage Loans and the number of Mortgage Loans which may
extend to maturity.
PREPAYMENT CHARGES
Some state laws restrict the imposition of Prepayment Charges and late
fees even when the mortgage loans expressly provide for the collection of those
charges. Although the Alternative Mortgage Transaction Parity Act of 1982 (the
"PARITY ACT"), permits the collection of Prepayment Charges and late fees in
connection with some types of eligible mortgage 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 and late fees may not be collected even on
loans that provide for the payment of those charges. The "OTS", the agency that
administers the Parity Act for unregulated, non-federally chartered housing
creditors, withdrew its favorable Parity Act regulations and Chief Counsel
Opinions that previously authorized state-chartered housing creditors to charge
Prepayment Charges and late fees in certain circumstances notwithstanding
contrary state law, effective with respect to mortgage loans originated on or
after July 1, 2003. However, the OTS's ruling does not retroactively affect
mortgage loans originated by such entities before July 1, 2003.
SUBORDINATE FINANCING
Where a mortgagor encumbers mortgaged property with one or more junior
liens, the senior lender is subjected to additional risk. First, the mortgagor
may have difficulty servicing and repaying multiple loans. In addition, if the
junior loan permits recourse to the mortgagor (as junior loans often do) and the
senior loan does not, a mortgagor may be more likely to repay sums due on the
junior loan than those on the senior loan. Second, acts of the senior lender
that prejudice the junior lender or impair the junior lender's security may
create a superior equity in favor of the junior lender. For example, if the
mortgagor and the senior lender agree to an increase in the principal amount of
or the interest rate payable on the senior loan, the senior lender may lose its
priority to the extent any
82
existing junior lender is harmed or the mortgagor is additionally burdened.
Third, if the mortgagor defaults on the senior loan and/or any junior loan or
loans, the existence of junior loans and actions taken by junior lenders can
impair the security available to the senior lender and can interfere with or
delay the taking of action by the senior lender. Moreover, the bankruptcy of a
junior lender may operate to stay foreclosure or similar proceedings by the
senior lender.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary
Control Act of 1980, enacted in March 1980 ("TITLE V"), provides that state
usury limitations shall not apply to certain types of residential first mortgage
loans originated by certain lenders after March 31, 1980. A similar federal
statute was in effect with respect to mortgage loans made during the first three
months of 1980. The Office of Thrift Supervision is authorized to issue rules
and regulations and to publish interpretations governing implementation of Title
V. The statute authorized any state to reimpose interest rate limits by
adopting, before April 1, 1983, a law or constitutional provision that expressly
rejects application of the federal law. In addition, even where Title V is not
so rejected, any state is authorized by the law to adopt a provision limiting
discount points or other charges on mortgage loans covered by Title V. Certain
states have taken action to reimpose interest rate limits and/or to limit
discount points or other charges.
The Depositor believes that a court interpreting Title V would hold
that residential first mortgage loans that are originated on or after January 1,
1980 are subject to federal preemption. Therefore, in a state that has not taken
the requisite action to reject application of Title V or to adopt a provision
limiting discount points or other charges prior to origination of such mortgage
loans, any such limitation under such state's usury law would not apply to such
mortgage loans.
In any state in which application of Title V has been expressly
rejected or a provision limiting discount points or other charges is adopted, no
mortgage loan originated after the date of such state action will be eligible
for inclusion in a Trust Fund unless (i) such mortgage loan provides for such
interest rate, discount points and charges as are permitted in such state or
(ii) such mortgage loan provides that the terms thereof shall be construed in
accordance with the laws of another state under which such interest rate,
discount points and charges would not be usurious and the mortgagor's counsel
has rendered an opinion that such choice of law provision would be given effect.
Statutes differ in their provisions as to the consequences of a
usurious loan. One group of statutes requires the lender to forfeit the interest
due above the applicable limit or impose a specified penalty. Under this
statutory scheme, the mortgagor may cancel the recorded mortgage or deed of
trust upon paying its debt with lawful interest, and the lender may foreclose,
but only for the debt plus lawful interest. A second group of statutes is more
severe. A violation of this type of usury law results in the invalidation of the
transaction, thereby permitting the mortgagor to cancel the recorded mortgage or
deed of trust without any payment or prohibiting the lender from foreclosing.
ALTERNATIVE MORTGAGE INSTRUMENTS
Alternative mortgage instruments, including adjustable rate mortgage
loans and early ownership mortgage loans, originated by non-federally chartered
lenders have historically been subject to a variety of restrictions. Such
restrictions differed from state to state, resulting in difficulties in
determining whether a particular alternative mortgage instrument originated by a
state-chartered lender was in compliance with applicable law. These difficulties
were alleviated substantially as a result of the enactment of Title VIII of the
Garn-St. Germain Act ("TITLE VIII"). Title VIII provides that, notwithstanding
any state law to the contrary, state-chartered banks may originate alternative
mortgage instruments in accordance with regulations promulgated by the
Comptroller of the Currency with respect to origination of alternative mortgage
instruments by national banks; state-chartered credit unions may originate
alternative mortgage instruments in accordance with regulations promulgated by
the National Credit Union Administration with respect to origination of
alternative mortgage instruments by federal credit unions; and all other
non-federally chartered housing creditors, including state-chartered savings and
loan associations, state-chartered savings banks and mutual savings banks and
mortgage banking companies, may originate alternative mortgage instruments in
accordance with the regulations promulgated by the Federal Home Loan Bank Board,
predecessor to the Office of Thrift Supervision, with respect to origination of
alternative
83
mortgage instruments by federal savings and loan associations. Title VIII
provides that any state may reject applicability of the provisions of Title VIII
by adopting, prior to October 15, 1985, a law or constitutional provision
expressly rejecting the applicability of such provisions. Certain states have
taken such action.
HOMEOWNERS PROTECTION ACT OF 1998
The Homeowners Protection Act of 1998 ("HOPA") provides for certain
disclosure and termination requirements for primary mortgage insurance ("PMI").
The termination provisions of HOPA apply only to mortgage loans relating to
single-family primary residences originated on or after July 29, 1999. Such
termination provisions govern when a mortgagor may cancel the requirement to
maintain PMI and when the requirement to maintain PMI is automatically
terminated. In general, voluntary termination is permitted and automatic
termination occurs when the principal balance of the mortgage loan is reduced to
80% or 78%, respectively, of the original property value. The disclosure
requirements of HOPA vary depending on whether the mortgage loan was originated
before or after July 29, 1999. Such disclosure requirements include notification
of the circumstances whereby a mortgagor may cancel PMI, the date when PMI
automatically terminates and servicer contact information. In addition, HOPA
provides that no later than 30 days after cancellation or termination of PMI,
the servicer shall provide written notification that such PMI is terminated and
no further payments are due or payable. Any servicer, mortgagee or mortgage
insurer that violates provisions of HOPA is subject to possible liability which
includes, but is not limited to, actual damages, statutory damages and
reasonable attorney's fees.
TEXAS HOME EQUITY LOANS
Generally, any "cash-out" refinance or other non-purchase money
transaction (except for rate/term refinance loans and certain other narrow
exceptions) secured by a Texas resident's principal residence is subject to the
provisions set forth in Section 50(a)(6) of Article XVI of the Constitution of
Texas and its implementing statutes and regulations (the "TEXAS HOME EQUITY
LAWS"). The Texas Home Equity Laws provide for certain disclosure requirements,
caps on allowable fees, required loan closing procedures and other restrictions.
Failure, inadvertent or otherwise, to comply with any requirement may render the
Mortgage Loan unenforceable and/or the lien on the Mortgaged Property voidable
unless cured within 60 days after the borrower provides notice of the defect to
the lender. Because mortgage loans which are subject to the Texas Home Equity
Laws can be foreclosed only pursuant to court order, rather than non-judicial
foreclosure as is available for other types of mortgage loans in Texas, delays
and increased losses may result in connection with foreclosures of such loans.
If a court were to find that any requirement of the Texas Home Equity Laws was
not complied with, the court could refuse to allow foreclosure to proceed,
declare the lien on the Mortgaged Property to be void, and/or require the
originating lender or the holder of the note to forfeit some or all principal
and interest of the related Mortgage Loan. Title insurance generally available
on such Mortgage Loans may exclude coverage for some of the risks described in
this paragraph.
SERVICEMEMBERS CIVIL RELIEF ACT
Generally, under the terms of the Servicemembers Civil Relief Act (the
"RELIEF ACT"), a mortgagor who enters military service after the origination of
such mortgagor's Mortgage Loan, including a mortgagor who was in reserve status
and is called to active duty after origination of the Mortgage Loan, may not be
charged interest, including fees and charges, in excess of 6% per annum during
the period of the mortgagor's active duty status. In addition to adjusting the
interest, the lender must forgive any such interest in excess of 6%, unless a
court or administrative agency orders otherwise upon application of the lender.
Further, the Relief Act provides broad discretion for a court to modify a
mortgage loan upon application by the mortgagor. The Relief Act applies to
mortgagors who are members of the U.S. Armed Forces and officers of the U.S.
Public Health Service or the National Oceanic and Atmospheric Administration
assigned to duty with the military. The California Military and Veterans Code
(the "CALIFORNIA MILITARY CODE") provides protection substantially similar to
that provided by the Relief Act to California national guard members called up
to active service by the Governor, California national guard members called up
to active service by the President and reservists called to active duty. In
addition, other states have enacted comparable legislation which may interfere
with or affect the ability of the Servicer to timely collect payments of
principal and interest on, or to foreclose on, Mortgage Loans of mortgagors in
such states who are active or reserve members of the armed services. It is
possible that the Relief Act, the California Military Code or similar state law
could have an effect, for an indeterminate period of time, on the ability of the
Servicer to collect full amounts of interest on certain of the Mortgage Loans in
a Trust Fund. Any shortfall in interest collections
84
resulting from the application of the Relief Act, the California Military Code
or similar state law could result in losses to the holders of the Securities of
the related Series. Further, since the Relief Act, the California Military Code
and similar state law impose limitations which would impair the ability of the
Servicer to foreclose on an affected Mortgage Loan during the mortgagor's period
of active duty status, in the event that such a Mortgage Loan goes into default,
there may be delays and losses occasioned by the inability to realize upon the
Mortgaged Property in a timely fashion.
FORFEITURE FOR DRUG, RICO AND MONEY LAUNDERING VIOLATIONS
Federal law provides that property purchased or improved with assets
derived from criminal activity or otherwise tainted, or used in the commission
of certain offenses, can be seized and ordered forfeited to the United States of
America. The offenses which can trigger such a seizure and forfeiture include,
among others, violations of the Racketeer Influenced and Corrupt Organizations
Act, the Bank Secrecy Act, the anti-money laundering laws and regulations,
including the USA Patriot Act of 2001 and the regulations issued thereunder, as
well as the narcotic drug laws. In many instances, the United States may seize
the property even before a conviction occurs.
In the event of a forfeiture proceeding, a lender may be able to
establish its interest in the property by proving that (i) its mortgage was
executed and recorded before the commission of the illegal conduct from which
the assets used to purchase or improve the property were derived or before any
other crime upon which the forfeiture is based, or (ii) the lender, at the time
of the execution of the mortgage, "did not know or was reasonably without cause
to believe that the property was subject to forfeiture." However, there can be
no assurance that such a defense will be successful.
CERTAIN LEGAL ASPECTS OF THE CONTRACTS
The following discussion contains summaries, which are general in
nature, of certain legal matters relating to the Contracts. Because such legal
aspects are governed primarily by applicable state law (which laws may differ
substantially), the summaries do not purport to be complete nor to reflect the
laws of any particular state, nor to encompass the laws of all states in which
the security for the Contracts is situated. The summaries are qualified in their
entirety by reference to the appropriate laws of the states in which Contracts
may be originated.
GENERAL
As a result of the assignment of the Contracts to the Trustee, the
Trustee will succeed collectively to all of the rights (including the right to
receive payment on the Contracts) of the obligee under the Contracts. Each
Contract evidences both (a) the obligation of the obligor to repay the loan
evidenced thereby, and (b) the grant of a security interest in the Manufactured
Home to secure repayment of such loan. Certain aspects of both features of the
Contracts are described more fully below.
The Contracts generally are "chattel paper" as defined in the UCC in
effect in the states in which the Manufactured Homes initially were registered.
Pursuant to the UCC, the sale of chattel paper is treated in a manner similar to
perfection of a security interest in chattel paper. Under the applicable
Agreement, the Servicer will transfer physical possession of the Contracts to
the Trustee or its custodian or may retain possession of the Contracts as
custodian for the Trustee. In addition, the Servicer will make an appropriate
filing of a UCC-1 financing statement in the appropriate states to give notice
of the Trustee's ownership of the Contracts. The Contracts will be stamped or
marked otherwise to reflect their assignment from the Company to the Trustee
only if provided in the related prospectus supplement. Therefore, if, through
negligence, fraud or otherwise, a subsequent purchaser were able to take
physical possession of the Contracts without notice of such assignment, the
Trustee's interest in Contracts could be defeated.
SECURITY INTERESTS IN THE MANUFACTURED HOMES
The Manufactured Homes securing the Contracts may be located in all 50
states and the District of Columbia. Security interests in manufactured homes
may be perfected either by notation of the secured party's lien on the
certificate of title or by delivery of the required documents and payment of a
fee to the state motor vehicle
85
authority, depending on state law. In some nontitle states, perfection pursuant
to the provisions of the UCC is required. The Asset Seller may effect such
notation or delivery of the required documents and fees, and obtain possession
of the certificate of title, as appropriate under the laws of the state in which
any manufactured home securing a manufactured housing conditional sales contract
is registered. In the event the Asset Seller fails, due to clerical error, to
effect such notation or delivery, or files the security interest under the wrong
law (for example, under a motor vehicle title statute rather than under the UCC,
in a few states), the Asset Seller may not have a first priority security
interest in the Manufactured Home securing a Contract. As manufactured homes
have become larger and often have been attached to their sites without any
apparent intention to move them, courts in many states have held that
manufactured homes, under certain circumstances, may become subject to real
estate title and recording laws. As a result, a security interest in a
manufactured home could be rendered subordinate to the interests of other
parties claiming an interest in the home under applicable state real estate law.
In order to perfect a security interest in a manufactured home under real estate
laws, the holder of the security interest must file either a "fixture filing"
under the provisions of the UCC or a real estate mortgage under the real estate
laws of the state where the home is located. These filings must be made in the
real estate records office of the county where the home is located.
Substantially all of the Contracts contain provisions prohibiting the borrower
from permanently attaching the Manufactured Home to its site. So long as the
borrower does not violate this agreement, a security interest in the
Manufactured Home will be governed by the certificate of title laws or the UCC,
and the notation of the security interest on the certificate of title or the
filing of a UCC financing statement will be effective to maintain the priority
of the security interest in the Manufactured Home. If, however, a Manufactured
Home is permanently attached to its site, other parties could obtain an interest
in the Manufactured Home which is prior to the security interest originally
retained by the Asset Seller and transferred to the Depositor. With respect to a
Series of Securities and if so described in the related prospectus supplement,
the Servicer may be required to perfect a security interest in the Manufactured
Home under applicable real estate laws. The Warranting Party will represent that
as of the date of the sale to the Depositor it has obtained a perfected first
priority security interest by proper notation or delivery of the required
documents and fees with respect to substantially all of the Manufactured Homes
securing the Contracts.
The Depositor will cause the security interests in the Manufactured
Homes to be assigned to the Trustee on behalf of the Securityholders. The
Depositor or the Trustee will amend the certificates of title (or file UCC-3
statements) to identify the Trustee as the new secured party, and will deliver
the certificates of title to the Trustee or note thereon the interest of the
Trustee only if specified in the related prospectus supplement. Accordingly, the
Asset Seller (or other originator of the Contracts) will continue to be named as
the secured party on the certificates of title relating to the Manufactured
Homes. In some states, such assignment is an effective conveyance of such
security interest without amendment of any lien noted on the related certificate
of title and the new secured party succeeds to Servicer's rights as the secured
party. However, in some states, in the absence of an amendment to the
certificate of title (or the filing of a UCC-3 statement), such assignment of
the security interest in the Manufactured Home may not be held effective or such
security interests may not be perfected and in the absence of such notation or
delivery to the Trustee, the assignment of the security interest in the
Manufactured Home may not be effective against creditors of the Asset Seller (or
such other originator of the Contracts) or a trustee in bankruptcy of the Asset
Seller (or such other originator).
In the absence of fraud, forgery or permanent affixation of the
Manufactured Home to its site by the Manufactured Home owner, or administrative
error by state recording officials, the notation of the lien of the Asset Seller
(or other originator of the Contracts) on the certificate of title or delivery
of the required documents and fees will be sufficient to protect the
Securityholders against the rights of subsequent purchasers of a Manufactured
Home or subsequent lenders who take a security interest in the Manufactured
Home. If there are any Manufactured Homes as to which the security interest
assigned to the Trustee is not perfected, such security interest would be
subordinate to, among others, subsequent purchasers for value of Manufactured
Homes and holders of perfected security interests. There also exists a risk in
not identifying the Trustee as the new secured party on the certificate of title
that, through fraud or negligence, the security interest of the Trustee could be
released.
In the event that the owner of a Manufactured Home moves it to a state
other than the state in which such Manufactured Home initially is registered,
under the laws of most states the perfected security interest in the
Manufactured Home would continue for four months after such relocation and
thereafter only if and after the owner re-registers the Manufactured Home in
such state. If the owner were to relocate a Manufactured Home to another state
and not re-register the Manufactured Home in such state, and if steps are not
taken to re-perfect the Trustee's
86
security interest in such state, the security interest in the Manufactured Home
would cease to be perfected. A majority of states generally require surrender of
a certificate of title to re-register a Manufactured Home; accordingly, the
Servicer must surrender possession if it holds the certificate of title to such
Manufactured Home or, in the case of Manufactured Homes registered in states
which provide for notation of lien, the Asset Seller (or other originator) would
receive notice of surrender if the security interest in the Manufactured Home is
noted on the certificate of title. Accordingly, the Trustee would have the
opportunity to re-perfect its security interest in the Manufactured Home in the
state of relocation. In states which do not require a certificate of title for
registration of a manufactured home, re-registration could defeat perfection. In
the ordinary course of servicing the manufactured housing contracts, the
Servicer takes steps to effect such re-perfection upon receipt of notice of
re-registration or information from the obligor as to relocation. Similarly,
when an obligor under a manufactured housing contract sells a manufactured home,
the Servicer must surrender possession of the certificate of title or, if it is
noted as lienholder on the certificate of title, will receive notice as a result
of its lien noted thereon and accordingly will have an opportunity to require
satisfaction of the related manufactured housing conditional sales contract
before release of the lien. Under the applicable Agreement, the Servicer is
obligated to take such steps, at the Servicer's expense, as are necessary to
maintain perfection of security interests in the Manufactured Homes.
Under the laws of most states, liens for repairs performed on a
Manufactured Home and liens for personal property taxes take priority even over
a perfected security interest. The Warranting Party will represent in the
applicable Agreement that it has no knowledge of any such liens with respect to
any Manufactured Home securing payment on any Contract. However, such liens
could arise at any time during the term of a Contract. No notice will be given
to the Trustee or Securityholders in the event such a lien arises.
ENFORCEMENT OF SECURITY INTERESTS IN MANUFACTURED HOMES
The Servicer on behalf of the Trustee, to the extent required by the
applicable Agreement, may take action to enforce the Trustee's security interest
with respect to Contracts in default by repossession and resale of the
Manufactured Homes securing such defaulted Contracts. So long as the
Manufactured Home has not become subject to the real estate law, a creditor can
repossess a Manufactured Home securing a Contract by voluntary surrender, by
"self-help" repossession that is "peaceful" (i.e., without breach of the peace)
or, in the absence of voluntary surrender and the ability to repossess without
breach of the peace, by judicial process. The holder of a Contract must give the
debtor a number of days' notice, which varies from 10 to 30 days depending on
the state, prior to commencement of any repossession. The UCC and consumer
protection laws in most states place restrictions on repossession sales,
including requiring prior notice to the debtor and commercial reasonableness in
effecting such a sale. The law in most states also requires that the debtor be
given notice of any sale prior to resale of the unit so that the debtor may
redeem at or before such resale. In the event of such repossession and resale of
a Manufactured Home, the Trustee would be entitled to be paid out of the sale
proceeds before such proceeds could be applied to the payment of the claims of
unsecured creditors or the holders of subsequently perfected security interests
or, thereafter, to the debtor.
Under the laws applicable in most states, a creditor is entitled to
obtain a deficiency judgment from a debtor for any deficiency on repossession
and resale of the manufactured home securing such debtor's loan. However, some
states impose prohibitions or limitations on deficiency judgments, and in many
cases the defaulting borrower would have no assets with which to pay a judgment.
Certain other statutory provisions, including 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.
SERVICEMEMBERS CIVIL RELIEF ACT
The terms of the Relief Act apply to an obligor on a Contract as
described for a mortgagor on a Mortgage Loan under "Certain Legal Aspects of
Mortgage Loans--Servicemembers Civil Relief Act."
CONSUMER PROTECTION LAWS
87
The so-called "Holder-in-Due-Course" rule of the Federal Trade
Commission is intended to defeat the ability of the transferor of a consumer
credit contract which is the seller of goods which gave rise to the transaction
(and certain related lenders and assignees) to transfer such contract free of
notice of claims by the debtor thereunder. The effect of this rule is to subject
the assignee of such a contract to all claims and defenses which the debtor
could assert against the seller of goods. Liability under this rule is limited
to amounts paid under a Contract; however, the obligor also may be able to
assert the rule to set off remaining amounts due as a defense against a claim
brought by the Trustee against such obligor. Numerous other federal and state
consumer protection laws impose requirements applicable to the origination and
lending pursuant to the Contracts, including the Truth in Lending Act, the
Federal Trade Commission Act, the Fair Credit Billing Act, the Fair Credit
Reporting Act, the Equal Credit Opportunity Act, the Fair Debt Collection
Practices Act and the Uniform Consumer Credit Code. In the case of some of these
laws, the failure to comply with their provisions may affect the enforceability
of the related Contract.
TRANSFERS OF MANUFACTURED HOMES; ENFORCEABILITY OF DUE-ON-SALE CLAUSES
The Contracts, in general, prohibit the sale or transfer of the related
Manufactured Homes without the consent of the Servicer and permit the
acceleration of the maturity of the Contracts by the Servicer upon any such sale
or transfer that is not consented to. Generally, it is expected that the
Servicer will permit most transfers of Manufactured Homes and not accelerate the
maturity of the related Contracts. In certain cases, the transfer may be made by
a delinquent obligor in order to avoid a repossession proceeding with respect to
a Manufactured Home.
In the case of a transfer of a Manufactured Home after which the
Servicer desires to accelerate the maturity of the related Contract, the
Servicer's ability to do so will depend on the enforceability under state law of
the "due-on-sale" clause. The Garn-St. Germain Depositary Institutions Act of
1982 preempts, subject to certain exceptions and conditions, state laws
prohibiting enforcement of "due-on-sale" clauses applicable to the Manufactured
Homes. Consequently, in some states the Servicer may be prohibited from
enforcing a "due-on-sale" clause in respect of certain Manufactured Homes.
APPLICABILITY OF USURY LAWS
Title V provides that, subject to the following conditions, state usury
limitations shall not apply to any loan which is secured by a first lien on
certain kinds of manufactured housing. The Contracts would be covered if they
satisfy certain conditions, among other things, governing the terms of any
prepayments, late charges and deferral fees and requiring a 30-day notice period
prior to instituting any action leading to repossession of or foreclosure with
respect to the related unit.
Title V authorized any state to reimpose limitations on interest rates
and finance charges by adopting before April 1, 1983 a law or constitutional
provision which expressly rejects application of the federal law. Fifteen states
adopted such a law prior to the April 1, 1983 deadline. In addition, even where
Title V was not so rejected, any state is authorized by the law to adopt a
provision limiting discount points or other charges on loans covered by Title V.
The related Asset Seller will represent that all of the Contracts comply with
applicable usury law.
FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following discussion is based on the advice of Cadwalader,
Wickersham & Taft LLP or Hunton & Williams LLP, as to the anticipated material
federal income tax consequences of the purchase, ownership and disposition of
the Securities offered hereunder. As to any Securities offered pursuant hereto,
Cadwalader, Wickersham & Taft LLP or Hunton & Williams LLP is of the opinion
that the following discussion, as supplemented by the discussion under the
heading "Federal Income Tax Consequences," if any, in the prospectus supplement
accompanying this prospectus with respect to those Securities, is correct in all
material respects as of the date of such prospectus supplement. Except as
specifically set forth elsewhere herein, the opinion set forth in the preceding
sentence and any opinions specifically set forth in this discussion or the
related prospectus supplement are the only opinions being rendered with respect
to tax matters affecting the Securities offered hereunder by Cadwalader,
Wickersham & Taft LLP or Hunton & Williams LLP. The opinion stated above and the
opinions
88
specifically identified as such in the following discussion and in the related
prospectus supplement are the only opinions that Cadwalader, Wickersham & Taft
LLP or Hunton & Williams LLP has been asked to render with respect to the tax
consequences of the purchase, ownership and dispositions of the Securities
offered under this prospectus and the related prospectus supplement. This
discussion is directed solely to Securityholders that hold the Securities as
capital assets within the meaning of Section 1221 of the Internal Revenue Code
of 1986, as amended (the "CODE") and does not purport to discuss all federal
income tax consequences that may be applicable to particular categories of
investors, some of which (such as banks, insurance companies and foreign
investors) may be subject to special rules. Further, the authorities on which
this discussion, and the opinion referred to below, are based are subject to
change or differing interpretations, which could apply retroactively. In
addition to the federal income tax consequences described herein, potential
investors should consider the state and local tax consequences, if any, of the
purchase, ownership and disposition of the Securities. See "State and Other Tax
Consequences." Securityholders are encouraged to consult their own tax advisors
concerning the federal, state, local or other tax consequences to them of the
purchase, ownership and disposition of the Securities offered hereunder.
The following discussion addresses securities of four general types:
(i) securities ("REMIC SECURITIES") representing interests in a Trust Fund, or a
portion thereof, that the Trustee will elect to have treated as a real estate
mortgage investment conduit ("REMIC" ) under Sections 860A through 860G (the
"REMIC PROVISIONS") of the Code, (ii) securities ("GRANTOR TRUST SECURITIES")
representing interests in a Trust Fund ("GRANTOR TRUST FUND") as to which no
such election will be made, (iii) securities ("PARTNERSHIP SECURITIES")
representing interests in a Trust Fund ("PARTNERSHIP TRUST FUND") which is
treated as a partnership for federal income tax purposes, and (iv) securities
("DEBT SECURITIES") representing indebtedness of a Partnership Trust Fund for
federal income tax purposes. The prospectus supplement for each Series of
Securities will indicate which of the foregoing treatments will apply to such
Series and, if a REMIC election (or elections) will be made for the related
Trust Fund, will identify all "regular interests" and "residual interests" in
the REMIC. For purposes of this tax discussion, (i) references to a
"Securityholder" or a "holder" are to the beneficial owner of a Security, (ii)
references to "REMIC POOL" are to an entity or portion thereof as to which a
REMIC election will be made and (iii) references to "Mortgage Loans" include
Contracts. Generally, no REMIC election will be made with respect to Unsecured
Home Improvement Loans.
The following discussion is based in part upon the rules governing
original issue discount that are set forth in Sections 1271-1273 and 1275 of the
Code and in the Treasury regulations issued thereunder (the "OID REGULATIONS"),
and in part upon the REMIC Provisions and the Treasury regulations issued
thereunder (the "REMIC REGULATIONS"). The OID Regulations do not adequately
address certain issues relevant to, and in some instances provide that they are
not applicable to, securities such as the Securities.
Taxable Mortgage Pools
Corporate income tax can be imposed on the net income of certain
entities issuing non-REMIC debt obligations secured by real estate mortgages
("TAXABLE MORTGAGE POOLS"). Any entity other than a REMIC will be considered a
Taxable Mortgage Pool if (i) substantially all of the assets of the entity
consist of debt obligations and more than 50% of such obligations consist of
"real estate mortgages," (ii) such entity is the obligor under debt obligations
with two or more maturities, and (iii) under the terms of the debt obligations
on which the entity is the obligor, payments on such obligations bear a
relationship to payments on the obligations held by the entity. Furthermore, a
group of assets held by an entity can be treated as a separate Taxable Mortgage
Pool if the assets are expected to produce significant cash flow that will
support one or more of the entity's issues of debt obligations. The Depositor
generally will structure offerings of non-REMIC Securities to avoid the
application of the Taxable Mortgage Pool rules.
REMICS
Classification of REMICs
With respect to each Series of REMIC Securities, assuming compliance
with all provisions of the related Pooling and Servicing Agreement, the related
Trust Fund (or each applicable portion thereof) will qualify as a REMIC and the
REMIC Securities offered with respect thereto will be considered to evidence
ownership of "regular
89
interests" ("REGULAR SECURITIES") or "residual interests" ("RESIDUAL
SECURITIES") in that REMIC within the meaning of the REMIC Provisions.
In order for the REMIC Pool to qualify as a REMIC, there must be
ongoing compliance on the part of the REMIC Pool with the requirements set forth
in the Code. The REMIC Pool must fulfill an asset test, which requires that no
more than a de minimis portion of the assets of the REMIC Pool, as of the close
of the third calendar month beginning after the "STARTUP DAY" (which for
purposes of this discussion is the date of issuance of the REMIC Securities) and
at all times thereafter, may consist of assets other than "qualified mortgages"
and "permitted investments." The REMIC Regulations provide a safe harbor
pursuant to which the de minimis requirement will be met if at all times the
aggregate adjusted basis of the nonqualified assets is less than 1% of the
aggregate adjusted basis of all the REMIC Pool's assets. An entity that fails to
meet the safe harbor may nevertheless demonstrate that it holds no more than a
de minimis amount of nonqualified assets. A REMIC Pool also must provide
"reasonable arrangements" to prevent its residual interests from being held by
"disqualified organizations" or agents thereof and must furnish applicable tax
information to transferors or agents that violate this requirement. The Pooling
and Servicing Agreement with respect to each Series of REMIC Securities will
contain provisions meeting these requirements. See "--Taxation of Owners of
Residual Securities--Tax-Related Restrictions on Transfer of Residual
Securities--Disqualified Organizations."
A qualified mortgage is any obligation that is principally secured by
an interest in real property and that (i) is either transferred to the REMIC
Pool on the Startup Day, (ii) is purchased by the REMIC Pool within a
three-month period thereafter pursuant to a fixed price contract in effect on
the Startup Day or (iii) represents an increase in the principal amount of the
obligation under the terms of such obligation described in (i) or (ii) above if
such increase is attributable to an advance made to the obligor pursuant to the
original terms of the obligation, occurs after the Startup Day of the REMIC and
is purchased by the REMIC pursuant to a fixed price contract in effect on the
Startup Day. Qualified mortgages include whole mortgage loans, such as the
Mortgage Loans, and, generally, certificates of beneficial interest in a grantor
trust that holds mortgage loans and regular interests in another REMIC, such as
lower-tier regular interests in Tiered REMICs. The REMIC Regulations specify
that loans secured by timeshare interests, shares held by a tenant stockholder
in a cooperative housing corporation, and manufactured housing that qualifies as
a "single family residence" under Code Section 25(e)(10) can be qualified
mortgages. A qualified mortgage includes a qualified replacement mortgage, which
is any property that would have been treated as a qualified mortgage if it were
transferred to the REMIC Pool on the Startup Day and that is received either (i)
in exchange for any qualified mortgage within a three-month period thereafter or
(ii) in exchange for a "defective obligation" within a two-year period
thereafter. A "defective obligation" includes (i) a mortgage in default or as to
which default is reasonably foreseeable, (ii) a mortgage as to which a customary
representation or warranty made at the time of transfer to the REMIC Pool has
been breached, (iii) a mortgage that was fraudulently procured by the mortgagor,
and (iv) a mortgage that was not in fact principally secured by real property
(but only if such mortgage is disposed of within 90 days of discovery). A
mortgage loan that is "defective" as described in clause (iv) that is not sold
or, if within two years of the Startup Day, exchanged, within 90 days of
discovery, ceases to be a qualified mortgage after such 90-day period.
Permitted investments include cash flow investments, qualified reserve
assets, and foreclosure property. A cash flow investment is an investment,
earning a return in the nature of interest, of amounts received on or with
respect to qualified mortgages for a temporary period, not exceeding 13 months,
until the next scheduled distribution to holders of interests in the REMIC Pool.
A qualified reserve asset is any intangible property held for investment that is
part of any reasonably required reserve maintained by the REMIC Pool (i) to
provide for payments of expenses of the REMIC Pool or amounts due on the regular
or residual interests in the event of defaults (including delinquencies) on the
qualified mortgages, lower than expected reinvestment returns, prepayment
interest shortfalls and certain other contingencies or (ii) to provide a source
of funding for the purchase of additional mortgage loans pursuant to a
qualifying fixed price or additional draws made by mortgagors under the terms of
loans held by the related REMIC. The aggregate fair market of any such reserve
cannot exceed 50% of the aggregate fair market value of all assets of the REMIC
on the Startup Day. The reserve fund will be disqualified if more than 30% of
the gross income from the assets in such fund for the year is derived from the
sale or other disposition of property held for less than three months, unless
required to prevent a default on the regular interests caused by a default on
one or more qualified mortgages. A reserve fund must be reduced "promptly and
appropriately" as payments on the Mortgage Loans are received. Foreclosure
property is real property acquired by the REMIC Pool in connection with
90
the default or imminent default of a qualified mortgage and generally may not be
held beyond the close of the third calendar year beginning after the taxable
year of acquisition unless an extension is granted by the IRS.
In addition to the foregoing requirements, the various interests in a
REMIC Pool also must meet certain requirements. All of the interests in a REMIC
Pool must be either of the following: (i) one or more Classes of regular
interests or (ii) a single class of residual interests on which distributions,
if any, are made pro rata. A regular interest is an interest in a REMIC Pool
that is issued on the Startup Day with fixed terms, is designated as a regular
interest, and unconditionally entitles the holder to receive a specified
principal amount (or other similar amount), and provides that interest payments
(or other similar amounts), if any, at or before maturity either are payable
based on a fixed rate or a qualified variable rate, or consist of a specified,
nonvarying portion of the interest payments on qualified mortgages. Such a
specified portion may consist of a fixed number of basis points, a fixed
percentage of the total interest, or a qualified variable rate, inverse variable
rate or difference between two fixed or qualified variable rates on some or all
of the qualified mortgages. The specified principal amount of a regular interest
that provides for interest payments consisting of a specified, nonvarying
portion of interest payments on qualified mortgages may be zero. A residual
interest is an interest in a REMIC Pool other than a regular interest that is
issued on the Startup Day and that is designated as a residual interest. An
interest in a REMIC Pool may be treated as a regular interest even if payments
of principal with respect to such interest are subordinated to payments on other
regular interests or the residual interest in the REMIC Pool, and are dependent
on the absence of defaults or delinquencies on qualified mortgages or permitted
investments, lower than reasonably expected returns on permitted investments,
unanticipated expenses incurred by the REMIC Pool or prepayment interest
shortfalls. Accordingly, the Regular Securities of a Series will constitute one
or more Classes of regular interests, and the Residual Securities with respect
to that Series will constitute a single Class of residual interests with respect
to each REMIC Pool.
If an entity electing to be treated as a REMIC fails to comply with one
or more of the ongoing requirements of the Code for such status during any
taxable year, the Code provides that the entity will not be treated as a REMIC
for such year and thereafter. In that event, such entity may be taxable as a
corporation under Treasury regulations, and the related REMIC Securities may not
be accorded the status or given the tax treatment described below. Although the
Code authorizes the Treasury Department to issue regulations providing relief in
the event of an inadvertent termination of REMIC status, no such regulations
have been issued. Any such relief, moreover, may be accompanied by sanctions,
such as the imposition of a corporate tax on all or a portion of the Trust
Fund's income for the period in which the requirements for such status are not
satisfied. The Pooling and Servicing Agreement with respect to each REMIC Pool
will include provisions designed to maintain the Trust Fund's status as a REMIC
under the REMIC Provisions. It is not anticipated that the status of any Trust
Fund as a REMIC will be terminated.
Characterization of Investments in REMIC Securities
In general, the REMIC Securities will be treated as "real estate
assets" within the meaning of Section 856(c)(4)(A) of the Code and assets
described in Section 7701(a)(19)(C) of the Code in the same proportion that the
assets of the REMIC Pool underlying such Securities would be so treated.
Moreover, if 95% or more of the assets of the REMIC Pool qualify for either of
the foregoing treatments at all times during a calendar year, the REMIC
Securities will qualify for the corresponding status in their entirety for that
calendar year. If the assets of the REMIC Pool include Buydown Mortgage Loans,
it is possible that the percentage of such assets constituting "loans . . .
secured by an interest in real property which is . . . residential real
property" for purposes of Code Section 7701(a)(19)(C)(v) may be required to be
reduced by the amount of the related funds paid thereon (the "BUYDOWN FUNDS").
Interest (including original issue discount) on the Regular Securities and
income allocated to the Class of Residual Securities will be interest described
in Section 856(c)(3)(B) of the Code to the extent that such Securities are
treated as "real estate assets" within the meaning of Section 856(c)(4)(A) of
the Code. In addition, the Regular Securities generally will be "qualified
mortgages" within the meaning of Section 860G(a)(3) of the Code if transferred
to another REMIC on its Startup Day in exchange for regular or residual
interests therein. The determination as to the percentage of the REMIC Pool's
assets that constitute assets described in the foregoing sections of the Code
will be made with respect to each calendar quarter based on the average adjusted
basis of each category of the assets held by the REMIC Pool during such calendar
quarter. The REMIC will report those determinations to Securityholders in the
manner and at the times required by applicable Treasury regulations.
The assets of the REMIC Pool will include, in addition to Mortgage
Loans, payments on Mortgage Loans held pending distribution on the REMIC
Securities and property acquired by foreclosure held pending sale, and may
91
include amounts in reserve accounts. It is unclear whether property acquired by
foreclosure held pending sale and amounts in reserve accounts would be
considered to be part of the Mortgage Loans, or whether such assets (to the
extent not invested in assets described in the foregoing sections) otherwise
would receive the same treatment as the Mortgage Loans for purposes of all of
the foregoing sections. The REMIC Regulations do provide, however, that payments
on Mortgage Loans held pending distribution are considered part of the Mortgage
Loans for purposes of Section 856(c)(4)(A) of the Code. Furthermore, foreclosure
property generally will qualify as "real estate assets" under Section
856(c)(4)(A) of the Code.
Tiered REMIC Structures
For certain Series of REMIC Securities, two or more separate elections
may be made to treat designated portions of the related Trust Fund as REMICs
("TIERED REMICS") for federal income tax purposes. Upon the issuance of any such
Series of REMIC Securities, Cadwalader, Wickersham & Taft LLP or Hunton &
Williams LLP will deliver its opinion generally to the effect that, assuming
compliance with all provisions of the related Pooling and Servicing Agreement,
the Tiered REMICs will each qualify as a REMIC and the REMIC Securities issued
by the Tiered REMICs will be considered to evidence ownership of Regular
Securities or Residual Securities in the related REMIC within the meaning of the
REMIC Provisions.
Solely for purposes of determining whether the REMIC Securities will be
"real estate assets" within the meaning of Section 856(c)(4)(A) of the Code and
"loans secured by an interest in real property" under Section 7701(a)(19)(C) of
the Code, and whether the income on such Securities is interest described in
Section 856(c)(3)(B) of the Code, the Tiered REMICs will be treated as one
REMIC.
Taxation of Owners of Regular Securities
General
In general, interest, original issue discount, and market discount on a
Regular Security will be treated as ordinary income to a holder of the Regular
Security (the "REGULAR SECURITYHOLDER"), and principal payments on a Regular
Security will be treated as a return of capital to the extent of the Regular
Securityholder's basis in the Regular Security allocable thereto. Regular
Securityholders must use the accrual method of accounting with regard to Regular
Securities, regardless of the method of accounting otherwise used by such
Regular Securityholder.
Original Issue Discount
Accrual Securities will be, and other Classes of Regular Securities may
be, issued with "original issue discount" within the meaning of Code Section
1273(a). Holders of any Class or subclass of Regular Securities having original
issue discount generally must include original issue discount in ordinary income
for federal income tax purposes as it accrues, in accordance with a constant
yield method that takes into account the compounding of interest, in advance of
the receipt of the cash attributable to such income. The following discussion is
based in part on OID Regulations issued under Code Sections 1271 through 1273
and 1275 and in part on the provisions of the 1986 Act. Regular Securityholders
should be aware, however, that the OID Regulations do not adequately address
certain issues relevant to prepayable securities, such as the Regular
Securities. To the extent such issues are not addressed in such regulations, the
Depositor intends to apply the methodology described in the Conference Committee
Report to the 1986 Act. No assurance can be provided that the IRS will not take
a different position as to those matters not currently addressed by the OID
Regulations. Moreover, the OID Regulations include an anti-abuse rule allowing
the IRS to apply or depart from the OID Regulations where necessary or
appropriate to ensure a reasonable tax result in light of the applicable
statutory provisions. A tax result will not be considered unreasonable under the
anti-abuse rule in the absence of a substantial effect on the present value of a
taxpayer's tax liability. Investors are advised to consult their own tax
advisors as to the discussion therein and the appropriate method for reporting
interest and original issue discount with respect to the Regular Securities.
Each Regular Security (except to the extent described below with
respect to a Regular Security on which principal is distributed in a single
installment or by lots of specified principal amounts upon the request of a
Securityholder or by random lot (a "NON-PRO RATA SECURITY")) will be treated as
a single installment obligation for
92
purposes of determining the original issue discount includable in a Regular
Securityholder's income. The total amount of original issue discount on a
Regular Security is the excess of the "stated redemption price at maturity" of
the Regular Security over its "issue price." The issue price of a Class of
Regular Securities offered pursuant to this prospectus generally is the first
price at which a substantial amount of such Class is sold to the public
(excluding bond houses, brokers and underwriters). Although unclear under the
OID Regulations, it is anticipated that the Trustee will treat the issue price
of a Class as to which there is no substantial sale as of the issue date or that
is retained by the Depositor as the fair market value of the Class as of the
issue date. The issue price of a Regular Security also includes any amount paid
by an initial Regular Securityholder for accrued interest that relates to a
period prior to the issue date of the Regular Security, unless the Regular
Securityholder elects on its federal income tax return to exclude such amount
from the issue price and to recover it on the first Distribution Date. The
stated redemption price at maturity of a Regular Security always includes the
original principal amount of the Regular Security, but generally will not
include distributions of interest if such distributions constitute "qualified
stated interest." Under the OID Regulations, qualified stated interest generally
means interest payable at a single fixed rate or a qualified variable rate (as
described below), provided that such interest payments are unconditionally
payable at intervals of one year or less during the entire term of the Regular
Security. Because there is no penalty or default remedy in the case of
nonpayment of interest with respect to a Regular Security, it is possible that
no interest on any Class of Regular Securities will be treated as qualified
stated interest. However, except as provided in the following three sentences or
in the applicable prospectus supplement, because the underlying Mortgage Loans
provide for remedies in the event of default, it is anticipated that the Trustee
will treat interest with respect to the Regular Securities as qualified stated
interest. Distributions of interest on an Accrual Security, or on other Regular
Securities with respect to which deferred interest will accrue, will not
constitute qualified stated interest, in which case the stated redemption price
at maturity of such Regular Securities includes all distributions of interest as
well as principal thereon. Likewise, it is anticipated that the Trustee will
treat an interest-only Class or a Class on which interest is substantially
disproportionate to its principal amount (a so-called "SUPER-PREMIUM" Class) as
having no qualified stated interest. Where the interval between the issue date
and the first Distribution Date on a Regular Security is shorter than the
interval between subsequent Distribution Dates, the interest attributable to the
additional days will be included in the stated redemption price at maturity.
Under a de minimis rule, original issue discount on a Regular Security
will be considered to be zero if such original issue discount is less than 0.25%
of the stated redemption price at maturity of the Regular Security multiplied by
the weighted average maturity of the Regular Security. For this purpose, the
weighted average maturity of the Regular Security is computed as the sum of the
amounts determined by multiplying the number of full years (i.e., rounding down
partial years) from the issue date until each distribution in reduction of
stated redemption price at maturity is scheduled to be made by a fraction, the
numerator of which is the amount of each distribution included in the stated
redemption price at maturity of the Regular Security and the denominator of
which is the stated redemption price at maturity of the Regular Security. The
Conference Committee Report to the 1986 Act provides that the schedule of such
distributions should be determined in accordance with the assumed rate of
prepayment of the Mortgage Loans (the "PREPAYMENT ASSUMPTION") and the
anticipated reinvestment rate, if any, relating to the Regular Securities. The
Prepayment Assumption with respect to a Series of Regular Securities will be set
forth in the applicable prospectus supplement. Holders generally must report de
minimis original issue discount pro rata as principal payments are received, and
such income will be capital gain if the Regular Security is held as a capital
asset. Under the OID Regulations, however, Regular Securityholders may elect to
accrue all de minimis original issue discount as well as market discount and
market premium, under the constant yield method. See "--Election to Treat All
Interest Under the Constant Yield Method."
A Regular Securityholder generally must include in gross income for any
taxable year the sum of the "daily portions," as defined below, of the original
issue discount on the Regular Security accrued during an accrual period for each
day on which it holds the Regular Security, including the date of purchase but
excluding the date of disposition. The Trustee will treat the monthly period
ending on the day before each Distribution Date as the accrual period. With
respect to each Regular Security, a calculation will be made of the original
issue discount that accrues during each successive full accrual period (or
shorter period from the date of original issue) that ends on the day before the
related Distribution Date on the Regular Security. The Conference Committee
Report to the 1986 Act states that the rate of accrual of original issue
discount is intended to be based on the Prepayment Assumption. The original
issue discount accruing in a full accrual period would be the excess, if any, of
(i) the sum of (a) the present value of all of the remaining distributions to be
made on the Regular Security as of the end of that accrual period, and (b) the
distributions made on the Regular Security during the accrual period that are
included in the
93
Regular Security's stated redemption price at maturity, over (ii) the adjusted
issue price of the Regular Security at the beginning of the accrual period. The
present value of the remaining distributions referred to in the preceding
sentence is calculated based on (i) the yield to maturity of the Regular
Security at the issue date, (ii) events (including actual prepayments) that have
occurred prior to the end of the accrual period, and (iii) the Prepayment
Assumption. For these purposes, the adjusted issue price of a Regular Security
at the beginning of any accrual period equals the issue price of the Regular
Security, increased by the aggregate amount of original issue discount with
respect to the Regular Security that accrued in all prior accrual periods and
reduced by the amount of distributions included in the Regular Security's stated
redemption price at maturity that were made on the Regular Security in such
prior periods. The original issue discount accruing during any accrual period
(as determined in this paragraph) will then be divided by the number of days in
the period to determine the daily portion of original issue discount for each
day in the period. With respect to an initial accrual period shorter than a full
accrual period, the daily portions of original issue discount must be determined
according to an appropriate allocation under any reasonable method.
Under the method described above, the daily portions of original issue
discount required to be included in income by a Regular Securityholder generally
will increase to take into account prepayments on the Regular Securities as a
result of prepayments on the Mortgage Loans that exceed the Prepayment
Assumption, and generally will decrease (but not below zero for any period) if
the prepayments are slower than the Prepayment Assumption. An increase in
prepayments on the Mortgage Loans with respect to a Series of Regular Securities
can result in both a change in the priority of principal payments with respect
to certain Classes of Regular Securities and either an increase or decrease in
the daily portions of original issue discount with respect to such Regular
Securities.
In the case of a Non-Pro Rata Security, it is anticipated that the
Trustee will determine the yield to maturity of such Security based upon the
anticipated payment characteristics of the Class as a whole under the Prepayment
Assumption. In general, the original issue discount accruing on each Non-Pro
Rata Security in a full accrual period would be its allocable share of the
original issue discount with respect to the entire Class, as determined in
accordance with the preceding paragraph. However, in the case of a distribution
in retirement of the entire unpaid principal balance of any Non-Pro Rata
Security (or portion of such unpaid principal balance), (a) the remaining
unaccrued original issue discount allocable to such Security (or to such
portion) will accrue at the time of such distribution, and (b) the accrual of
original issue discount allocable to each remaining Security of such Class will
be adjusted by reducing the present value of the remaining payments on such
Class and the adjusted issue price of such Class to the extent attributable to
the portion of the unpaid principal balance thereof that was distributed. The
Depositor believes that the foregoing treatment is consistent with the "pro rata
prepayment" rules of the OID Regulations, but with the rate of accrual of
original issue discount determined based on the Prepayment Assumption for the
Class as a whole. Investors are advised to consult their tax advisors as to this
treatment.
Acquisition Premium
A purchaser of a Regular Security having original issue discount at a
price greater than its adjusted issue price but less than its stated redemption
price at maturity will be required to include in gross income the daily portions
of the original issue discount on the Regular Security reduced pro rata by a
fraction, the numerator of which is the excess of its purchase price over such
adjusted issue price and the denominator of which is the excess of the remaining
stated redemption price at maturity over the adjusted issue price.
Alternatively, such a subsequent purchaser may elect to treat all such
acquisition premium under the constant yield method, as described below under
the heading "--Election to Treat All Interest Under the Constant Yield Method."
Variable Rate Regular Securities
Regular Securities may provide for interest based on a variable rate.
Under the OID Regulations, interest is treated as payable at a variable rate if,
generally, (i) the issue price does not exceed the original principal balance by
more than a specified amount and (ii) the interest compounds or is payable at
least annually at current values of (a) one or more "qualified floating rates,"
(b) a single fixed rate and one or more qualified floating rates, (c) a single
"objective rate," or (d) a single fixed rate and a single objective rate that is
a "qualified inverse floating rate." A floating rate is a qualified floating
rate if variations can reasonably be expected to measure contemporaneous
variations in the cost of newly borrowed funds. A multiple of a qualified
floating rate is considered a qualified floating rate only if the rate is equal
to either (a) the product of a qualified floating rate and a fixed multiple that
is
94
greater than 0.65 but not more than 1.35 or (b) the product of a qualified
floating rate and a fixed multiple that is greater that 0.65 but not more than
1.35, increased or decreased by a fixed rate. Such rate may also be subject to a
fixed cap or floor, or a cap or floor that is not reasonably expected as of the
issue date to affect the yield of the instrument significantly. An objective
rate is any rate (other than a qualified floating rate) that is determined using
a single fixed formula and that is based on objective financial or economic
information, provided that such information is not (i) within the control of the
issuer or a related party or (ii) unique to the circumstances of the issuer or a
related party. A qualified inverse floating rate is a rate equal to a fixed rate
minus a qualified floating rate that inversely reflects contemporaneous
variations in the cost of newly borrowed funds; an inverse floating rate that is
not a qualified inverse floating rate may nevertheless be an objective rate. A
Class of Regular Securities may be issued under this prospectus that does not
have a variable rate under the foregoing rules, for example, a Class that bears
different rates at different times during the period it is outstanding such that
it is considered significantly "front-loaded" or "back-loaded" within the
meaning of the OID Regulations. It is possible that such a Class may be
considered to bear "contingent interest" within the meaning of the OID
Regulations. The OID Regulations, as they relate to the treatment of contingent
interest, are by their terms not applicable to Regular Securities. However, if
final regulations dealing with contingent interest with respect to Regular
Securities apply the same principles as the OID Regulations, such regulations
may lead to different timing of income inclusion that would be the case under
the OID Regulations. Furthermore, application of such principles could lead to
the characterization of gain on the sale of contingent interest Regular
Securities as ordinary income. Investors should consult their tax advisors
regarding the appropriate treatment of any Regular Security that does not pay
interest at a fixed rate or variable rate as described in this paragraph.
Under the REMIC Regulations, a Regular Security (i) bearing interest at
a rate that qualifies as a variable rate under the OID Regulations that is tied
to current values of a variable rate (or the highest, lowest or average of two
or more variable rates, including a rate based on the average cost of funds of
one or more financial institutions), or a positive or negative multiple of such
a rate (plus or minus a specified number of basis points), or that represents a
weighted average of rates on some or all of the Mortgage Loans, including such a
rate that is subject to one or more caps or floors, or (ii) bearing one or more
such variable rates for one or more periods, or one or more fixed rates for one
or more periods, and a different variable rate or fixed rate for other periods,
qualifies as a regular interest in a REMIC. Accordingly, it is anticipated that
the Trustee will treat Regular Securities that qualify as regular interests
under this rule in the same manner as obligations bearing a variable rate for
original issue discount reporting purposes.
The amount of original issue discount with respect to a Regular
Security bearing a variable rate of interest will accrue in the manner described
above under "Original Issue Discount," with the yield to maturity and future
payments on such Regular Security generally to be determined by assuming that
interest will be payable for the life of the Regular Security based on the
initial rate (or, if different, the value of the applicable variable rate as of
the pricing date) for the relevant Class. Unless required otherwise by
applicable final regulations, it is anticipated that the Trustee will treat such
variable interest as qualified stated interest, other than variable interest on
an interest-only or super-premium Class, which will be treated as non-qualified
stated interest includable in the stated redemption price at maturity. Ordinary
income reportable for any period will be adjusted based on subsequent changes in
the applicable interest rate index.
Although unclear under the OID Regulations, unless required otherwise
by applicable final regulations, the Seller intends to treat Regular Securities
bearing an interest rate that is a weighted average of the net interest rates on
Mortgage Loans as having qualified stated interest, except to the extent that
initial "teaser" rates cause sufficiently "back-loaded" interest to create more
than de minimis original issue discount. The yield on such Regular Securities
for purposes of accruing original issue discount will be a hypothetical fixed
rate based on the fixed rates, in the case of fixed-rate Mortgage Loans, and
initial "teaser rates" followed by fully indexed rates, in the case of
adjustable-rate Mortgage Loans. In the case of adjustable-rate Mortgage Loans,
the applicable index used to compute interest on the Mortgage Loans in effect on
the pricing date (or possibly the issue date) will be deemed to be in effect
beginning with the period in which the first weighted average adjustment date
occurring after the issue date occurs. Adjustments will be made in each accrual
period either increasing or decreasing the amount of ordinary income reportable
to reflect the actual Pass-Through Rate on the Regular Securities.
Market Discount
95
A subsequent purchaser of a Regular Security also may be subject to the
market discount rules of Code Sections 1276 through 1278. Under these sections
and the principles applied by the OID Regulations in the context of original
issue discount, "market discount" is the amount by which the purchaser's
original basis in the Regular Security (i) is exceeded by the remaining
outstanding principal payments and interest payments other than qualified stated
interest payments due on a Regular Security, or (ii) in the case of a Regular
Security having original issue discount, is exceeded by the adjusted issue price
of such Regular Security at the time of purchase. Such purchaser generally will
be required to recognize ordinary income to the extent of accrued market
discount on such Regular Security as distributions includable in the stated
redemption price at maturity thereof are received, in an amount not exceeding
any such distribution. Such market discount would accrue in a manner to be
provided in Treasury regulations and should take into account the Prepayment
Assumption. The Conference Committee Report to the 1986 Act provides that until
such regulations are issued, such market discount would accrue either (i) on the
basis of a constant interest rate, or (ii) in the ratio of stated interest
allocable to the relevant period to the sum of the interest for such period plus
the remaining interest as of the end of such period, or in the case of a Regular
Security issued with original issue discount, in the ratio of original issue
discount accrued for the relevant period to the sum of the original issue
discount accrued for such period plus the remaining original issue discount as
of the end of such period. Such purchaser also generally will be required to
treat a portion of any gain on a sale or exchange of the Regular Security as
ordinary income to the extent of the market discount accrued to the date of
disposition under one of the foregoing methods, less any accrued market discount
previously reported as ordinary income as partial distributions in reduction of
the stated redemption price at maturity were received. Such purchaser will be
required to defer deduction of a portion of the excess of the interest paid or
accrued on indebtedness incurred to purchase or carry a Regular Security over
the interest distributable thereon. The deferred portion of such interest
expense in any taxable year generally will not exceed the accrued market
discount on the Regular Security for such year. Any such deferred interest
expense is, in general, allowed as a deduction not later than the year in which
the related market discount income is recognized or the Regular Security is
disposed of. As an alternative to the inclusion of market discount in income on
the foregoing basis, the Regular Securityholder may elect to include market
discount in income currently as it accrues on all market discount instruments
acquired by such Regular Securityholder in that taxable year or thereafter, in
which case the interest deferral rule will not apply. See "--Election to Treat
All Interest Under the Constant Yield Method" below regarding an alternative
manner in which such election may be deemed to be made. A person who purchases a
Regular Security at a price lower than the remaining amounts includable in the
stated redemption price at maturity of the security, but higher than its
adjusted issue price, does not acquire the Regular Security with market
discount, but will be required to report original issue discount, appropriately
adjusted to reflect the excess of the price paid over the adjusted issue price.
Market discount with respect to a Regular Security will be considered
to be zero if such market discount is less than 0.25% of the remaining stated
redemption price at maturity of such Regular Security (or, in the case of a
Regular Security having original issue discount, the adjusted issue price of
such Regular Security) multiplied by the weighted average maturity of the
Regular Security (determined as described above in the third paragraph under
"--Original Issue Discount") remaining after the date of purchase. It appears
that de minimis market discount would be reported in a manner similar to de
minimis original issue discount. See "--Original Issue Discount" above.
Under provisions of the OID Regulations relating to contingent payment
obligations, a secondary purchaser of a Regular Security that has "contingent
interest" at a discount generally would continue to accrue interest and
determine adjustments on the Regular Security based on the original projected
payment schedule devised by the issuer of the Security. The holder of such a
Regular Security would be required, however, to allocate the difference between
the adjusted issue price of the Regular Security and its basis in the Regular
Security as positive adjustments to the accruals or projected payments on the
Regular Security over the remaining term of the Regular Security in a manner
that is reasonable (e.g., based on a constant yield to maturity).
Treasury regulations implementing the market discount rules have not
yet been issued, and uncertainty exists with respect to many aspects of those
rules. Due to the substantial lack of regulatory guidance with respect to the
market discount rules, it is unclear how those rules will affect any secondary
market that develops for a given Class of Regular Securities. Prospective
investors in Regular Securities should consult their own tax advisors regarding
the application of the market discount rules to the Regular Securities.
Investors should also consult Revenue Procedure 92-67 concerning the elections
to include market discount in income currently and to accrue market discount on
the basis of the constant yield method.
96
Amortizable Premium
A Regular Security purchased at a cost greater than its remaining
stated redemption price at maturity generally is considered to be purchased at a
premium. If the Regular Securityholder holds such Regular Security as a "capital
asset" within the meaning of Code Section 1221, the Regular Securityholder may
elect under Code Section 171 to amortize such premium under a constant yield
method that reflects compounding based on the interval between payments on the
Regular Security. Such election will apply to all taxable debt obligations
(including REMIC regular interests) acquired by the Regular Securityholder at a
premium held in that taxable year or thereafter, unless revoked with the
permission of the IRS. Final Treasury regulations have been issued with respect
to amortizable bond premiums which do not by their terms apply to prepayable
debt instruments such as the Regular Securities. However, the Conference
Committee Report to the 1986 Act indicates a Congressional intent that the same
rules that apply to the accrual of market discount on installment obligations
will also apply to amortizing bond premium under Code Section 171 on installment
obligations such as the Regular Securities, although it is unclear whether the
alternatives to the constant interest method described above under "--Market
Discount" are available. Amortizable bond premium generally will be treated as
an offset to interest income on a Regular Security, rather than as a separate
deduction. See "--Election to Treat All Interest Under the Constant Yield
Method" below regarding an alternative manner in which the Code Section 171
election may be deemed to be made.
Amortizable premium on a Regular Security that is subject to redemption
at the option of the issuer generally must be amortized as if the optional
redemption price and date were the Security's principal amount and maturity date
if doing so would result in a smaller amount of premium amortization during the
period ending with the optional redemption date. Thus, a holder of a Regular
Security would not be able to amortize any premium on a Regular Security that is
subject to optional redemption at a price equal to or greater than the
Securityholder's acquisition price unless and until the redemption option
expires. A Regular Security subject to redemption at the option of the issuer
described in the preceding sentence will be treated as having matured on the
redemption date for the redemption price and then as having been reissued on
that date for that price. Any premium remaining on the Regular Security at the
time of the deemed reissuance will be amortized on the basis of (i) the original
principal amount and maturity date or (ii) the price and date of any succeeding
optional redemption, under the principles described above.
Election to Treat All Interest Under the Constant Yield Method
A holder of a debt instrument such as a Regular Security may elect to
treat all interest that accrues on the instrument using the constant yield
method, with none of the interest being treated as qualified stated interest.
For purposes of applying the constant yield method to a debt instrument subject
to such an election, (i) "interest" includes stated interest, original issue
discount, de minimis original issue discount, market discount and de minimis
market discount, as adjusted by any amortizable bond premium or acquisition
premium and (ii) the debt instrument is treated as if the instrument were issued
on the holder's acquisition date in the amount of the holder's adjusted basis
immediately after acquisition. It is unclear whether, for this purpose, the
initial Prepayment Assumption would continue to apply or if a new prepayment
assumption as of the date of the holder's acquisition would apply. A holder
generally may make such an election on an instrument by instrument basis or for
a Class or group of debt instruments. However, if the holder makes such an
election with respect to a debt instrument with amortizable bond premium or with
market discount, the holder is deemed to have made elections to amortize bond
premium or to report market discount income currently as it accrues under the
constant yield method, respectively, for all premium bonds held or market
discount bonds acquired by the holder in the same taxable year or thereafter.
The election is made on the holder's federal income tax return for the year in
which the debt instrument is acquired and is irrevocable except with the
approval of the IRS. Investors should consult their own tax advisors regarding
the advisability of making such an election.
Treatment of Losses
Regular Securityholders will be required to report income with respect
to Regular Securities on the accrual method of accounting, without giving effect
to delays or reductions in distributions attributable to defaults or
delinquencies on the Mortgage Loans, except to the extent it can be established
that such losses are uncollectable. Accordingly, the holder of a Regular
Security, particularly a Subordinated Security, may have income, or may incur
97
a diminution in cash flow as a result of a default or delinquency, but may not
be able to take a deduction (subject to the discussion below) for the
corresponding loss until a subsequent taxable year. In this regard, investors
are cautioned that while they may generally cease to accrue interest income if
it reasonably appears that the interest will be uncollectable, the IRS may take
the position that original issue discount must continue to be accrued in spite
of its uncollectibility until the debt instrument is disposed of in a taxable
transaction or becomes worthless in accordance with the rules of Code Section
166. Under Code Section 166, it appears that Regular Securityholders that are
corporations or that otherwise hold the Regular Securities in connection with a
trade or business should in general be allowed to deduct as an ordinary loss
such loss with respect to principal sustained during the taxable year on account
of any such Regular Securities becoming wholly or partially worthless, and that,
in general, Regular Securityholders that are not corporations and do not hold
the Regular Securities in connection with a trade or business should be allowed
to deduct as a short-term capital loss any loss sustained during the taxable
year on account of a portion of any such Regular Securities becoming wholly
worthless. Although the matter is not free from doubt, such non-corporate
Regular Securityholders should be allowed a bad debt deduction at such time as
the principal balance of such Regular Securities is reduced to reflect losses
resulting from any liquidated Mortgage Loans. The IRS, however, could take the
position that non-corporate holders will be allowed a bad debt deduction to
reflect such losses only after all the Mortgage Loans remaining in the Trust
Fund have been liquidated or the applicable Class of Regular Securities has been
otherwise retired. The IRS could also assert that losses on the Regular
Securities are deductible based on some other method that may defer such
deductions for all holders, such as reducing future cashflow for purposes of
computing original issue discount. This may have the effect of creating
"negative" original issue discount which would be deductible only against future
positive original issue discount or otherwise upon termination of the Class.
Regular Securityholders are urged to consult their own tax advisors regarding
the appropriate timing, amount and character of any loss sustained with respect
to such Regular Securities. While losses attributable to interest previously
reported as income should be deductible as ordinary losses by both corporate and
non-corporate holders, the IRS may take the position that losses attributable to
accrued original issue discount may only be deducted as capital losses in the
case of non-corporate holders who do not hold the Regular Securities in
connection with a trade or business. Special loss rules are applicable to banks
and thrift institutions, including rules regarding reserves for bad debts. Such
taxpayers are advised to consult their tax advisors regarding the treatment of
losses on Regular Securities.
Sale or Exchange of Regular Securities
If a Regular Securityholder sells or exchanges a Regular Security, the
Regular Securityholder will recognize gain or loss equal to the difference, if
any, between the amount received and its adjusted basis in the Regular Security.
The adjusted basis of a Regular Security generally will equal the original cost
of the Regular Security to the seller, increased by any original issue discount
or market discount previously included in the seller's gross income with respect
to the Regular Security and reduced by amounts included in the stated redemption
price at maturity of the Regular Security that were previously received by the
seller, by any amortized premium, and by any recognized losses.
Except as described above with respect to market discount, and except
as provided in this paragraph, any gain or loss on the sale or exchange of a
Regular Security realized by an investor who holds the Regular Security as a
capital asset will be capital gain or loss and will be long-term or short-term
depending on whether the Regular Security has been held for the long-term
capital gain holding period (currently, more than one year). Such gain will be
treated as ordinary income (i) if a Regular Security is held as part of a
"conversion transaction" as defined in Code Section 1258(c), up to the amount of
interest that would have accrued on the Regular Securityholder's net investment
in the conversion transaction at 120% of the appropriate applicable Federal rate
in effect at the time the taxpayer entered into the transaction minus any amount
previously treated as ordinary income with respect to any prior disposition of
property that was held as part of such transaction, (ii) in the case of a
non-corporate taxpayer, to the extent such taxpayer has made an election under
Code Section 163(d)(4) to have net capital gains taxed as investment income at
ordinary income rates, or (iii) to the extent that such gain does not exceed the
excess, if any, of (a) the amount that would have been includable in the gross
income of the holder if its yield on such Regular Security were 110% of the
applicable Federal rate as of the date of purchase, over (b) the amount of
income actually includable in the gross income of such holder with respect to
such Regular Security. In addition, gain or loss recognized from the sale of a
Regular Security by certain banks or thrift institutions will be treated as
ordinary income or loss pursuant to Code Section 582(c). Long-term capital gains
of certain noncorporate taxpayers generally are subject to a lower maximum tax
rate than ordinary income or short-term capital gains of such
98
taxpayers for property held for more than one year. Currently, the maximum tax
rate for corporations is the same with respect to both ordinary income and
capital gains.
Taxation of Owners of Residual Securities
Taxation of REMIC Income
Generally, the "daily portions" of REMIC taxable income or net loss
will be includable as ordinary income or loss in determining the federal taxable
income of holders of Residual Securities ("RESIDUAL HOLDERS"), and will not be
taxed separately to the REMIC Pool. The daily portions of REMIC taxable income
or net loss of a Residual Holder are determined by allocating the REMIC Pool's
taxable income or net loss for each calendar quarter ratably to each day in such
quarter and by allocating such daily portion among the Residual Holders in
proportion to their respective holdings of Residual Securities in the REMIC Pool
on such day. REMIC taxable income is generally determined in the same manner as
the taxable income of an individual using the accrual method of accounting,
except that (i) the limitations on deductibility of investment interest expense
and expenses for the production of income do not apply, (ii) all bad loans will
be deductible as business bad debts, and (iii) the limitation on the
deductibility of interest and expenses related to tax-exempt income will apply.
The REMIC Pool's gross income includes interest, original issue discount income
and market discount income, if any, on the Mortgage Loans, reduced by
amortization of any premium on the Mortgage Loans, plus income from amortization
of issue premium, if any, on the Regular Securities, plus income on reinvestment
of cash flows and reserve assets, plus any cancellation of indebtedness income
upon allocation of realized losses to the Regular Securities. The REMIC Pool's
deductions include interest and original issue discount expense on the Regular
Securities, servicing fees on the Mortgage Loans, other administrative expenses
of the REMIC Pool and realized losses on the Mortgage Loans. The requirement
that Residual Holders report their pro rata share of taxable income or net loss
of the REMIC Pool will continue until there are no Securities of any Class of
the related Series outstanding.
The taxable income recognized by a Residual Holder in any taxable year
will be affected by, among other factors, the relationship between the timing of
recognition of interest, original issue discount or market discount income or
amortization of premium with respect to the Mortgage Loans, on the one hand, and
the timing of deductions for interest (including original issue discount) or
income from amortization of issue premium on the Regular Securities, on the
other hand. In the event that an interest in the Mortgage Loans is acquired by
the REMIC Pool at a discount, and one or more of such Mortgage Loans is prepaid,
the prepayment may be used in whole or in part to make distributions in
reduction of principal on the Regular Securities, and (ii) the discount on the
Mortgage Loans which is includable in income may exceed the deduction allowed
upon such distributions on those Regular Securities on account of any unaccrued
original issue discount relating to those Regular Securities. When there is more
than one Class of Regular Securities that distribute principal sequentially,
this mismatching of income and deductions is particularly likely to occur in the
early years following issuance of the Regular Securities when distributions in
reduction of principal are being made in respect of earlier Classes of Regular
Securities to the extent that such Classes are not issued with substantial
discount or are issued at a premium. If taxable income attributable to such a
mismatching is realized, in general, losses would be allowed in later years as
distributions on the later maturing Classes of Regular Securities are made.
Taxable income may also be greater in earlier years than in later years as a
result of the fact that interest expense deductions, expressed as a percentage
of the outstanding principal amount of such a Series of Regular Securities, may
increase over time as distributions in reduction of principal are made on the
lower yielding Classes of Regular Securities, whereas, to the extent the REMIC
Pool consists of fixed rate Mortgage Loans, interest income with respect to any
given Mortgage Loan will remain constant over time as a percentage of the
outstanding principal amount of that loan. Consequently, Residual Holders must
have sufficient other sources of cash to pay any federal, state, or local income
taxes due as a result of such mismatching or unrelated deductions against which
to offset such income, subject to the discussion of "excess inclusions" below
under "--Limitations on Offset or Exemption of REMIC Income." The timing of such
mismatching of income and deductions described in this paragraph, if present
with respect to a Series of Securities, may have a significant adverse effect
upon a Residual Holder's after-tax rate of return.
A portion of the income of a Residual Securityholder may be treated
unfavorably in three contexts: (i) it may not be offset by current or net
operating loss deductions; (ii) it will be considered unrelated business taxable
income to tax-exempt entities; and (iii) it is ineligible for any statutory or
treaty reduction in the 30% withholding tax otherwise available to a foreign
Residual Securityholder. See "--Limitations on Offset or Exemption of REMIC
99
Income" below. In addition, a Residual Holder's taxable income during certain
periods may exceed the income reflected by such Residual Holders for such
periods in accordance with generally accepted accounting principles. Investors
should consult their own accountants concerning the accounting treatment of
their investment in Residual Securities.
Basis and Losses
The amount of any net loss of the REMIC Pool that may be taken into
account by the Residual Holder is limited to the adjusted basis of the Residual
Security as of the close of the quarter (or time of disposition of the Residual
Security if earlier), determined without taking into account the net loss for
the quarter. The initial adjusted basis of a purchaser of a Residual Security is
the amount paid for such Residual Security. Such adjusted basis will be
increased by the amount of taxable income of the REMIC Pool reportable by the
Residual Holder and will be decreased (but not below zero), first, by a cash
distribution from the REMIC Pool and, second, by the amount of loss of the REMIC
Pool reportable by the Residual Holder. Any loss that is disallowed on account
of this limitation may be carried over indefinitely with respect to the Residual
Holder as to whom such loss was disallowed and may be used by such Residual
Holder only to offset any income generated by the same REMIC Pool.
A Residual Holder will not be permitted to amortize directly the cost
of its Residual Security as an offset to its share of the taxable income of the
related REMIC Pool. However, the taxable income will not include cash received
by the REMIC Pool that represents a recovery of the REMIC Pool's basis in its
assets. Although the law is unclear in certain respects, such recovery of basis
by the REMIC Pool will have the effect of amortization of the issue price of the
Residual Securities over their life. However, in view of the possible
acceleration of the income of Residual Holders described above under "--Taxation
of REMIC Income," the period of time over which such issue price is effectively
amortized may be longer than the economic life of the Residual Securities.
A Residual Security may have a negative value if the net present value
of anticipated tax liabilities exceeds the present value of anticipated cash
flows. The REMIC Regulations appear to treat the issue price of such a residual
interest as zero rather than such negative amount for purposes of determining
the REMIC Pool's basis in its assets. Regulations have been issued addressing
the federal income tax treatment of "inducement fees" received by transferees of
noneconomic residual interests. The regulations require inducement fees to be
included in income over a period reasonably related to the period in which a
Residual Security is expected to generate taxable income or net loss to its
holder. Under two safe harbor methods, inducement fees are permitted to be
included in income: (i) in the same amounts and over the same period that the
holder uses for financial reporting purposes, provided that such period is not
shorter than the period the related 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 related REMIC, determined based on
actual distributions projected as remaining to be made on such interests under
the applicable prepayment assumption. If a Residual Holder sells or otherwise
disposes of the residual interest, any unrecognized portion of the inducement
fee is required to be taken into account at the time of the sale or disposition.
Further, to the extent that the initial adjusted basis of a Residual
Holder (other than an original holder) in the Residual Security is greater than
the corresponding portion of the REMIC Pool's basis in the Mortgage Loans, the
Residual Holder will not recover a portion of such basis until termination of
the REMIC Pool unless future Treasury regulations provide for periodic
adjustments to the REMIC income otherwise reportable by such holder. The REMIC
Regulations currently in effect do not so provide. See "--Treatment of Certain
Items of REMIC Income and Expense--Market Discount" below regarding the basis of
Mortgage Loans to the REMIC Pool and "--Sale or Exchange of a Residual Security"
below regarding possible treatment of a loss upon termination of the REMIC Pool
as a capital loss.
Treatment of Certain Items of REMIC Income and Expense
Although it is anticipated that the Trustee will compute REMIC income
and expense in accordance with the Code and applicable regulations, the
authorities regarding the determination of specific items of income and expense
are subject to differing interpretations. The Depositor makes no representation
as to the specific method that will be used for reporting income with respect to
the Mortgage Loans and expenses with respect to the Regular Securities, and
different methods could result in different timing or reporting of taxable
income or net loss to Residual Holders or differences in capital gain versus
ordinary income.
100
Original Issue Discount and Premium. Generally, the REMIC Pool's
deductions for original issue discount and income from amortization of premium
will be determined in the same manner as original issue discount income on
Regular Securities as described above under "--Taxation of Owners of Regular
Securities--Original Issue Discount" and "--Variable Rate Regular Securities,"
without regard to the de minimis rule described therein, and "--Taxation of
Owners of Regular Securities--Amortizable Premium."
Market Discount. The REMIC Pool will have market discount income in
respect of Mortgage Loans if, in general, the basis of the REMIC Pool in such
Mortgage Loans is exceeded by their unpaid principal balances. The REMIC Pool's
basis in such Mortgage Loans is generally the fair market value of the Mortgage
Loans immediately after the transfer thereof to the REMIC Pool. The REMIC
Regulations provide that such basis is equal in the aggregate to the issue
prices of all regular and residual interests in the REMIC Pool. The accrued
portion of such market discount would be recognized currently as an item of
ordinary income in a manner similar to original issue discount. Market discount
income generally should accrue in the manner described above under "--Taxation
of Owners of Regular Securities--Market Discount."
Premium. Generally, if the basis of the REMIC Pool in the Mortgage
Loans exceeds the unpaid principal balances thereof, the REMIC Pool will be
considered to have acquired such Mortgage Loans at a premium equal to the amount
of such excess. As stated above, the REMIC Pool's basis in Mortgage Loans is the
fair market value of the Mortgage Loans, based on the aggregate of the issue
prices of the regular and residual interests in the REMIC Pool immediately after
the transfer thereof to the REMIC Pool. In a manner analogous to the discussion
above under "--Taxation of Owners of Regular Securities--Amortizable Premium," a
person that holds a Mortgage Loan as a capital asset under Code Section 1221 may
elect under Code Section 171 to amortize premium on Mortgage Loans originated
after September 27, 1985 under the constant yield method. Amortizable bond
premium will be treated as an offset to interest income on the Mortgage Loans,
rather than as a separate deduction item. Because substantially all of the
mortgagors on the Mortgage Loans are expected to be individuals, Code Section
171 will not be available for premium on Mortgage Loans originated on or prior
to September 27, 1985. Premium with respect to such Mortgage Loans may be
deductible in accordance with a reasonable method regularly employed by the
holder thereof. The allocation of such premium pro rata among principal payments
should be considered a reasonable method; however, the IRS may argue that such
premium should be allocated in a different manner, such as allocating such
premium entirely to the final payment of principal.
Limitations on Offset or Exemption of REMIC Income
A portion (or all) of the REMIC taxable income includable in
determining the federal income tax liability of a Residual Holder will be
subject to special treatment. That portion, referred to as the "excess
inclusion," is equal to the excess of REMIC taxable income for the calendar
quarter allocable to a Residual Security over the daily accruals for such
quarterly period of (i) 120% of the long-term applicable Federal rate that would
have applied to the Residual Security (if it were a debt instrument) on the
Startup Day under Code Section 1274(d), multiplied by (ii) the adjusted issue
price of such Residual Security at the beginning of such quarterly period. For
this purpose, the adjusted issue price of a Residual Security at the beginning
of a quarter is the issue price of the Residual Security, plus the amount of
such daily accruals of REMIC income described in this paragraph for all prior
quarters, decreased by any distributions made with respect to such Residual
Security prior to the beginning of such quarterly period. Accordingly, the
portion of the REMIC Pool's taxable income that will be treated as excess
inclusions will be a larger portion of such income as the adjusted issue price
of the Residual Securities diminishes.
The portion of a Residual Holder's REMIC taxable income consisting of
the excess inclusions generally may not be offset by other deductions, including
net operating loss carryforwards, on such Residual Holder's return. However, net
operating loss carryovers are determined without regard to excess inclusion
income. Further, if the Residual Holder is an organization subject to the tax on
unrelated business income imposed by Code Section 511, the Residual Holder's
excess inclusions will be treated as unrelated business taxable income of such
Residual Holder for purposes of Code Section 511. In addition, REMIC taxable
income is subject to 30% withholding tax with respect to certain persons who are
not U.S. Persons (as defined below under "--Tax-Related Restrictions on Transfer
of Residual Securities--Foreign Investors"), and the portion thereof
attributable to excess inclusions is not eligible for any reduction in the rate
of withholding tax (by treaty or otherwise). See "--Taxation of Certain Foreign
Investors--Residual Securities" below. Finally, if a real estate investment
trust or a regulated investment company owns a Residual Security, a portion
(allocated under Treasury regulations yet to be issued) of dividends
101
paid by the real estate investment trust or regulated investment company could
not be offset by net operating losses of its shareholders, would constitute
unrelated business taxable income for tax-exempt shareholders, and would be
ineligible for reduction of withholding to certain persons who are not U.S.
Persons.
There are three rules for determining the effect of excess inclusions
on the alternative minimum taxable income of a Residual Holder. First,
alternative minimum taxable income for a Residual Holder is determined without
regard to the special rule, discussed above, that taxable income cannot be less
than excess inclusions. Second, a Residual Holder's alternative minimum taxable
income for a taxable year cannot be less than the excess inclusions for the
year. Third, the amount of any alternative minimum tax net operating loss
deduction must be computed without regard to any excess inclusions.
Tax-Related Restrictions on Transfer of Residual Securities
Disqualified Organizations. If any legal or beneficial interest in a
Residual Security is transferred to a Disqualified Organization (as defined
below), a tax would be imposed in an amount equal to the product of (i) the
present value of the total anticipated excess inclusions with respect to such
Residual Security for periods after the transfer and (ii) the highest marginal
federal income tax rate applicable to corporations. The REMIC Regulations
provide that the anticipated excess inclusions are based on actual prepayment
experience to the date of the transfer and projected payments based on the
Prepayment Assumption. The present value rate equals the applicable Federal rate
under Code Section 1274(d) as of the date of the transfer for a term ending with
the last calendar quarter in which excess inclusions are expected to accrue.
Such rate is applied to the anticipated excess inclusions from the end of the
remaining calendar quarters in which they arise to the date of the transfer.
Such a tax generally would be imposed on the transferor of the Residual
Security, except that where such transfer is through an agent (including a
broker, nominee, or other middleman) for a Disqualified Organization, the tax
would instead be imposed on such agent. However, a transferor of a Residual
Security would in no event be liable for such tax with respect to a transfer if
the transferee furnished to the transferor an affidavit stating that the
transferee is not a Disqualified Organization and, as of the time of the
transfer, the transferor does not have actual knowledge that such affidavit is
false. The tax also may be waived by the IRS if the Disqualified Organization
promptly disposes of the Residual Security and the transferor pays income tax at
the highest corporate rate on the excess inclusion for the period the Residual
Security is actually held by the Disqualified Organization.
In addition, if a Pass-Through Entity (as defined below) has excess
inclusion income with respect to a Residual Security during a taxable year and a
Disqualified Organization is the record holder of an equity interest in such
entity, then a tax is imposed on such entity equal to the product of (i) the
amount of excess inclusions that are allocable to the interest in the
Pass-Through Entity during the period such interest is held by such Disqualified
Organization, and (ii) the highest marginal federal corporate income tax rate.
Such tax would be deductible from the ordinary gross income of the Pass-Through
Entity for the taxable year. The Pass-Through Entity would not be liable for
such tax if it has received an affidavit from such record holder that it is not
a Disqualified Organization or stating such holder's taxpayer identification
number and, during the period such person is the record holder of the Residual
Security, the Pass-Through Entity does not have actual knowledge that such
affidavit is false.
If an "electing large partnership" holds a Residual Security, all
interests in the electing large partnership are treated as held by Disqualified
Organizations for purposes of the tax imposed upon a Pass-Through Entity by
section 860E(c) of the Code. An exception to this tax, otherwise available to a
Pass-Through Entity that is furnished certain affidavits by record holders of
interests in the entity and that does not know such affidavits are false, is not
available to an electing large partnership.
For these purposes, (i) "DISQUALIFIED ORGANIZATION" means the United
States, any state or political subdivision thereof, any foreign government, any
international organization, any agency or instrumentality of any of the
foregoing (provided, that such term does not include an instrumentality if all
of its activities are subject to tax and a majority of its board of directors in
not selected by any such governmental entity), any cooperative organization
furnishing electric energy or providing telephone service or persons in rural
areas as described in Code Section 1381(a)(2)(C), and any organization (other
than a farmers' cooperative described in Code Section 531) that is exempt from
taxation under the Code unless such organization is subject to the tax on
unrelated business income imposed by Code Section 511, (ii) "PASS-THROUGH
ENTITY" means any regulated investment company, real estate investment trust,
common trust fund, partnership, trust or estate and certain corporations
operating on a cooperative
102
basis. Except as may be provided in Treasury regulations, any person holding an
interest in a Pass-Through Entity as a nominee for another will, with respect to
such interest, be treated as a Pass-Through Entity, and (iii) an "ELECTING LARGE
PARTNERSHIP" means any partnership having more than 100 members during the
preceding tax year (other than certain service partnerships and commodity
pools), which elect to apply simplified reporting provisions under the Code.
The Pooling and Servicing Agreement with respect to a Series will
provide that no legal or beneficial interest in a Residual Security may be
transferred or registered unless (i) the proposed transferee furnished to the
transferor and the Trustee an affidavit providing its taxpayer identification
number and stating that such transferee is the beneficial owner of the Residual
Security and is not a Disqualified Organization and is not purchasing such
Residual Security on behalf of a Disqualified Organization (i.e., as a broker,
nominee or middleman thereof) and (ii) the transferor provides a statement in
writing to the Trustee that it has no actual knowledge that such affidavit is
false. Moreover, the Pooling and Servicing Agreement will provide that any
attempted or purported transfer in violation of these transfer restrictions will
be null and void and will vest no rights in any purported transferee. Each
Residual Security with respect to a Series will bear a legend referring to such
restrictions on transfer, and each Residual Holder will be deemed to have
agreed, as a condition of ownership thereof, to any amendments to the related
Pooling and Servicing Agreement required under the Code or applicable Treasury
regulations to effectuate the foregoing restrictions. Information necessary to
compute an applicable excise tax must be furnished to the IRS and to the
requesting party within 60 days of the request, and the Depositor or the Trustee
may charge a fee for computing and providing such information.
Noneconomic Residual Interests. The REMIC Regulations would disregard
certain transfers of Residual Securities, in which case the transferor would
continue to be treated as the owner of the Residual Securities and thus would
continue to be subject to tax on its allocable portion of the net income of the
REMIC Pool. Under the REMIC Regulations, a transfer of a "noneconomic residual
interest" (as defined below) to a Residual Holder (other than a Residual Holder
who is not a U.S. Person as defined below under "--Foreign Investors") is
disregarded for all federal income tax purposes if a significant purpose of the
transfer is to impede the assessment or collection of tax. A residual interest
in a REMIC (including a residual interest with a positive value at issuance) is
a "noneconomic residual interest" unless, at the time of the transfer, (i) the
present value of the expected future distributions on the residual interest at
least equals the product of the present value of the anticipated excess
inclusions and the highest corporate income tax rate in effect for the year in
which the transfer occurs, and (ii) the transferor reasonably expects that the
transferee will receive distributions from the REMIC at or after the time at
which taxes accrue on the anticipated excess inclusions in an amount sufficient
to satisfy the accrued taxes on each excess inclusion. The anticipated excess
inclusions and the present value rate are determined in the same manner as set
forth above under "--Disqualified Organizations." The REMIC Regulations explain
that a significant purpose to impede the assessment or collection of tax exists
if the transferor, at the time of the transfer, either knew or should have known
that the transferee would be unwilling or unable to pay taxes due on its share
of the taxable income of the REMIC. Under the REMIC Regulations, as amended on
July 19, 2002, a safe harbor is provided if (i) the transferor conducted, at the
time of the transfer, a reasonable investigation of the financial condition of
the transferee and found that the transferee historically had paid its debts as
they came due and found no significant evidence to indicate that the transferee
would not continue to pay its debts as they came due in the future, (ii) the
transferee represents to the transferor that it understands that, as the holder
of the non-economic residual interest, the transferee may incur liabilities in
excess of any cash flows generated by the interest and that the transferee
intends to pay taxes associated with holding the residual interest as they
become due and (iii) the transferee represents to the transferor that it will
not cause income from the Residual Security to be attributable to a foreign
permanent establishment or fixed base (within the meaning of an applicable
income tax treaty) of the transferee or any other person. The Pooling and
Servicing Agreement with respect to each Series of Certificates will require the
transferee of a Residual Security to certify to the matters in the preceding
sentence as part of the affidavit described above under the heading
"Disqualified Organizations."
In addition to the three conditions set forth above for the transferor
of a noneconomic residual interest to be presumed not to have knowledge that the
transferee would be unwilling or unable to pay taxes due on its share of the
taxable income of the REMIC, the REMIC Regulations contain a fourth condition
for the transferor to be presumed to lack such knowledge. This fourth condition
requires that one of the two following tests be satisfied: Either
103
(a) the present value of the anticipated tax liabilities
associated with holding the noneconomic residual interest not exceed
the sum of:
(i) the present value of any consideration given to the transferee
to acquire the interest;
(ii) the present value of the expected future distributions on the
interest; and
(iii) the present value of the anticipated tax savings associated
with holding the interest as the REMIC generates losses.
For purposes of these computations, the transferee is assumed to pay
tax at the highest corporate rate of tax specified in the Code or, in certain
circumstances, the alternative minimum tax rate. Further, present values
generally are computed using a discount rate equal to the short-term Federal
rate set forth in Section 1274(d) of the Code for the month of the transfer and
the compounding period used by the transferee; or
(b) (i) the transferee must be a domestic "C" corporation
(other than a corporation exempt from taxation or a regulated
investment company or real estate investment trust) that meets certain
asset tests; (ii) the transferee must agree in writing that any
subsequent transfer of the residual interest would be to an eligible
"C" corporation and would meet the requirements for a safe harbor
transfer; and (iii) the facts and circumstances known to the transferor
on or before the date of the transfer must not reasonably indicate that
the taxes associated with ownership of the residual interest will not
be paid by the transferee.
The Pooling and Servicing Agreement will not require that transfers of
the Residual Securities meet the fourth requirement above, and thus meet the
safe harbor. Persons considering the purchase of the Residual Securities should
consult their advisors regarding the advisability of meeting the safe harbor in
any transfer of the Residual Securities.
Foreign Investors. The REMIC Regulations provide that the transfer of a
Residual Security that has "tax avoidance potential" to a "foreign person" will
be disregarded for all federal tax purposes. This rule appears intended to apply
to a transferee who is not a "U.S. Person" (as defined below), unless such
transferee's income is effectively connected with the conduct of a trade or
business within the United States. A Residual Security is deemed to have tax
avoidance potential unless, at the time of the transfer, (i) the future value of
expected distributions equals at least 30% of the anticipated excess inclusions
after the transfer, and (ii) the transferor reasonably expects that the
transferee will receive sufficient distributions from the REMIC Pool at or after
the time at which the excess inclusions accrue and prior to the end of the next
succeeding taxable year for the accumulated withholding tax liability to be
paid. If the non-U.S. Person transfers the Residual Security back to a U.S.
Person, the transfer will be disregarded and the foreign transferor will
continue to be treated as the owner unless arrangements are made so that the
transfer does not have the effect of allowing the transferor to avoid tax on
accrued excess inclusions.
The prospectus supplement relating to the Securities of a Series may
provide that a Residual Security may not be purchased by or transferred to any
person that is not a U.S. Person or may describe the circumstances and
restrictions pursuant to which such a transfer may be made. The term "U.S.
PERSON" means a citizens or resident of the United States, a corporation or
partnership (unless, in the case of a partnership, Treasury regulations are
adopted that provide otherwise) created or organized in or under the laws of the
United States, any state thereof or the District of Columbia, including an
entity treated as a corporation or partnership for federal income tax purposes,
an estate that is subject to U.S. federal income tax regardless of the source of
its income, or a trust if a court within the United States is able to exercise
primary supervision over the administration of such trust and one or more such
U.S. Persons have the authority to control all substantial decisions of such
trust (or, to the extent provided in applicable Treasury regulations, certain
trusts in existence on August 20, 1996 which are eligible to elect to be treated
as U.S. Persons).
Sale or Exchange of a Residual Security
104
Upon the sale or exchange of a Residual Security, the Residual Holder
will recognize gain or loss equal to the excess, if any, of the amount realized
over the adjusted basis (as described above under "--Taxation of Owners of
Residual Securities--Basis and Losses") of such Residual Holder in such Residual
Security at the time of the sale or exchange. In addition to reporting the
taxable income of the REMIC Pool, a Residual Holder will have taxable income to
the extent that any cash distribution to it from the REMIC Pool exceeds such
adjusted basis on that Distribution Date. Such income will be treated as gain
from the sale or exchange of the Residual Holder's Residual Security, in which
case, if the Residual Holder has an adjusted basis in its Residual Security
remaining when its interest in the REMIC Pool terminates, and if it holds such
Residual Security as a capital asset under Code Section 1221, then it will
recognize a capital loss at that time in the amount of such remaining adjusted
basis.
Any gain on the sale of a Residual Security will be treated as ordinary
income (i) if a Residual Security is held as part of a "conversion transaction"
as defined in Code Section 1258(c), up to the amount of interest that would have
accrued on the Residual Holder's net investment in the conversion transaction at
120% of the appropriate applicable Federal rate in effect at the time the
taxpayer entered into the transaction minus any amount previously treated as
ordinary income with respect to any prior disposition of property that was held
as a part of such transaction or (ii) in the case of a non-corporate taxpayer,
to the extent such taxpayer has made an election under Code Section 163(d)(4) to
have net capital gains taxed as investment income at ordinary income rates. In
addition, gain or loss recognized from the sale of a Residual Security by
certain banks or thrift institutions will be treated as ordinary income or loss
pursuant to Code Section 582(c).
The Conference Committee Report to the 1986 Act provides that, except
as provided in Treasury regulations yet to be issued, the wash sale rules of
Code Section 1091 will apply to dispositions of Residual Securities where the
seller of the Residual Security, during the period beginning six months before
the sale or disposition of the Residual Security and ending six months after
such sale or disposition, acquires (or enters into any other transaction that
results in the application of Code Section 1091) any residual interest in any
REMIC or any interest in a "taxable mortgage pool" (such as a non-REMIC owner
trust) that is economically comparable to a Residual Security.
Mark to Market Regulations
The IRS has issued final regulations (the "MARK TO MARKET REGULATIONS")
under Code Section 475 relating to the requirement that a securities dealer mark
to market securities held for sale to customers. This mark-to-market requirement
applies to all securities of a dealer, except to the extent that the dealer has
specifically identified a security as held for investment. The Mark to Market
Regulations provide that, for purposes of this mark to market requirement, a
Residual Security is not treated as a security and thus may not be marked to
market.
Taxes That May Be Imposed on the REMIC Pool
Prohibited Transactions
Income from certain transaction by the REMIC Pool, called prohibited
transactions, will not be part of the calculation of income or loss includable
in the federal income tax returns of Residual Holders, but rather will be taxed
directly to the REMIC Pool at a 100% rate. Prohibited transactions generally
include (i) the disposition of a qualified mortgages other than for (a)
substitution within two years of the Startup Day for a defective (including a
defaulted) obligation (or repurchase in lieu of substitution of a defective
(including a defaulted) obligation at any time) or for any qualified mortgage
within three months of the Startup Day, (b) foreclosure, default, or imminent
default of a qualified mortgage, (c) bankruptcy or insolvency of the REMIC Pool,
or (d) a qualified (complete) liquidation, (ii) the receipt of income from
assets that are not the type of mortgages or investments that the REMIC Pool is
permitted to hold, (iii) the receipt of compensation for services, or (iv) the
receipt of gain from disposition of cash flow investments other than pursuant to
a qualified liquidation. Notwithstanding (i) and (iv), it is not a prohibited
transaction to sell a qualified mortgage or cash flow investment held by a REMIC
Pool to prevent a default on Regular Securities as a result of a default on
qualified mortgages or to facilitate a clean-up call (generally, an optional
termination to save administrative costs when no more than a small percentage of
the Securities is outstanding). The REMIC Regulations indicate that the
modification of a Mortgage Loan generally will not be treated as a disposition
if it is occasioned by a default or reasonably foreseeable default, an
assumption of the
105
Mortgage Loan, the waiver of a due-on-sale or due-on-encumbrance clause, or the
conversion of an interest rate by a mortgagor pursuant to the terms of a
convertible adjustable rate Mortgage Loan.
Contributions to the REMIC Pool After the Startup Day
In general, the REMIC Pool will be subject to a tax at a 100% rate on
the value of any property contributed to the REMIC Pool after the Startup Day.
Exceptions are provided for cash contributions to the REMIC Pool (i) during the
three months following the Startup Day, (ii) made to a qualified reserve fund by
a Residual Holder, (iii) in the nature of a guarantee, (iv) made to facilitate a
qualified liquidation or clean-up call, and (v) as otherwise permitted in
Treasury regulations yet to be issued. It is not anticipated that there will be
any contributions to the REMIC Pool after the Startup Day.
Net Income from Foreclosure Property
The REMIC Pool will be subject of federal income tax at the highest
corporate rate on "net income from foreclosure property," determined by
reference to the rules applicable to real estate investment trusts. Generally,
property acquired by deed in lieu of foreclosure would be treated as
"foreclosure property" for a period ending with the close of the third calendar
year beginning after the year in which the REMIC Pool acquires such property,
with a possible extension. Net income from foreclosure property generally means
gain from the sale of a foreclosure property that is inventory property and
gross income from foreclosure property other than qualifying rents and other
qualifying income for a real estate investment trust. It is not anticipated that
the REMIC Pool will have any taxable net income from foreclosure property.
Liquidation of the REMIC Pool
If a REMIC Pool adopts a plan of complete liquidation, within the
meaning of Code Section 860F(a)(4)(A)(i), which may be accomplished by
designating in the REMIC Pool's final tax return a date on which such adoption
is deemed to occur, and sells all of its assets (other than cash) within a
90-day period beginning on such date, the REMIC Pool will not be subject to the
prohibited transaction rules on the sale of its assets, provided that the REMIC
Pool credits or distributes in liquidation all of the sale proceeds plus its
cash (other than amounts retained to meet claims) to holders of Regular
Securities and Residual Holders within the 90-day period.
Administrative Matters
The REMIC Pool will be required to maintain its books on a calendar
year basis and to file federal income tax returns for federal income tax
purposes in a manner similar to a partnership. The form for such income tax
return is Form 1066, U.S. Real Estate Mortgage Investment Conduit Income Tax
Return. The Trustee will be required to sign the REMIC Pool's returns. Treasury
regulations provide that, except where there is a single Residual Holder for an
entire taxable year, the REMIC Pool will be subject to the procedural and
administrative rules of the Code applicable to partnerships, including the
determination by the IRS of any adjustments to, among other things, items of
REMIC income, gain, loss, deduction, or credit in a unified administrative
proceeding. The Master Servicer will be obligated to act as "tax matters
person," as defined in applicable Treasury regulations, with respect to the
REMIC Pool as agent of the Residual Holders holding the largest percentage
interest in the Residual Securities. If the Code or applicable Treasury
regulations do not permit the Master Servicer to act as tax matters person in
its capacity as agent of such Residual Holder, such Residual Holder or such
other person specified pursuant to Treasury regulations will be required to act
as tax matters person. The tax matters person generally has responsibility for
overseeing and providing notice to the other Residual Holders of certain
administrative and judicial proceedings regarding the REMIC Pool's tax affairs,
although other holders of the Residual Securities of the same Series would be
able to participate in such proceedings in appropriate circumstances.
Limitations on Deduction of Certain Expenses
An investor who is an individual, estate, or trust will be subject to
limitation with respect to certain itemized deductions described in Code Section
67, to the extent that such itemized deductions, in the aggregate, do not exceed
2% of the investor's adjusted gross income. In addition, Code Section 68
provides that itemized
106
deductions otherwise allowable for a taxable year of an individual taxpayer will
be reduced by the lesser of (i) 3% of the excess, if any, of adjusted gross
income over a statutory threshold amount or (ii) 80% of the amount of itemized
deductions otherwise allowable for such year. These limitations will be phased
out and eliminated by 2010. In the case of a REMIC Pool, such deductions may
include deductions under Code Section 212 for the Servicing Fee and all
administrative and other expenses relating to the REMIC Pool, or any similar
expenses allocated to the REMIC Pool with respect to a regular interest it holds
in another REMIC. Such investors who hold REMIC Securities either directly or
indirectly through certain pass-through entities may have their pro rata share
of such expenses allocated to them as additional gross income, but may be
subject to such limitation on deductions. In addition, such expenses are not
deductible at all for purposes of computing the alternative minimum tax, and may
cause such investors to be subject to significant additional tax liability.
Temporary Treasury regulations provide that the additional gross income and
corresponding amount of expenses generally are to be allocated entirely to the
holders of Residual Securities in the case of a REMIC Pool that would not
qualify as a fixed investment trust in the absence of a REMIC election. With
respect to a REMIC Pool that would be classified as an investment trust in the
absence of a REMIC election or that is substantially similar to an investment
trust, any holder of a Regular Security that is an individual, trust, estate, or
pass-through entity also will be allocated its pro rata share of such expenses
and a corresponding amount of income and will be subject to the limitations or
deductions imposed by Code Sections 67 and 68, as described above. All such
expenses will be allocable to the Residual Securities. In general, such
allocable portion will be determined based on the ratio that a REMIC
Securityholder's income, determined on a daily basis, bears to the income of all
holders of Regular Securities and Residual Securities with respect to a REMIC
Pool. As a result, individuals, estates or trusts holding REMIC Securities
(either directly or indirectly through a grantor trust, partnership, S
corporation, REMIC, or certain other pass-through entities described in the
foregoing temporary Treasury regulations) may have taxable income in excess of
the interest income at the pass-through rate on Regular Securities that are
issued in a single Class or otherwise consistently with fixed investment trust
status or in excess of cash distributions for the related period on Residual
Securities.
Taxation of Certain Foreign Investors
Regular Securities
Interest, including original issue discount, distributable to Regular
Securityholders who are non-resident aliens, foreign corporations, or other
non-U.S. Persons, generally will be considered "portfolio interest" and,
therefore, generally will not be subject to 30% United States withholding tax,
provided that (i) such interest is not effectively connected with the conduct of
a trade or business in the United States of the Securityholder, (ii) such
non-U.S. Person is not a "10-percent shareholder" within the meaning of Code
Section 871(h)(3)(B) or a controlled foreign corporation described in Code
Section 881(c)(3)(C) and (iii) such non-U.S. Person provides the Trustee, or the
person who would otherwise be required to withhold tax from such distributions
under Code Section 1441 or 1442, with an appropriate statement, signed under
penalties of perjury, identifying the beneficial owner and stating, among other
things, that the beneficial owner of the Regular Security is a non-U.S. Person.
If such statement, or any other required statement, is not provided, 30%
withholding will apply unless reduced or eliminated pursuant to an applicable
tax treaty or unless the interest on the Regular Security is effectively
connected with the conduct of a trade or business within the United States by
such non-U.S. Person. In the latter case, such non-U.S. Person will be subject
to United States federal income tax at regular rates. Investors who are non-U.S.
Persons should consult their own tax advisors regarding the specific tax
consequences to them of owning a Regular Security.
Residual Securities
The Conference Committee Report to the 1986 Act indicates that amounts
paid to Residual Holders who are non-U.S. Persons generally should be treated as
interest for purposes of the 30% (or lower treaty rate) United States
withholding tax. Treasury regulations provide that amount distributed to
Residual Holders may qualify as "portfolio interest," subject to the conditions
described in "--Regular Securities" above, but only to the extent that (i) the
Mortgage Loans were issued after July 18, 1984 and (ii) the Trust Fund or
segregated pool of assets therein (as to which a separate REMIC election will be
made), to which the Residual Security relates, consists of obligations issued in
"registered form" within the meaning of Code Section 163(f)(1). Generally,
Mortgage Loans will not be, but regular interests in another REMIC Pool will be,
considered obligations issued in registered form. Furthermore, Residual Holders
will not be entitled to any exemption from the 30% withholding tax (or lower
treaty rate) to the extent of that portion of REMIC taxable income that
constitutes an "excess inclusion." See "--Taxation of Owners
107
of Residual Securities--Limitations on Offset or Exemption of REMIC Income." If
the amounts paid to Residual Holders who are non-U.S. Persons are effectively
connected with the conduct of a trade or business within the United States by
such non-U.S. Persons, 30% (or lower treaty rate) withholding will not apply.
Instead, the amounts paid to such non-U.S. Persons will be subject to United
States federal income tax at regular rates. If 30% (or lower treaty rate)
withholding is applicable, such amounts generally will be taken into account for
purposes of withholding only when paid or otherwise distributed (or when the
Residual Security is disposed of) under rules similar to withholding upon
disposition of debt instruments that have original issue discount. See
"--Taxation of Owners of Residual Securities--Tax-Related Restrictions on
Transfer of Residual Securities--Foreign Investors" above concerning the
disregard of certain transfers having "tax avoidance potential." Investors who
are non-U.S. Persons should consult their own tax advisors regarding the
specific tax consequences to them of owning Residual Securities.
Backup Withholding
Distributions made on the Regular Securities, and proceeds from the
sale of the Regular Securities to or through certain brokers, may be subject to
a "backup" withholding tax under Code Section 3406 of 28% (increasing to 31%
after 2010) on "reportable payments" (including interest distributions, original
issue discount, and, under certain circumstances, principal distributions)
unless the Regular Holder complies with certain reporting and/or certification
procedures, including the provision of its taxpayer identification number to the
Trustee, its agent or the broker who effected the sale of the Regular Security,
or such Holder is otherwise an exempt recipient under applicable provisions of
the Code. Any amounts to be withheld from distribution on the Regular Securities
would be refunded by the IRS or allowed as a credit against the Regular Holder's
federal income tax liability. The Withholding Regulations change certain of the
rules relating to certain presumptions relating to information reporting and
backup withholding. Non-U.S. Persons are urged to contact their own tax advisors
regarding the application to them of backup withholding and information
reporting.
Reporting Requirements
Reports of accrued interest, original issue discount and information
necessary to compute the accrual of market discount will be made annually to the
IRS and to individuals, estates, non-exempt and non-charitable trusts, and
partnerships who are either holders of record of Regular Securities or
beneficial owners who own Regular Securities through a broker or middleman as
nominee. All brokers, nominees and all other non-exempt holders of record of
Regular Securities (including corporations, non-calendar year taxpayers,
securities or commodities dealers, real estate investment trusts, investment
companies, common trust funds, thrift institutions and charitable trusts) may
request such information for any calendar quarter by telephone or in writing by
contacting the person designated in Internal Revenue Service Publication 938
with respect to a particular Series of Regular Securities. Holders through
nominees must request such information from the nominee.
The IRS's Form 1066 has an accompanying Schedule Q, Quarterly Notice to
Residual Interest Holders of REMIC Taxable Income or Net Loss Allocation.
Treasury regulations require that Schedule Q be furnished by the REMIC Pool to
each Residual Holder by the end of the month following the close of each
calendar quarter (41 days after the end of a quarter under proposed Treasury
regulations) in which the REMIC Pool is in existence). Treasury regulations
require that, in addition to the foregoing requirements, information must be
furnished quarterly to Residual Holders, furnished annually, if applicable, to
holders of Regular Securities, and filed annually with the IRS concerning Code
Section 67 expenses (see "--Taxes That May Be Imposed on the REMIC
Pool--Limitations on Deduction of Certain Expenses" above) allocable to such
holders. Furthermore, under such regulations, information must be furnished
quarterly to Residual Holders, furnished annually to holders of Regular
Securities, and filed annually with the IRS concerning the percentage of the
REMIC Pool's assets meeting the qualified asset tests described above under
"Characterization of Investments in REMIC Securities."
Residual Holders should be aware that their responsibilities as holders
of the residual interest in a REMIC Pool, including the duty to account for
their shares of the REMIC Pool's income or loss on their returns, continue for
the life of the REMIC Pool, even after the principal and interest on their
Residual Securities have been paid in full.
108
Treasury regulations provide that a Residual Holder is not required to
treat items on its return consistently with their treatment on the REMIC Pool's
return if the Holder owns 100% of the Residual Securities for the entire
calendar year. Otherwise, each Residual Holder is required to treat items on its
returns consistently with their treatment on the REMIC Pool's return, unless the
Holder either files a statement identifying the inconsistency or establishes
that the inconsistency resulted from incorrect information received from the
REMIC Pool. The IRS may assess a deficiency resulting from a failure to comply
with the consistency requirement without instituting an administrative
proceeding at the REMIC Pool level. Any person that holds a Residual Security as
a nominee for another person may be required to furnish the related REMIC Pool,
in a manner to be provided in Treasury regulations, with the name and address of
such person and other specified information.
GRANTOR TRUST FUNDS
Classification of Grantor Trust Funds
With respect to each Series of Grantor Trust Securities, assuming
compliance with all provisions of the applicable Agreement, the related Grantor
Trust Fund will be classified as a grantor trust under subpart E, part I of
subchapter J of the Code and not as a partnership, an association taxable as a
corporation, or a "taxable mortgage pool" within the meaning of Code Section
7701(i). Accordingly, each holder of a Grantor Trust Security generally will be
treated as the beneficial owner of an undivided interest in the Mortgage Loans
included in the Grantor Trust Fund.
STANDARD SECURITIES
General
Where there is no Retained Interest or "excess" servicing with respect
to the Mortgage Loans underlying the Securities of a Series, and where such
Securities are not designated as "Stripped Securities," the holder of each such
Security in such Series (referred to herein as "STANDARD SECURITIES") will be
treated as the owner of a pro rata undivided interest in the ordinary income and
corpus portions of the Grantor Trust Fund represented by its Standard Security
and will be considered the beneficial owner of a pro rata undivided interest in
each of the Mortgage Loans, subject to the discussion below under
"--Recharacterization of Servicing Fees." Accordingly, the holder of a Standard
Security of a particular Series will be required to report on its federal income
tax return its pro rata share of the entire income from the Mortgage Loans
represented by its Standard Security, including interest at the coupon rate on
such Mortgage Loans, original issue discount (if any), prepayment fees,
assumption fees, and late payment charges received by the Servicer, in
accordance with such Securityholder's method of accounting. A Securityholder
generally will be able to deduct its share of the Servicing Fee and all
administrative and other expenses of the Trust Fund in accordance with its
method of accounting, provided that such amounts are reasonable compensation for
services rendered to that Grantor Trust Fund. However, investors who are
individuals, estates or trusts who own Securities, either directly or indirectly
through certain pass-through entities, will be subject to limitations with
respect to certain itemized deductions described in Code Section 67, including
deductions under Code Section 212 for the Servicing Fee and all such
administrative and other expenses of the Grantor Trust Fund, to the extent that
such deductions, in the aggregate, do not exceed two percent of an investor's
adjusted gross income. In addition, Code Section 68 provides that itemized
deductions otherwise allowable for a taxable year of an individual taxpayer will
be reduced by the lesser of (i) 3% of the excess, if any, of adjusted gross
income over a statutory threshold amount or (ii) 80% of the amount of itemized
deductions otherwise allowable for such year. These limitations will be phased
out and eliminated by 2010. As a result, such investors holding Standard
Securities, directly or indirectly through a pass-through entity, may have
aggregate taxable income in excess of the aggregate amount of cash received on
such Standard Securities with respect to interest at the pass-through rate or as
discount income on such Standard Securities. In addition, such expenses are not
deductible at all for purposes of computing the alternative minimum tax, and may
cause such investors to be subject to significant additional tax liability.
Moreover, where there is Retained Interest with respect to the Mortgage Loans
underlying a Series of Securities or where the servicing fees are in excess of
reasonable servicing compensation, the transaction will be subject to the
application of the "stripped bond" and "stripped coupon" rules of the Code, as
described below under "--Stripped Securities" and "--Recharacterization of
Servicing Fees," respectively.
109
Holders of Standard Securities, particularly any Class of a Series
which is a Subordinated Security, may incur losses of interest or principal with
respect to the Mortgage Loans. Such losses would be deductible generally only as
described above under "--REMICs--Taxation of Owners of Regular
Securities--Treatment of Losses," except that Securityholders on the cash method
of accounting would not be required to report qualified stated interest as
income until actual receipt.
Tax Status
With respect to a Series, Cadwalader, Wickersham & Taft LLP or Hunton &
Williams LLP has advised the Depositor that, except with respect to a Trust Fund
consisting of Unsecured Home Improvement Loans:
o A Standard Security owned by a "domestic building and loan
association" within the meaning of Code Section 7701(a)(19) will
be considered to represent "loans . . . secured by an interest in
real property which is . . . residential real property" within
the meaning of Code Section 7701(a)(19)(C)(v), provided that the
real property securing the Mortgage Loans represented by that
Standard Security is of the type described in such section of the
Code.
o A Standard Security owned by a real estate investment trust will
be considered to represent "real estate assets" within the
meaning of Code Section 856(c)(4)(A) to the extent that the
assets of the related Grantor Trust Fund consist of qualified
assets, and interest income on such assets will be considered
"interest on obligations secured by mortgages on real property"
to such extent within the meaning of Code Section 856(c)(3)(B).
o A Standard Security owned by a REMIC will be considered to
represent an "obligation (including any participation or
certificate of beneficial ownership therein) which is principally
secured by an interest in real property" within the meaning of
Code Section 860G(a)(3)(A) to the extent that the assets of the
related Grantor Trust Fund consist of "qualified mortgages"
within the meaning of Code Section 860G(a)(3).
An issue arises as to whether Buydown Mortgage Loans may be
characterized in their entirety under the Code provisions cited in the first two
bullet points above or whether the amount qualifying for such treatment must be
reduced by the amount of the Buydown Funds. There is indirect authority
supporting treatment of an investment in a Buydown Mortgage Loan as entirely
secured by real property if the fair market value of the real property securing
the loan exceeds the principal amount of the loan at the time of issuance or
acquisition, as the case may be. There is no assurance that the treatment
described above is proper. Accordingly, Securityholders are urged to consult
their own tax advisors concerning the effects of such arrangements on the
characterization of such Securityholder's investment for federal income tax
purposes.
Premium and Discount
Securityholders are advised to consult with their tax advisors as to
the federal income tax treatment of premium and discount arising either upon
initial acquisition of Standard Securities or thereafter.
Premium. The treatment of premium incurred upon the purchase of a
Standard Security will be determined generally as described above under
"--REMICs--Taxation of Owners of Residual Securities--Premium." The rules
allowing for the amortization of premium are available with respect to Mortgage
Loans originated after September 27, 1985.
Original Issue Discount. The original issue discount rules of Code
Section 1271 through 1275 will be applicable to a Securityholder's interest in
those Mortgage Loans as to which the conditions for the application of those
sections are met. Rules regarding periodic inclusion of original issue discount
income generally are applicable to mortgages originated after March 2, 1984.
Under the OID Regulations, original issue discount could arise by the charging
of points by the originator of the mortgages in an amount greater than the
statutory de minimis exception, including a payment of points that is currently
deductible by the borrower under applicable Code provisions or,
110
under certain circumstances, by the presence of "teaser" rates on the Mortgage
Loans. See "--Stripped Securities" below regarding original issue discount on
Stripped Securities.
Original issue discount generally must be reported as ordinary gross
income as it accrues under a constant interest method that takes into account
the compounding of interest, in advance of the cash attributable to such income.
Generally no prepayment assumption will be assumed for purposes of such accrual.
However, Code Section 1272 provides for a reduction in the amount of original
issue discount includable in the income of a holder of an obligation that
acquires the obligation after its initial issuance at a price greater than the
sum of the original issue price and the previously accrued original issue
discount, less prior payments of principal. Accordingly, if such Mortgage Loans
acquired by a Securityholder are purchased at a price equal to the then unpaid
principal amount of such Mortgage Loans, no original issue discount attributable
to the difference between the issue price and the original principal amount of
such Mortgage Loans (i.e., points) will be includable by such holder.
Market Discount. Securityholders also will be subject to the market
discount rules to the extent that the conditions for application of those
sections are met. Market discount on the Mortgage Loans will be determined and
will be reported as ordinary income generally in the manner described above
under "--REMICs--Taxation of Owners of Regular Securities--Market Discount,"
except that the ratable accrual methods described therein will not apply.
Rather, the holder will accrue market discount pro rata over the life of the
Mortgage Loans, unless the constant yield method is elected. Generally no
prepayment assumption will be assumed for purposes of such accrual.
Recharacterization of Servicing Fees
If the servicing fees paid to a Servicer were deemed to exceed
reasonable servicing compensation, the amount of such excess would represent
neither income nor a deduction to Securityholders. In this regard, there are no
authoritative guidelines for federal income tax purposes as to either the
maximum amount of servicing compensation that may be considered reasonable in
the context of this or similar transactions or whether, in the case of Standard
Securities, the reasonableness of servicing compensation should be determined on
a weighted average or loan-by-loan basis. If a loan-by-loan basis is
appropriate, the likelihood that such amount would exceed reasonable servicing
compensation as to some of the Mortgage Loans would be increased. IRS guidance
indicates that a servicing fee in excess of reasonable compensation ("EXCESS
SERVICING") will cause the Mortgage Loans to be treated under the "stripped
bond" rules. Such guidance provides safe harbors for servicing deemed to be
reasonable and requires taxpayers to demonstrate that the value of servicing
fees in excess of such amounts is not greater than the value of the services
provided.
Accordingly, if the IRS's approach is upheld, a Servicer who receives a
servicing fee in excess of such amounts would be viewed as retaining an
ownership interest in a portion of the interest payments on the Mortgage Loans.
Under the rules of Code Section 1286, the separation of ownership of the right
to receive some or all of the interest payments on an obligation from the right
to receive some or all of the principal payments on the obligation would result
in treatment of such Mortgage Loans as "stripped coupons" and "stripped bonds."
Subject to the de minimis rule discussed below under "Stripped Securities," each
stripped bond or stripped coupon could be considered for this purpose as a
non-interest bearing obligation issued on the date of issue of the Standard
Securities, and the original issue discount rules of the Code would apply to the
holder thereof. While Securityholders would still be treated as owners of
beneficial interests in a grantor trust for federal income tax purposes, the
corpus of such trust could be viewed as excluding the portion of the Mortgage
Loans the ownership of which is attributed to the Servicer, or as including such
portion as a second Class of equitable interest. Applicable Treasury regulations
treat such an arrangement as a fixed investment trust, since the multiple
Classes of trust interests should be treated as merely facilitating direct
investments in the trust assets and the existence of multiple Classes of
ownership interests is incidental to that purpose. In general, such a
recharacterization should not have any significant effect upon the timing or
amount of income reported by a Securityholder, except that the income reported
by a cash method holder may be slightly accelerated. See "--Stripped Securities"
below for a further description of the federal income tax treatment of stripped
bonds and stripped coupons.
Sale or Exchange of Standard Securities
111
Upon sale or exchange of a Standard Securities, a Securityholder will
recognize gain or loss equal to the difference between the amount realized on
the sale and its aggregate adjusted basis in the Mortgage Loans and other assets
represented by the Security. In general, the aggregate adjusted basis will equal
the Securityholder's cost for the Standard Security, exclusive of accrued
interest, increased by the amount of any income previously reported with respect
to the Standard Security and decreased by the amount of any losses previously
reported with respect to the Standard Security and the amount of any
distributions (other than accrued interest) received thereon. Except as provided
above with respect to market discount on any Mortgage Loans, and except for
certain financial institutions subject to the provisions of Code Section 582(c),
any such gain or loss generally would be capital gain or loss if the Standard
Security was held as a capital asset. However, gain on the sale of a Standard
Security will be treated as ordinary income (i) if a Standard Security is held
as part of a "conversion transaction" as defined in Code Section 1258(c), up to
the amount of interest that would have accrued on the Securityholder's net
investment in the conversion transaction at 120% of the appropriate applicable
Federal rate in effect at the time the taxpayer entered into the transaction
minus any amount previously treated as ordinary income with respect to any prior
disposition of property that was held as part of such transaction or (ii) in the
case of a non-corporate taxpayer, to the extent such taxpayer has made an
election under Code Section 163(d)(4) to have net capital gains taxed as
investment income at ordinary income rates. Long-term capital gains of certain
noncorporate taxpayers generally are subject to a lower maximum tax rate than
ordinary income or short-term capital gains of such taxpayers for property held
for more than one year. The maximum tax rate for corporations currently is the
same with respect to both ordinary income and capital gains.
STRIPPED SECURITIES
General
Pursuant to Code Section 1286, the separation of ownership of the right
to receive some or all of the principal payments on an obligation from ownership
of the right to receive some or all of the interest payments results in the
creation of "stripped bonds" with respect to principal payments and "stripped
coupons" with respect to interest payments. For purposes of this discussion,
Securities that are subject to those rules will be referred to as "STRIPPED
SECURITIES." The Securities will be subject to those rules if (i) the Depositor
or any of its affiliates retains (for its own account or for purposes of
resale), in the form of Retained Interest or otherwise, an ownership interest in
a portion of the payments on the Mortgage Loans, (ii) the Depositor or any of
its affiliates is treated as having an ownership interest in the Mortgage Loans
to the extent it is paid (or retains) servicing compensation in an amount
greater than reasonable consideration for servicing the Mortgage Loans (see
"--Standard Securities--Recharacterization of Servicing Fees" above), and (iii)
a Class of Securities are issued in two or more Classes or subclasses
representing the right to non-pro-rata percentages of the interest and principal
payments on the Mortgage Loans.
In general, a holder of a Stripped Security will be considered to own
"stripped bonds" with respect to its pro rata share of all or a portion of the
principal payments on each Mortgage Loan and/or "stripped coupons" with respect
to its pro rata share of all or a portion of the interest payments on each
Mortgage Loan, including the Stripped Security's allocable share of the
servicing fees paid to a Servicer, to the extent that such fees represent
reasonable compensation for services rendered. See the discussion above under
"--Standard Securities--Recharacterization of Servicing Fees." Although not free
from doubt, for purposes of reporting to Stripped Securityholders, the servicing
fees will be allocated to the Classes of Stripped Securities in proportion to
the distributions to such Classes for the related period or periods. The holder
of a Stripped Security generally will be entitled to a deduction each year in
respect of the servicing fees, as described above under "--Standard
Securities--General," subject to the limitation described therein.
Code Section 1286 treats a stripped bond or a stripped coupon generally
as an obligation issued at an original issue discount on the date that such
stripped interest is purchased. Although the treatment of Stripped Securities
for federal income tax purposes is not clear in certain respects, particularly
where such Stripped Securities are issued with respect to a Mortgage Pool
containing variable-rate Mortgage Loans, the Depositor has been advised by
counsel that (i) the Grantor Trust Fund will be treated as a grantor trust under
subpart E, part I of subchapter J of the Code and not as an association taxable
as a corporation or a "taxable mortgage pool" within the meaning of Code Section
7701(i), and (ii) each Stripped Security should be treated as a single
installment obligation for purposes of calculating original issue discount and
gain or loss on disposition. This treatment is based on the
112
interrelationship of Code Section 1286, Code Sections 1272 through 1275, and the
OID Regulations. Although it is possible that computations with respect to
Stripped Securities could be made in one of the ways described below under
"--Possible Alternative Characterizations," the OID Regulations state, in
general, that two or more debt instruments issued by a single issuer to a single
investor in a single transaction should be treated as a single debt instrument.
Accordingly, for original issue discount purposes, all payments on any Stripped
Securities should be aggregated and treated as though they were made on a single
debt instrument. The Pooling and Servicing Agreement will require that the
Trustee make and report all computations described below using this aggregate
approach, unless substantial legal authority requires otherwise.
Furthermore, Treasury regulations provide for treatment of a Stripped
Security as a single debt instrument issued on the date it is purchased for
purposes of calculating any original issue discount. In addition, under such
regulations, a Stripped Security that represents a right to payments of both
interest and principal may be viewed either as issued with original issue
discount or market discount (as described below), at a de minimis original issue
discount, or, presumably, at a premium. This treatment indicates that the
interest component of such a Stripped Security would be treated as qualified
stated interest under the OID Regulations, assuming it is not an interest-only
or super-premium Stripped Security. Further, these regulations provide that the
purchaser of such a Stripped Security will be required to account for any
discount as market discount rather than original issue discount if either (i)
the initial discount with respect to the Stripped Security was treated as zero
under the de minimis rule, or (ii) no more than 100 basis points in excess of
reasonable servicing is stripped off the related Mortgage Loans. Any such market
discount would be reportable as described above under "--REMICs--Taxation of
Owners of Regular Securities--Market Discount," without regard to the de minimis
rule therein, assuming that a prepayment assumption is employed in such
computation.
The holder of a Stripped Security will be treated as owning an interest
in each of the Mortgage Loans held by the Grantor Trust Fund and will recognize
an appropriate share of the income and expenses associated with the Mortgage
Loans. Accordingly, an individual, trust or estate that holds a Stripped
Security directly or through a pass-through entity will be subject to the
limitations on deductions imposed by Code Sections 67 and 68.
A holder of a Stripped Security, particularly any Class of a Series
which is a Subordinated Security, may deduct losses incurred with respect to the
Stripped Security as described above under "--Standard Securities--General."
Status of Stripped Securities
No specific legal authority exists as to whether the character of the
Stripped Securities, for federal income tax purposes, will be the same as that
of the Mortgage Loans. Although the issue is not free from doubt, counsel has
advised the Depositor that, except with respect to a Trust Fund consisting of
Unsecured Home Improvement Loans, Stripped Securities owned by applicable
holders should be considered to represent "real estate assets" within the
meaning of Code Section 856(c)(4)(A), "obligation[s] . . . principally secured
by an interest in real property which is . . . residential real estate" within
the meaning of Code Section 860G(a)(3)(A), and "loans . . . secured by an
interest in real property" within the meaning of Code Section 7701(a)(19)(C)(v),
and interest (including original issue discount) income attributable to Stripped
Securities should be considered to represent "interest on obligations secured by
mortgages on real property" within the meaning of Code Section 856(c)(3)(B),
provided that in each case the Mortgage Loans and interest on such Mortgage
Loans qualify for such treatment. The application of such Code provisions to
Buydown Mortgage Loans is uncertain. See "--Standard Securities--Tax Status"
above.
Taxation of Stripped Securities
Original Issue Discount. Except as described above under "--General,"
each Stripped Security will be considered to have been issued at an original
issue discount for federal income tax purposes. Original issue discount with
respect to a Stripped Security must be included in ordinary income as it
accrues, in accordance with a constant yield method that takes into account the
compounding of interest, which may be prior to the receipt of the cash
attributable to such income. Based in part on the issue discount required to be
included in the income of a holder of a Stripped Security (referred to in this
discussion as a "STRIPPED SECURITYHOLDER") in any taxable year likely will be
computed generally as described above under "--REMICs--Taxation of Owner of
Regular Securities--Original
113
Issue Discount" and "--Variable Rate Regular Securities." However, with the
apparent exception of a Stripped Security qualifying as a market discount
obligation as described above under "--General," the issue price of a Stripped
Security will be the purchase price paid by each holder thereof, and the stated
redemption price at maturity will include the aggregate amount of the payments,
other than qualified stated interest, to be made on the Stripped Security to
such Securityholder, presumably under the Prepayment Assumption.
If the Mortgage Loans prepay at a rate either faster or slower than
that under the Prepayment Assumption, a Securityholder's recognition of original
issue discount will be either accelerated or decelerated and the amount of such
original issue discount will be either increased or decreased depending on the
relative interests in principal and interest on each Mortgage Loan represented
by such Securityholder's Stripped Security. While the matter is not free from
doubt, the holder of a Stripped Security should be entitled in the year that it
becomes certain (assuming no further prepayments) that the holder will not
recover a portion of its adjusted basis in such Stripped Security to recognize a
loss (which may be a capital loss) equal to such portion of unrecoverable basis.
As an alternative to the method described above, the fact that some or
all of the interest payments with respect to the Stripped Securities will not be
made if the Mortgage Loans are prepaid could lead to the interpretation that
such interest payments are "contingent" within the meaning of the OID
Regulations. The OID Regulations, as they relate to the treatment of contingent
interest, are by their terms not applicable to prepayable securities such as the
Stripped Securities. However, if final regulations dealing with contingent
interest with respect to the Stripped Securities apply the same principles as
the OID Regulations, such regulations may lead to different timing of income
inclusion that would be the case under the OID Regulations. Furthermore,
application of such principles could lead to the characterization of gain on the
sale of contingent interest Stripped Securities as ordinary income. Investors
should consult their tax advisors regarding the appropriate tax treatment of
Stripped Securities.
Sale or Exchange of Stripped Securities. Sale or exchange of a Stripped
Security prior to its maturity will result in gain or loss equal to the
difference, if any, between the amount received and the Securityholder's
adjusted basis in such Stripped Security, as described above under
"--REMICs--Taxation of Owners of Regular Securities--Sale or Exchange of Regular
Securities." Gain or loss from the sale or exchange of a Stripped Security
generally will be capital gain or loss to the Securityholder if the Stripped
Security is held as a "capital asset" within the meaning of Code Section 1221,
and will be long-term or short-term depending on whether the Stripped Security
has been held for the long-term capital gain holding period (currently, more
than one year). To the extent that a subsequent purchaser's purchase price is
exceeded by the remaining payments on the Stripped Securities, such subsequent
purchaser will be required for federal income tax purposes to accrue and report
such excess as if it were original issue discount in the manner described above.
It is not clear for this purpose whether the assumed prepayment rate that is to
be used in the case of a Securityholder other than an original Securityholder
should be the Prepayment Assumption or a new rate based on the circumstances at
the date of subsequent purchase.
Purchase of More Than One Class of Stripped Securities. When an
investor purchases more than one Class of Stripped Securities, it is currently
unclear whether for federal income tax purposes such Classes of Stripped
Securities should be treated separately or aggregated for purposes of the rules
described above.
Possible Alternative Characterization. The characterizations of the
Stripped Securities discussed above are not the only possible interpretations of
the applicable Code provisions. For example, the Securityholder may be treated
as the owner of (i) one installment obligation consisting of such Stripped
Security's pro rata share of the payments attributable to principal on each
Mortgage Loan and a second installment obligation consisting of such Stripped
Security's pro rata share of the payments attributable to interest on each
Mortgage Loan, (ii) as many stripped bonds or stripped coupons as there are
scheduled payments of principal and/or interest on each Mortgage Loan, or (iii)
a separate installment obligation for each Mortgage Loan, representing the
Stripped Security's pro rata share of payments of principal and/or interest to
be made with respect thereto. Alternatively, the holder of one or more Classes
of Stripped Securities may be treated as the owner of a pro rata fractional
undivided interest in each Mortgage Loan to the extent that such Stripped
Security, or Classes of Stripped Securities in the aggregate, represent the same
pro rata portion of principal and interest on each such Mortgage Loan, and a
stripped bond or stripped coupon (as the case may be), treated as an installment
obligation or contingent payment obligation, as to the remainder. Treasury
regulations regarding original issue discount on stripped obligations make the
foregoing interpretations less likely to be applicable. The preamble to such
regulations states that they are premised on the assumption that an aggregation
approach is appropriate for determining whether original issue discount on a
stripped
114
bond or stripped coupon is de minimis, and solicits comments on appropriate
rules for aggregating stripped bonds and stripped coupons under Code Section
1286.
Because of these possible varying characterizations of Stripped
Securities and the resultant differing treatment of income recognition,
Securityholders are urged to consult their own tax advisors regarding the proper
treatment of Stripped Securities for federal income tax purposes.
Reporting Requirements and Backup Withholding
The Trustee will furnish, within a reasonable time after the end of
each calendar year, to each Securityholder at any time during such year, such
information (prepared on the basis described above) as is necessary to enable
such Securityholder to prepare its federal income tax returns. Such information
will include the amount of original issue discount accrued on Securities held by
persons other than Securityholders exempted from the reporting requirements.
However, the amount required to be reported by the Trustee may not be equal to
the proper amount of original issue discount required to be reported as taxable
income by a Securityholder, other than an original Securityholder that purchased
at the issue price. In particular, in the case of Stripped Securities, such
reporting will be based upon a representative initial offering price of each
Class of Stripped Securities. The Trustee will also file such original issue
discount information with the IRS. If a Securityholder fails to supply an
accurate taxpayer identification number or if the Secretary of the Treasury
determines that a Securityholder has not reported all interest and dividend
income required to be shown on his federal income tax return, backup withholding
may be required in respect of any reportable payments, as described above under
"--REMICs--Taxation of Certain Foreign Investors--Backup Withholding."
Taxation of Certain Foreign Investors
To the extent that a Security evidences ownership in Mortgage Loans
that are issued on or before July 18, 1984, interest or original issue discount
paid by the person required to withhold tax under Code Section 1441 or 1442 to
nonresident aliens, foreign corporations, or other non-U.S. Persons generally
will be subject to 30% United States withholding tax, or such lower rate as may
be provided for interest by an applicable tax treaty. Accrued original issue
discount recognized by the Securityholder on the sale or exchange of such a
Security also will be subject to federal income tax at the same rate.
Treasury regulations provide that interest or original issue discount
paid by the Trustee or other withholding agent to a non-U.S. Person evidencing
ownership interest in Mortgage Loans issued after July 18, 1984 will be
"portfolio interest" and will be treated in the manner, and such persons will be
subject to the same certification requirements, described above under
"--REMICs--Taxation of Certain Foreign Investors--Regular Securities."
PARTNERSHIP TRUST FUNDS
Classification of Partnership Trust Funds
With respect to each Series of Partnership Securities or Debt
Securities, Cadwalader, Wickersham & Taft LLP or Hunton & Williams LLP will
deliver its opinion that the Trust Fund will not be a taxable mortgage pool or
an association (or publicly traded partnership) taxable as a corporation for
federal income tax purposes. This opinion will be based on the assumption that
the terms of the applicable Agreement and related documents will be complied
with, and on counsel's conclusion that the nature of the income of the Trust
Fund will exempt it from the rule that certain publicly traded partnerships are
taxable as corporations.
Characterization of Investments in Partnership Securities and Debt
Securities
For federal income tax purposes, (i) Partnership Securities and Debt
Securities held by a thrift institution taxed as a domestic building and loan
association will not constitute "loans . . . secured by an interest in real
property which is . . . residential real property" within the meaning of Code
Section 7701(a)(19)(C)(v) and (ii) interest on Debt Securities held by a real
estate investment trust will not be treated as "interest on obligations
115
secured by mortgages on real property or on interests in real property" within
the meaning of Code Section 856(c)(3)(B), and Debt Securities held by a real
estate investment trust will not constitute "real estate assets" within the
meaning of Code Section 856(c)(4)(A), but Partnership Securities held by a real
estate investment trust will qualify under those sections based on the real
estate investments trust's proportionate interest in the assets of the
Partnership Trust Fund qualifying for such treatments based on capital accounts.
Taxation of Debt Securityholders
Treatment of the Debt Securities as Indebtedness
The Depositor will agree, and the Securityholders will agree by their
purchase of Debt Securities, to treat the Debt Securities as debt for federal
income tax purposes. No regulations, published rulings, or judicial decisions
exist that discuss the characterization for federal income tax purposes of
securities with terms substantially the same as the Debt Securities. However,
with respect to each Series of Debt Securities, Cadwalader, Wickersham & Taft
LLP or Hunton & Williams LLP will deliver its opinion that the Debt Securities
will be classified as indebtedness for federal income tax purposes. The
discussion below assumes this characterization of the Debt Securities is
correct.
If, contrary to the opinion of counsel, the IRS successfully asserted
that the Debt Securities were not debt for federal income tax purposes, the Debt
Securities might be treated as equity interests in the Partnership Trust, and
the timing and amount of income allocable to holders of such Debt Securities may
be different than as described in the following paragraph.
Debt Securities generally will be subject to the same rules of taxation
as Regular Securities issued by a REMIC, as described above, except that (i)
income reportable on Debt Securities is not required to be reported under the
accrual method unless the holder otherwise uses the accrual method and (ii) the
special rule treating a portion of the gain on sale or exchange of a Regular
Security as ordinary income is inapplicable to Debt Securities. See
"--REMICs--Taxation of Owners of Regular Securities" and "--Sale or Exchange of
Regular Securities."
Taxation of Owners of Partnership Securities
Treatment of the Partnership Trust Fund as a Partnership
If so specified in the applicable prospectus supplement, the Depositor
will agree, and the Securityholders will agree by their purchase of Securities,
to treat the Partnership Trust Fund as a partnership for purposes of federal and
state income tax, franchise tax and any other tax measured in whole or in part
by income, with the assets of the partnership being the assets held by the
Partnership Trust Fund, the partners of the partnership being the
Securityholders (including the Depositor), and the Debt Securities (if any)
being debt of the partnership. However, the proper characterization of the
arrangement involving the Partnership Trust Fund, the Partnership Securities,
the Debt Securities, and the Depositor is not clear, because there is no
authority on transactions closely comparable to that contemplated herein.
A variety of alternative characterizations are possible. For example,
because one or more of the Classes of Partnership Securities have certain
features characteristic of debt, the Partnership Securities might be considered
debt of the Depositor or the Partnership Trust Fund. Any such characterization
would not result in materially adverse tax consequences to Securityholders as
compared to the consequences from treatment of the Partnership Securities as
equity in a partnership, described below. The following discussion assumes that
the Partnership Securities represent equity interests in a partnership.
Partnership Taxation
As a partnership, the Partnership Trust Fund will not be subject to
federal income tax. Rather, each Securityholder will be required to separately
take into account such holder's allocated share of income, gains, losses,
deductions and credits of the Partnership Trust Fund. It is anticipated that the
Partnership Trust Fund's income will consist primarily of interest earned on the
Mortgage Loans (including appropriate adjustments for market discount,
116
original issue discount and bond premium) as described above under "--Grantor
Trust Funds-- Standard Securities--General" and "--Premium and Discount") and
any gain upon collection or disposition of Mortgage Loans. The Partnership Trust
Fund's deductions will consist primarily of interest accruing with respect to
the Debt Securities, servicing and other fees, and losses or deductions upon
collection or disposition of Debt Securities.
The tax items of a partnership are allocable to the partners in
accordance with the Code, Treasury regulations and the partnership agreement
(here, the Agreements and related documents). The applicable Agreement will
provide, in general, that the Securityholders will be allocated taxable income
of the Partnership Trust Fund for each Collection Period equal to the sum of (i)
the interest that accrues on the Partnership Securities in accordance with their
terms for such Collection Period, including interest accruing at the applicable
pass-through rate for such Collection Period and interest on amounts previously
due on the Partnership Securities but not yet distributed; (ii) any Partnership
Trust Fund income attributable to discount on the Mortgage Loans that
corresponds to any excess of the principal amount of the Partnership Securities
over their initial issue price; and (iii) any other amounts of income payable to
the Securityholders for such Collection Period. Such allocation will be reduced
by any amortization by the Partnership Trust Fund of premium on Mortgage Loans
that corresponds to any excess of the issue price of Partnership Securities over
their principal amount. All remaining taxable income of the Partnership Trust
Fund will be allocated to the Depositor. Based on the economic arrangement of
the parties, this approach for allocating Partnership Trust Fund income should
be permissible under applicable Treasury regulations, although no assurance can
be given that the IRS would not require a greater amount of income to be
allocated to Securityholders. Moreover, even under the foregoing method of
allocation, Securityholders may be allocated income equal to the entire
pass-through rate plus the other items described above even though the Trust
Fund might not have sufficient cash to make current cash distributions of such
amount. Thus, cash basis holders will in effect be required to report income
from the Partnership Securities on the accrual basis and Securityholders may
become liable for taxes on Partnership Trust Fund income even if they have not
received cash from the Partnership Trust Fund to pay such taxes.
Part or all of the taxable income allocated to a Securityholder that is
a pension, profit sharing or employee benefit plan or other tax-exempt entity
(including an individual retirement account) may constitute "unrelated business
taxable income" generally taxable to such a holder under the Code.
A share of expenses of the Partnership Trust Fund (including fees of
the Master Servicer but not interest expense) allocable to an individual, estate
or trust Securityholder would be miscellaneous itemized deductions subject to
the limitations described above under "--Grantor Trust Funds--Standard
Securities--General". Accordingly, such deductions might be disallowed to the
individual in whole or in part and might result in such holder being taxed on an
amount of income that exceeds the amount of cash actually distributed to such
holder over the life of the Partnership Trust Fund.
Discount income or premium amortization with respect to each Mortgage
Loan would be calculated in a manner similar to the description above under
"--Grantor Trust Funds--Standard Securities--General" and "--Premium and
Discount." Notwithstanding such description, it is intended that the Partnership
Trust Fund will make all tax calculations relating to income and allocations to
Securityholders on an aggregate basis with respect to all Mortgage Loans held by
the Partnership Trust Fund rather than on a Mortgage Loan-by-Mortgage Loan
basis. If the IRS were to require that such calculations be made separately for
each Mortgage Loan, the Partnership Trust Fund might be required to incur
additional expense, but it is believed that there would not be a material
adverse effect on Securityholders.
Discount and Premium
It is not anticipated that the Mortgage Loans will have been issued
with original issue discount and, therefore, the Partnership Trust Fund should
not have original issue discount income. However, the purchase price paid by the
Partnership Trust Fund for the Mortgage Loans may be greater or less than the
remaining principal balance of the Mortgage Loans at the time of purchase. If
so, the Mortgage Loans will have been acquired at a premium or discount, as the
case may be. See "--Grantor Trust Funds--Standard Securities--Premium and
Discount." (As indicated above, the Partnership Trust Fund will make this
calculation on an aggregate basis, but might be required to recompute it on a
Mortgage Loan-by-Mortgage Loan basis).
117
If the Partnership Trust Fund acquires the Mortgage Loans at a market
discount or premium, the Partnership Trust Fund will elect to include any such
discount in income currently as it accrues over the life of the Mortgage Loans
or to offset any such premium against interest income on the Mortgage Loans. As
indicated above, a portion of such market discount income or premium deduction
may be allocated to Securityholders.
Section 708 Termination
Under Section 708 of the Code, the Partnership Trust Fund will be
deemed to terminate for federal income tax purposes if 50% or more of the
capital and profits interests in the Partnership Trust Fund are sold or
exchanged within a 12-month period. If such a termination occurs, it would cause
a deemed contribution of the assets of a Partnership Trust Fund (the "OLD
PARTNERSHIP") to a new Partnership Trust Fund (the "NEW PARTNERSHIP") in
exchange for interests in the new partnership. Such interests would be deemed
distributed to the partners of the old partnership in liquidation thereof, which
would not constitute a sale or exchange. The Partnership Trust Fund will not
comply with certain technical requirements that might apply when such a
constructive termination occurs. As a result, the Partnership Trust Fund may be
subject to certain tax penalties and may incur additional expenses if it is
required to comply with those requirements. Furthermore, the Partnership Trust
Fund might not be able to comply due to lack of data.
Disposition of Securities
Generally, capital gain or loss will be recognized on a sale of
Partnership Securities in an amount equal to the difference between the amount
realized and the seller's tax basis in the Partnership Securities sold. A
Securityholder's tax basis in an Partnership Security will generally equal the
holder's cost increased by the holder's share of Partnership Trust Fund income
(includable in income) and decreased by any distributions received with respect
to such Partnership Security. In addition, both the tax basis in the Partnership
Securities and the amount realized on a sale of an Partnership Security would
include the holder's share of the Debt Securities and other liabilities of the
Partnership Trust Fund. A holder acquiring Partnership Securities at different
prices may be required to maintain a single aggregate adjusted tax basis in such
Partnership Securities, and, upon sale or other disposition of some of the
Partnership Securities, allocate a portion of such aggregate tax basis to the
Partnership Securities sold (rather than maintaining a separate tax basis in
each Partnership Security for purposes of computing gain or loss on a sale of
that Partnership Security).
Any gain on the sale of a Partnership Security attributable to the
holder's share of unrecognized accrued market discount on the Mortgage Loans
would generally be treated as ordinary income to the holder and would give rise
to special tax reporting requirements. The Partnership Trust Fund does not
expect to have any other assets that would give rise to such special reporting
considerations. Thus, to avoid those special reporting requirements, the
Partnership Trust Fund will elect to include market discount in income as it
accrues.
If a Securityholder is required to recognize an aggregate amount of
income (not including income attributable to disallowed itemized deductions
described above) over the life of the Partnership Securities that exceeds the
aggregate cash distributions with respect thereto, such excess will generally
give rise to a capital loss upon the retirement of the Partnership Securities.
Allocations Between Transferors and Transferees
In general, the Partnership Trust Fund's taxable income and losses will
be determined each Collection Period and the tax items for a particular
Collection Period will be apportioned among the Securityholders in proportion to
the principal amount of Partnership Securities owned by them as of the close of
the last day of such Collection Period. As a result, a holder purchasing
Partnership Securities may be allocated tax items (which will affect its tax
liability and tax basis) attributable to periods before the actual transaction.
The use of such a Collection Period convention may not be permitted by
existing regulations. If a Collection Period convention is not allowed (or only
applies to transfers of less than all of the partner's interest), taxable income
or losses of the Partnership Trust Fund might be reallocated among the
Securityholders. The
118
Depositor will be authorized to revise the Partnership Trust Fund's method of
allocation between transferors and transferees to conform to a method permitted
by future regulations.
Section 731 Distributions
In the case of any distribution to a Securityholder, no gain will be
recognized to that Securityholder to the extent that the amount of any money
distributed with respect to such Security does not exceed the adjusted basis of
such Securityholder's interest in the Security. To the extent that the amount of
money distributed exceeds such Securityholder's adjusted basis, gain will be
currently recognized. In the case of any distribution to a Securityholder, no
loss will be recognized except upon a distribution in liquidation of a
Securityholder's interest. Any gain or loss recognized by a Securityholder will
be capital gain or loss.
Section 754 Election
In the event that a Securityholder sells its Partnership Securities at
a profit (loss), the purchasing Securityholder will have a higher (lower) basis
in the Partnership Securities than the selling Securityholder had. The tax basis
of the Partnership Trust Fund's assets would not be adjusted to reflect that
higher (or lower) basis unless the Partnership Trust Fund were to file an
election under Section 754 of the Code. In order to avoid the administrative
complexities that would be involved in keeping accurate accounting records, as
well as potentially onerous information reporting requirements, the Partnership
Trust Fund will not make such an election. As a result, a Securityholder might
be allocated a greater or lesser amount of Partnership Trust Fund income than
would be appropriate based on its own purchase price for Partnership Securities.
Administrative Matters
The Trustee is required to keep or have kept complete and accurate
books of the Partnership Trust Fund. Such books will be maintained for financial
reporting and tax purposes on an accrual basis and the fiscal year of the
Partnership Trust Fund will be the calendar year. The Trustee will file a
partnership information return (IRS Form 1065) with the IRS for each taxable
year of the Partnership Trust Fund and will report each Securityholder's
allocable share of items of Partnership Trust Fund income and expense to holders
and the IRS on Schedule K-1. The Trustee will provide the Schedule K-1
information to nominees that fail to provide the Partnership Trust Fund with the
information statement described below and such nominees will be required to
forward such information to the beneficial owners of the Partnership Securities.
Generally, holders must file tax returns that are consistent with the
information return filed by the Partnership Trust Fund or be subject to
penalties unless the holder notifies the IRS of all such inconsistencies.
Under Section 6031 of the Code, any person that holds Partnership
Securities as a nominee at any time during a calendar year is required to
furnish the Partnership Trust Fund with a statement containing certain
information on the nominee, the beneficial owners and the Partnership Securities
so held. Such information includes (i) the name, address and taxpayer
identification number of the nominee and (ii) as to each beneficial owner (x)
the name, address and identification number of such person, (y) whether such
person is a United States person, a tax-exempt entity or a foreign government,
an international organization, or any wholly-owned agency or instrumentality of
either of the foregoing, and (z) certain information on Partnership Securities
that were held, bought or sold on behalf of such person throughout the year. In
addition, brokers and financial institutions that hold Partnership Securities
through a nominee are required to furnish directly to the Trustee information as
to themselves and their ownership of Partnership Securities. A clearing agency
registered under Section 17A of the Exchange Act is not required to furnish any
such information statement to the Partnership Trust Fund. The information
referred to above for any calendar year must be furnished to the Partnership
Trust Fund on or before the following January 31. Nominees, brokers and
financial institutions that fail to provide the Partnership Trust Fund with the
information described above may be subject to penalties.
The Depositor will be designated as the tax matters partner in the
Pooling and Servicing Agreement and, as such, will be responsible for
representing the Securityholders in any dispute with the IRS. The Code provides
for administrative examination of a partnership as if the partnership were a
separate and distinct taxpayer. Generally, the statute of limitations for
partnership items does not expire until three years after the date on which the
partnership information return is filed. Any adverse determination following an
audit of the return of the
119
Partnership Trust Fund by the appropriate taxing authorities could result in an
adjustment of the returns of the Securityholders, and, under certain
circumstances, a Securityholder may be precluded from separately litigating a
proposed adjustment to the items of the Partnership Trust Fund. An adjustment
could also result in an audit of a Securityholder's returns and adjustments of
items not related to the income and losses of the Partnership Trust Fund.
Tax Consequences to Foreign Securityholders
It is not clear whether the Partnership Trust Fund would be considered
to be engaged in a trade or business in the United States for purposes of
federal withholding taxes with respect to non-U.S. Persons, because there is no
clear authority dealing with that issue under facts substantially similar to
those described herein. Although it is not expected that the Partnership Trust
Fund would be engaged in a trade or business in the United States for such
purposes, if so specified in the applicable prospectus supplement, the
Partnership Trust Fund may withhold as if it were so engaged in order to protect
the Partnership Trust Fund from possible adverse consequences of a failure to
withhold. The Partnership Trust Fund may withhold on the portion of its taxable
income that is allocable to Securityholders who are non-U.S. Persons pursuant to
Section 1446 of the Code, as if such income were effectively connected to a U.S.
trade or business, at the maximum tax rate for corporations or individuals, as
applicable. Amounts withheld will be deemed distributed to the non-U.S. Person
Securityholders. Subsequent adoption of Treasury regulations or the issuance of
other administrative pronouncements may require the Partnership Trust Fund to
change its withholding procedures. In determining a holder's withholding status,
the Partnership Trust Fund may rely on IRS Form W-8BEN, IRS Form W-9 or the
holder's certification of nonforeign status signed under penalties of perjury.
To the extent specified in the applicable prospectus supplement, (i)
each non-U.S. Person holder might be required to file a U.S. individual or
corporate income tax return (including, in the case of a corporation, the branch
profits tax) on its share of the Partnership Trust Fund's income; (ii) each
non-U.S. Person holder must obtain a taxpayer identification number from the IRS
and submit that number to the Partnership Trust Fund on Form W-8BEN in order to
assure appropriate crediting of the taxes withheld; and (iii) a non-U.S. Person
holder generally would be entitled to file with the IRS a claim for refund with
respect to taxes withheld by the Partnership Trust Fund, taking the position
that no taxes were due because the Partnership Trust Fund was not engaged in a
U.S. trade or business. Notwithstanding the foregoing, interest payments made
(or accrued) to a Securityholder who is a non-U.S. Person may be considered
guaranteed payments to the extent such payments are determined without regard to
the income of the Partnership Trust Fund. If these interest payments are
properly characterized as guaranteed payments, then the interest may not be
considered "portfolio interest." As a result, Securityholders who are non-U.S.
Persons may be subject to United States federal income tax and withholding tax
at a rate of 30 percent, unless reduced or eliminated pursuant to an applicable
treaty. In such case, a non-U.S. Person holder would only be entitled to claim a
refund for that portion of the taxes in excess of the taxes that should be
withheld with respect to the guaranteed payments.
Backup Withholding
Distributions made on the Partnership Securities and proceeds from the
sale of the Partnership Securities will be subject to a "backup" withholding tax
of 28% (increasing to 31% after 2010) if, in general, the Securityholder fails
to comply with certain identification procedures, unless the holder is an exempt
recipient under applicable provisions of the Code.
PROSPECTIVE INVESTORS SHOULD CONSULT THEIR TAX ADVISORS CONCERNING ANY
POSSIBLE TAX RETURN DISCLOSURE OBLIGATION WITH RESPECT TO THE SECURITIES
DISCUSSED HEREIN. THE FEDERAL TAX DISCUSSIONS SET FORTH ABOVE ARE INCLUDED FOR
GENERAL INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON A
SECURITYHOLDER'S PARTICULAR TAX SITUATION. PROSPECTIVE PURCHASERS SHOULD CONSULT
THEIR TAX ADVISORS WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF THE PURCHASE,
OWNERSHIP AND DISPOSITION OF REMIC SECURITIES, GRANTOR TRUST SECURITIES,
PARTNERSHIP SECURITIES AND DEBT SECURITIES, INCLUDING THE TAX CONSEQUENCES UNDER
STATE, LOCAL, FOREIGN AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN
FEDERAL OR OTHER TAX LAWS.
120
STATE AND OTHER TAX CONSEQUENCES
In addition to the federal income tax consequences described in
"Federal Income Tax Consequences," potential investors should consider the state
and local tax consequences of the acquisition, ownership, and disposition of the
Securities offered hereunder. State tax law may differ substantially from the
corresponding federal tax law, and the discussion above does not purport to
describe any aspect of the tax laws of any state or other jurisdiction.
Therefore, prospective investors should consult their own tax advisors with
respect to the various tax consequences of investments in the Securities offered
hereunder.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended
("ERISA" ) and the Code impose certain requirements on employee benefit plans
and on certain other retirement plans and arrangements, including individual
retirement accounts, individual retirement annuities, Keogh plans and collective
investment funds and separate accounts in which such plans, accounts or
arrangements are invested, that are subject to Title I of ERISA and Section 4975
of the Code ("PLANS") and on persons who are fiduciaries with respect to such
Plans in connection with the investment of Plan assets. Certain employee benefit
plans, such as governmental plans (as defined in ERISA Section 3(32)), and, if
no election has been made under Section 410(d) of the Code, church plans (as
defined in Section 3(33) of ERISA) are not subject to ERISA requirements.
However, such plans may be subject to the provisions of other applicable
federal, state and local law materially similar to the foregoing provisions of
ERISA and the Code. Any such plan which is qualified and exempt from taxation
under Sections 401(a) and 501(a) of the Code, however, is subject to the
prohibited transaction rules set forth in Section 503 of the Code.
ERISA generally imposes on Plan fiduciaries certain general fiduciary
requirements, including those of investment prudence and diversification and the
requirement that a Plan's investments be made in accordance with the documents
governing the Plan. In addition, ERISA and the Code prohibit a broad range of
transactions involving assets of a Plan and persons ("PARTIES IN INTEREST") who
have certain specified relationships to the Plan unless a statutory or
administrative exemption is available. Certain Parties in Interest that
participate in a prohibited transaction may be subject to an excise tax imposed
pursuant to Section 4975 of the Code, unless a statutory or administrative
exemption is available. These prohibited transactions generally are set forth in
Sections 406 and 407 of ERISA and Section 4975 of the Code.
A Plan's investment in Securities may cause the Mortgage Loans,
Contracts, Unsecured Home Improvement Loans and other assets included in a
related Trust Fund to be deemed Plan assets. Section 2510.3-101 of the
regulations of the United States Department of Labor ("DOL") provides that when
a Plan acquires an equity interest in an entity, the Plan's assets include both
such equity interest and an undivided interest in each of the underlying assets
of the entity, unless certain exceptions not applicable here apply, or unless
the equity participation in the entity by "benefit plan investors" (i.e., Plans
and certain employee benefit plans not subject to ERISA) is not "significant",
both as defined therein. For this purpose, in general, equity participation by
benefit plan investors will be "significant" on any date if 25% or more of the
value of any Class of equity interests in the entity is held by benefit plan
investors. To the extent the Securities are treated as equity interests for
purposes of DOL regulations section 2510.3-101, equity participation in a Trust
Fund will be significant on any date if immediately after the most recent
acquisition of any Security, 25% or more of any Class of Securities is held by
benefit plan investors.
Any person who has discretionary authority or control respecting the
management or disposition of Plan assets, and any person who provides investment
advice with respect to such assets for a fee, is a fiduciary of the investing
Plan. If the Mortgage Loans, Contracts, Unsecured Home Improvement Loans and
other assets included in a Trust Fund constitute Plan assets, then any party
exercising management or discretionary control regarding those assets, such as
the Servicer or Master Servicer, may be deemed to be a Plan "fiduciary" and thus
subject to the fiduciary responsibility provisions and prohibited transaction
provisions of ERISA and the Code with respect to the investing Plan. In
addition, if the Mortgage Loans, Contracts, Unsecured Home Improvement Loans and
other assets included in a Trust Fund constitute Plan assets, the purchase of
Securities by a Plan, as well as the operation of the Trust Fund, may constitute
or involve a prohibited transaction under ERISA and the Code.
On May 14, 1993, the DOL granted to NationsBank Corporation, the
predecessor to Bank of America Corporation, the corporate parent of Banc of
America Securities LLC, an individual administrative exemption,
121
Prohibited Transaction Exemption ("PTE") 93-31, as amended by PTE 97-34, PTE
2000-58 and PTE 2002-41 (the "EXEMPTION"), which generally exempts from the
application of the prohibited transaction provisions of Sections 406(a) and 407
of ERISA, and the excise taxes imposed on such prohibited transactions pursuant
to Section 4975(a) and (b) of the Code, certain transactions, among others,
relating to the servicing and operation of mortgage pools and the purchase, sale
and holding of Securities underwritten by an Underwriter (as hereinafter
defined), that (a) represent a beneficial ownership interest in the assets of a
Trust Fund and entitle the holder the pass-through payments of principal,
interest and/or other payments made with respect to the assets of the Trust Fund
or (b) are denominated as a debt instrument and represent an interest in a REMIC
or certain other specified entities, provided that certain conditions set forth
in the Exemption are satisfied. For purposes of this Section "ERISA
Considerations," the term "UNDERWRITER" shall include (a) Bank of America
Corporation, (b) any person directly or indirectly, through one or more
intermediaries, controlling, controlled by or under common control with Bank of
America Corporation, including Banc of America Securities LLC, and (c) any
member of the underwriting syndicate or selling group of which a person
described in (a) or (b) is a manager or co-manager with respect to a Class of
Securities.
The Exemption sets forth five general conditions which must be
satisfied for a transaction involving the purchase, sale and holding of
Securities to be eligible for exemptive relief thereunder. First, the
acquisition of Securities by a Plan must be on terms that are at least as
favorable to the Plan as they would be in an arm's-length transaction with an
unrelated party. Second, the Securities at the time of acquisition by the Plan
must be rated in one of the four highest generic rating categories by Standard &
Poor's, a division of The McGraw-Hill Companies, Inc. ("S&P"), Moody's Investors
Service, Inc. ("MOODY'S") or Fitch Ratings ("FITCH"). Third, the Trustee cannot
be an affiliate of any member of the Restricted Group other than an Underwriter;
the "RESTRICTED GROUP" consists of the Underwriter, the Depositor, the Trustee,
the Master Servicer, any Servicer, any insurer and any obligor with respect to
Assets constituting more than 5% of the aggregate unamortized principal balance
of the Assets in the related Trust Fund as of the date of initial issuance of
the Securities. Fourth, the sum of all payments made to and retained by the
Underwriter(s) must represent not more than reasonable compensation for
underwriting the Securities; the sum of all payments made to and retained by the
Depositor pursuant to the assignment of the Assets to the related Trust Fund
must represent not more than the fair market value of such obligations; and the
sum of all payments made to and retained by the Servicer must represent not more
than reasonable compensation for such person's services under the applicable
Agreement and reimbursement of such person's reasonable expenses in connection
therewith. Fifth, the investing Plan must be an accredited investor as defined
in Rule 501(a)(1) of Regulation D of the Commission under the Securities Act of
1933, as amended. In addition, the Trust Fund must meet the following
requirements: (i) the assets of the Trust Fund must consist solely of assets of
the type that have been included in other investment pools; (ii) securities
evidencing interests in such other investment pools must have been rated in one
of the four highest generic rating categories by S&P, Moody's or Fitch for at
least one year prior to the Plan's acquisition of the securities; and (iii)
securities evidencing interests in such other investment pools must have been
purchased by investors other than Plans for at least one year prior to any
Plan's acquisition of the Securities.
A fiduciary of a Plan contemplating purchasing a Security must make its
own determination that the general conditions set forth above will be satisfied
with respect to such Security. In addition, any Securities representing a
beneficial ownership interest in Unsecured Home Improvement Loans or Revolving
Credit Line Loans will not satisfy the general conditions of the Exemption.
If the general conditions of the Exemption are satisfied, the Exemption
may provide an exemption from the restrictions imposed by Sections 406(a) and
407 of ERISA (as well as the excise taxes imposed by Sections 4975(a) and (b) of
the Code by reason of Sections 4975(c)(1)(A) through (D) of the Code) in
connection with the direct or indirect sale, exchange, transfer, holding or the
direct or indirect acquisition or disposition in the secondary market of
Securities by Plans. However, no exemption is provided from the restrictions of
Sections 406(a)(1)(E), 406(a)(2) and 407 of ERISA for the acquisition or holding
of a Security on behalf of an "EXCLUDED PLAN" by any person who has
discretionary authority or renders investment advice with respect to the assets
of such Excluded Plan. For purposes of the Securities, an Excluded Plan is a
Plan sponsored by any member of the Restricted Group.
If certain specific conditions of the Exemption are also satisfied, the
Exemption may provide an exemption from the restrictions imposed by Sections
406(b)(1) and (b)(2) of ERISA and the taxes imposed by Sections 4975(a) and (b)
of the Code by reason of Section 4975(c)(1)(E) of the Code in connection with
(1) the direct or indirect sale, exchange or transfer of Securities in the
initial issuance of Securities between the Depositor or an Underwriter and a
122
Plan when the person who has discretionary authority or renders investment
advice with respect to the investment of Plan assets in the Securities is (a) an
obligor with respect to 5% or less of the fair market value of the Assets or (b)
an affiliate of such a person, (2) the direct or indirect acquisition or
disposition in the secondary market of Securities by a Plan and (3) the holding
of Securities by a Plan.
Further, if certain specific conditions of the Exemption are satisfied,
the Exemption may provide an exemption from the restrictions imposed by Sections
406(a), 406(b) and 407 of ERISA, and the taxes imposed by Sections 4975(a) and
(b) of the Code by reason of Section 4975(c) of the Code for transactions in
connection with the servicing, management and operation of the Trust Fund. The
Depositor expects that the specific conditions of the Exemption required for
this purpose will be satisfied with respect to the Securities so that the
Exemption would provide an exemption from the restrictions imposed by Sections
406(a) and (b) of ERISA (as well as the excise taxes imposed by Sections 4975(a)
and (b) of the Code by reason of Section 4975(c) of the Code) for transactions
in connection with the servicing, management and operation of the Mortgage
Pools, provided that the general conditions of the Exemption are satisfied.
The Exemption also may provide an exemption from the restrictions
imposed by Sections 406(a) and 407(a) of ERISA, and the taxes imposed by Section
4975(a) and (b) of the Code by reason of Sections 4975(c)(1)(A) through (D) of
the Code if such restrictions are deemed to otherwise apply merely because a
person is deemed to be a "party in interest" (within the meaning of Section
3(14) of ERISA) or a "disqualified person" (within the meaning of Section
4975(e)(2) of the Code) with respect to an investing Plan by virtue of providing
services to the Plan (or by virtue of having certain specified relationships to
such a person) solely as a result of the Plan's ownership of Securities.
The Exemption was amended by PTE 97-34, 62 Fed. Reg. 39021 (July 21,
1997), which, among other changes, permits the inclusion of a pre-funding
account in a trust fund, provided that the following conditions are met: (a) the
pre-funding account may not exceed 25% of the total amount of certificates being
offered; (b) additional obligations purchased generally must meet the same terms
and conditions as those of the original obligations used to create the trust
fund; (c) the transfer of additional obligations to the trust during the
pre-funding period must not result in the certificates receiving a lower rating
at the termination of the pre-funding period than the rating that was obtained
at the time of the initial issuance of the certificates; (d) the weighted
average interest rate for all of the obligations in the trust at the end of the
pre-funding period must not be more than 100 basis points less than the weighted
average interest rate for the obligations which were transferred to the trust on
the closing date; (e) the characteristics of the additional obligations must be
monitored to confirm that they are substantially similar to those which were
acquired as of the closing date either by a credit support provider or insurance
provider independent of the sponsor or by an independent accountant retained by
the sponsor that confirms such conformance in writing; (f) the pre-funding
period must be described in the prospectus or private placement memorandum
provided to investing plans; and (g) the trustee of the trust must be a
substantial financial institution or trust company experienced in trust
activities and familiar with its duties, responsibilities and liabilities as a
fiduciary under ERISA.
Further, the pre-funding period must be a period beginning on the
closing date and ending no later than the earliest to occur of (x) the date the
amount on deposit in the pre-funding account is less than the minimum dollar
amount specified in the pooling and servicing agreement; (y) the date on which
an event of default occurs under the pooling and servicing agreement; or (z) the
date which is the later of three months or 90 days after the closing date. It is
expected that the Pre-Funding Account will meet all of these requirements.
To the extent the Securities are not treated as equity interests for
purposes of DOL regulations section 2510.3-101, a Plan's investment in such
Securities ("NON-EQUITY SECURITIES") would not cause the assets included in a
related Trust Fund to be deemed Plan assets. However, the Depositor, the
Servicer, the Trustee, or Underwriter may be the sponsor of or investment
advisor with respect to one or more Plans. Because such parties may receive
certain benefits in connection with the sale of Non-Equity Securities, the
purchase of Non-Equity Securities using Plan assets over which any such parties
has investment authority might be deemed to be a violation of the prohibited
transaction rules of ERISA and the Code for which no exemption may be available.
Accordingly, Non-Equity Securities may not be purchased using the assets of any
Plan if any of the Depositor, the Servicer, the Trustee or Underwriter has
investment authority with respect to such assets.
123
In addition, certain affiliates of the Depositor might be considered or
might become Parties in Interest with respect to a Plan. Also, any holder of
Securities, because of its activities or the activities of its respective
affiliates, may be deemed to be a Party in Interest with respect to certain
Plans, including but not limited to Plans sponsored by such holder. In either
case, the acquisition or holding of Non-Equity Securities by or on behalf of
such a Plan could be considered to give rise to an indirect prohibited
transaction within the meaning of ERISA and the Code, unless it is subject to
one or more statutory or administrative exemptions such as Prohibited
Transaction Class Exemption ("PTCE") 84-14, which exempts certain transactions
effected on behalf of a Plan by a "qualified professional asset manager", PTCE
90-1, which exempts certain transactions involving insurance company pooled
separate accounts, PTCE 91-38, which exempts certain transactions involving bank
collective investment funds, PTCE 95-60, which exempts certain transactions
involving insurance company general accounts, or PTCE 96-23, which exempts
certain transactions effected on behalf of a Plan by certain "in-house" asset
managers. It should be noted, however, that even if the conditions specified in
one or more of these exemptions are met, the scope of relief provided by these
exemptions may not necessarily cover all acts that might be construed as
prohibited transactions.
Any Plan fiduciary which proposes to cause a Plan to purchase
Securities should consult with its counsel with respect to the potential
applicability of ERISA and the Code to such investment, the availability of the
exemptive relief provided in the Exemption and the potential applicability of
any other prohibited transaction exemption in connection therewith. In
particular, a Plan fiduciary which proposes to cause a Plan to purchase
Securities representing a beneficial ownership interest in a pool of
single-family residential first mortgage loans, a Plan fiduciary should consider
the applicability of PTCE 83-1, which provides exemptive relief for certain
transactions involving mortgage pool investment trusts. The prospectus
supplement with respect to a Series of Securities may contain additional
information regarding the application of the Exemption, PTCE 83-1 or any other
exemption, with respect to the Securities offered thereby. In addition, any Plan
fiduciary that proposes to cause a Plan to purchase Strip Securities should
consider the federal income tax consequences of such investment. Fiduciaries of
plans not subject to ERISA or the Code, such as governmental plans, should
consider the application of any applicable federal, state or local law
materially similar to the provisions of ERISA or the Code, as well as the need
for and the availability of exemptive relief under such applicable law.
Any Plan fiduciary considering whether to purchase a Security on behalf
of a Plan should consult with its counsel regarding the applicability of the
fiduciary responsibility and prohibited transaction provisions of ERISA and the
Code to such investment.
The sale of Securities to a Plan is in no respect a representation by
the Depositor or the Underwriter that this investment meets all relevant legal
requirements with respect to investments by Plans generally or any particular
Plan, or that this investment is appropriate for Plans generally or any
particular Plan.
LEGAL INVESTMENT
As will be specified in the applicable prospectus supplement, certain
Classes of the Securities will constitute "mortgage related securities " for
purposes of the Secondary Mortgage Market Enhancement Act of 1984, as amended
("SMMEA"), so long as (i) they are rated in one of the two highest rating
categories by at least one Rating Agency and (ii) are part of a Series
representing interests in a Trust Fund consisting of Mortgage Loans originated
by certain types of originators specified in SMMEA and secured by first liens on
real estate. The appropriate characterization of those Securities not qualifying
as "mortgage related securities" for purposes of SMMEA ("NON-SMMEA SECURITIES")
under various legal investment restrictions, and thus the ability of investors
subject to these restrictions to purchase such Securities, may be subject to
significant interpretive uncertainties. Accordingly, all investors whose
investment activities are subject to legal investment laws and regulations,
regulatory capital requirements, or review by regulatory authorities should
consult with their own legal advisors in determining whether and to what extent
the Non-SMMEA Securities constitute legal investments for them.
Classes which qualify as "mortgage related securities" will constitute
legal investments for persons, trusts, corporations, partnerships, associations,
business trusts and business entities (including but not limited to depository
institutions, insurance companies and pension funds) created pursuant to or
existing under the laws of the United States or of any state (including the
District of Columbia and Puerto Rico) whose authorized investments are subject
to state regulation, to the same extent that, under applicable law, obligations
issued by or guaranteed as to principal and interest by the United States or any
agency or instrumentality thereof constitute legal investments for such
124
entities. Pursuant to SMMEA, a number of states enacted legislation, on or
before the October 3, 1991 cut-off for such enactments, limiting to varying
extents the ability of certain entities (in particular, insurance companies) to
invest in "mortgage related securities" secured by loans on residential, or
mixed residential and commercial properties, in most cases by requiring the
affected investors to rely solely upon existing state law, and not SMMEA.
Pursuant to Section 347 of the Riegle Community Development and Regulatory
Improvement Act of 1994, which amended the definition of "mortgage related
security" to include, in relevant part, Securities satisfying the rating and
qualified originator requirements for "mortgage related securities," but
evidencing interests in a Trust Fund consisting, in whole or in part, of first
liens on one or more parcels of real estate upon which are located one or more
commercial structures, states were authorized to enact legislation, on or before
September 23, 2001, specifically referring to Section 347 and prohibiting or
restricting the purchase, holding or investment by state-regulated entities in
those types of Securities. Accordingly, the investors affected by such
legislation will be authorized to invest in the Offered Securities only to the
extent provided in such legislation.
SMMEA also amended the legal investment authority of
federally-chartered depository institutions as follows: federal savings and loan
associations and federal savings banks may invest in, sell or otherwise deal in
mortgage related securities without limitation as to the percentage of their
assets represented thereby, federal credit unions may invest in such securities,
and national banks may purchase mortgage related securities for their own
account without regard to the limitations generally applicable to investment
securities set forth in 12 U. S. C. Section 24 (Seventh), subject in each case
to such regulations as the applicable federal regulatory authority may
prescribe. In this connection, the OCC has amended 12 C. F. R. Part 1 to
authorize national banks to purchase and sell for their own account, without
limitation as to a percentage of the bank's capital and surplus (but subject to
compliance with certain general standards in 12 C. F. R. Section 1.5 concerning
"safety and soundness" and retention of credit information), certain "Type IV
securities," defined in 12 C. F. R. Section 1.2(m) to include certain
"residential mortgage-related securities." As so defined, "residential
mortgage-related security" means, in relevant part, "mortgage related security"
within the meaning of SMMEA. The National Credit Union Administration ("NCUA" )
has adopted rules, codified at 12 C.F.R. Part 703, which permit federal credit
unions to invest in "mortgage related securities," other than stripped mortgage
related securities (unless the credit union complies with the requirements of 12
C.F.R. Section 703.16(e) for investing in those securities), residual interests
in mortgage related securities and commercial mortgage related securities,
subject to compliance with general rules governing investment policies and
practices; however, credit unions approved for the NCUA's "investment pilot
program" under 12 C.F.R. Section 703.19 may be able to invest in those
prohibited forms of securities. The OTS has issued Thrift Bulletin 13a (December
1, 1998), " Management of Interest Rate Risk, Investment Securities, and
Derivative Activities" and Thrift Bulletin 73a (December 18, 2001), "Investing
in Complex Securities," which thrift institutions subject to the jurisdiction of
the OTS should consider before investing in any of the Offered Securities.
All depository institutions considering an investment in the Offered
Securities should review the "Supervisory Policy Statement on Investment
Securities and End-User Derivatives Activities" of the Federal Financial
Institutions Examination Council, which has been adopted by the Board of
Governors of the Federal Reserve System, the Federal Deposit Insurance
Corporation, the OCC and the OTS, effective May 26, 1998, and by the NCUA,
effective October 1, 1998. This policy statement sets forth general guidelines
which depository institutions must follow in managing risks (including market,
credit, liquidity, operational (transaction), and legal risks) applicable to all
securities (including mortgage pass-through securities and mortgage-derivative
products) used for investment purposes.
Investors whose investment activities are subject to regulation by
federal or state authorities should review rules, policies, and guidelines
adopted from time to time by those authorities before purchasing any Class of
the Offered Securities, as certain Classes may be deemed unsuitable investments,
or may otherwise be restricted, under those rules, policies, or guidelines (in
certain instances irrespective of SMMEA).
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines, or agreements generally
governing investments made by a particular investor, including, but not limited
to, "prudent investor" provisions, percentage-of-assets limits, provisions which
may restrict or prohibit investment in securities which are not
"interest-bearing" or "income-paying," and, with regard to any Class of Offered
Securities issued in book-entry form, provisions which may restrict or prohibit
investments in securities which are issued in book-entry form.
125
Except as to the status of certain Classes of Offered Securities as
"mortgage related securities," no representations are made as to the proper
characterization of the Offered Securities for legal investment purposes,
financial institution regulatory purposes, or other purposes, or as to the
ability of particular investors to purchase any Offered Securities under
applicable legal investment restrictions. The uncertainties described above (and
any unfavorable future determinations concerning legal investment or financial
institution regulatory characteristics of the Offered Securities) may adversely
affect the liquidity of the Offered Securities.
Accordingly, all investors whose investment activities are subject to
legal investment laws and regulations, regulatory capital requirements or review
by regulatory authorities should consult with their legal advisors in
determining whether and to what extent the Offered Securities of any Class
constitute legal investments or are subject to investment, capital or other
restrictions and, if applicable, whether SMMEA has been overridden in any
jurisdiction relevant to such investor.
METHODS OF DISTRIBUTION
The Securities offered hereby and by the supplements to this prospectus
will be offered in Series. The distribution of the Securities may be effected
from time to time in one or more transactions, including negotiated
transactions, at a fixed public offering price or at varying prices to be
determined at the time of sale or at the time of commitment therefor. If so
specified in the related prospectus supplement, the Securities will be
distributed in a firm commitment underwriting, subject to the terms and
conditions of the underwriting agreement, by Banc of America Securities LLC
("BANC OF AMERICA SECURITIES") acting as underwriter with other underwriters, if
any, named therein. In such event, the prospectus supplement may also specify
that the underwriters will not be obligated to pay for any Securities agreed to
be purchased by purchasers pursuant to purchase agreements acceptable to the
Depositor. In connection with the sale of the Securities, underwriters may
receive compensation from the Depositor or from purchasers of the Securities in
the form of discounts, concessions or commissions. The prospectus supplement
will describe any such compensation paid by the Depositor.
Alternatively, the prospectus supplement may specify that the
Securities will be distributed by Banc of America Securities acting as agent or
in some cases as principal with respect to Securities which it has previously
purchased or agreed to purchase. If Banc of America Securities acts as agent in
the sale of Securities, Banc of America Securities will receive a selling
commission with respect to each Series of Securities, depending on market
conditions, expressed as a percentage of the aggregate principal balance of the
related Assets as of the Cut-off Date. The exact percentage for each Series of
Securities will be disclosed in the related prospectus supplement. To the extent
that Banc of America Securities elects to purchase Securities as principal, Banc
of America Securities may realize losses or profits based upon the difference
between its purchase price and the sales price.
In addition, the prospectus supplement may specify that the Securities
may be offered by direct placements by the Depositor with investors, in which
event the Depositor will be an underwriter with respect to the Securities, or by
inclusion as underlying securities backing another series of asset-backed
securities issued by an entity of which the Depositor or an affiliate of the
Depositor may act as the depositor. In the event that the Depositor or an
affiliate of the Depositor acts as depositor with respect to the other series of
asset-backed securities, the Depositor or its affiliate will be an underwriter
with respect to the underlying securities.
The prospectus supplement with respect to any Series offered other than
through underwriters will contain information regarding the nature of such
offering and any agreements to be entered into between the Depositor and
purchasers of Securities of such Series.
The Depositor will indemnify Banc of America Securities and any
underwriters against certain civil liabilities, including liabilities under the
Securities Act of 1933, or will contribute to payments Banc of America
Securities and any underwriters may be required to make in respect thereof.
In the ordinary course of business, Banc of America Securities and the
Depositor may engage in various securities and financing transactions, including
repurchase agreements to provide interim financing of the Depositor's mortgage
loans pending the sale of such mortgage loans or interests therein, including
the Securities.
126
The Depositor anticipates that the Securities will be sold primarily to
institutional investors. Purchasers of Securities, including dealers, may,
depending on the facts and circumstances of such purchases, be "underwriters"
within the meaning of the Securities Act of 1933 in connection with reoffers and
sales by them of Securities. Securityholders should consult with their legal
advisors in this regard prior to any such reoffer or sale.
As to each Series of Securities, only those Classes rated in one of the
four highest rating categories by any Rating Agency will be offered hereby. Any
unrated Class may be initially retained by the Depositor, and may be sold by the
Depositor at any time to one or more institutional investors.
LEGAL MATTERS
The legality of, including the federal income tax matters related to
the Securities of a Series, will be passed upon for the Depositor by Cadwalader,
Wickersham & Taft LLP, New York, New York or Hunton & Williams LLP, Charlotte,
North Carolina.
FINANCIAL INFORMATION
A new Trust Fund will be formed with respect to each Series of
Securities and no Trust Fund will engage in any business activities or have any
assets or obligations prior to the issuance of the related Series of Securities.
Accordingly, no financial statements with respect to any Trust Fund will be
included in this prospectus or in the related prospectus supplement.
RATING
It is a condition to the issuance of any Class of Offered Securities
that they shall have been rated not lower than investment grade, that is, in one
of the four highest rating categories, by at least one nationally recognized
statistical rating organization ("RATING AGENCY").
Ratings on mortgage pass-through securities 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 securities, the nature of the underlying assets and the
credit quality of the guarantor, if any. Ratings on mortgage pass-through
securities and other asset-backed securities do not represent any assessment of
the likelihood of principal prepayments by borrowers or of the degree by which
such prepayments might differ from those originally anticipated. As a result,
securityholders might suffer a lower than anticipated yield, and, in addition,
holders of stripped interest securities in extreme cases might fail to recoup
their initial investments.
A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization.
REPORTS TO SECURITYHOLDERS
The Trustee will prepare and forward to the Securityholders of each
Series statements containing information with respect to principal and interest
payments and the related Trust Fund, as described under "Description of the
Securities--Reports to Securityholders." Copies of these statements will be
filed with the Commission through its EDGAR system located at
"http://www.sec.gov" under the name of the Issuing Entity as an exhibit to the
Issuing Entity's monthly distribution reports on Form 10-D for each Series of
Securities for so long as the Issuing Entity is subject to the reporting
requirement of the Securities Exchange Act of 1934, as amended. In addition,
each party to the servicing function for a Series of Securities (generally the
Trustee and the Servicer (and any Master Servicer)) will furnish to the Trustee
or Master Servicer, as applicable, the compliance statements, Assessments of
Compliance and Attestation Reports detailed under "Description of the
Agreements--Material Terms of the Pooling and Servicing Agreements and
Underlying Servicing Agreements--Evidence as to Compliance." Copies of these
statements and reports will be filed with the Commission under the name of the
Issuing Entity as an exhibit to the Issuing Entity's annual statement on Form
10-K for each Series of Securities.
WHERE YOU CAN FIND MORE INFORMATION
127
The Depositor filed a registration statement (the "REGISTRATION
STATEMENT") relating to the Securities with the Securities and Exchange
Commission (the "COMMISSION"). This prospectus is part of the Registration
Statement, but the Registration Statement includes additional information.
Copies of the Registration Statement and any other materials the
Depositor files with the Commission, including distribution reports on Form
10-D, annual reports on Form 10-K, current reports on Form 8-K and amendments to
these reports (collectively, "PERIODIC REPORTS") may be read and copied at the
Commission's Public Reference Room at 100 F Street N.E., Washington, D.C. 20549.
Information concerning the operation of the Commission's Public Reference Room
may be obtained by calling the Commission at (800) SEC-0330. The Commission also
maintains a site on the World Wide Web at "http://www.sec.gov" at which you can
view and download copies of reports, proxy and information statements and other
information filed electronically through the EDGAR system. The Depositor has
filed the Registration Statement, including all exhibits, and will file Periodic
Reports through the EDGAR system and therefore such materials should be
available by logging onto the Commission's Web site. Copies of any documents
incorporated to this prospectus by reference will be provided at no cost to each
person, including any beneficial owner, to whom a prospectus is delivered upon
written or oral request directed to Asset Backed Funding Corporation, 214 North
Tryon Street, Charlotte, North Carolina 28255, telephone number (704) 386-2400.
Copies of filed Periodic Reports relating to an Issuing Entity will
also be available on the applicable Trustee's website on the same day they are
filed through the EDGAR system as described under "Reports to
Certificateholders" or "Reports to Noteholders," as the case may be, in the
related prospectus supplement.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The Commission allows the Depositor to "incorporate by reference"
information it files with the Commission, which means that the Depositor can
disclose important information to you by referring you to those documents. The
information incorporated by reference is considered to be part of this
prospectus. Information that the Depositor files later with the Commission will
automatically update the information in this prospectus. In all cases, you
should rely on the later information rather than on any different information
included in this prospectus or the accompanying prospectus supplement. The
Depositor incorporates by reference any future annual, monthly and current
Commission reports filed by or on behalf of the Issuing Entity until the
termination of the offering of the related Series of Securities.
Copies of any documents incorporated to this prospectus by reference
will be provided at no cost to each person, including any beneficial owner, to
whom a prospectus is delivered upon written or oral request directed to Asset
Backed Funding Corporation, 214 North Tryon Street, Charlotte, North Carolina
28255, telephone number (704) 386-2400.
128
INDEX OF PROSPECTUS DEFINITIONS
TERMS PAGE
- ----- ----
Accrual Securities............................................................29
Accrued Security Interest.....................................................31
Adjustable Rate Assets........................................................17
Agreement.....................................................................46
ARM Contracts.................................................................21
ARM Loans.....................................................................19
ARM Unsecured Home Improvement Loans..........................................20
Assessment of Compliance......................................................57
Asset Conservation Act........................................................80
Asset Group...................................................................29
Asset Seller..................................................................17
Assets........................................................................17
Attestation Report............................................................58
Auction Administrator.........................................................46
Auction Distribution Date.....................................................45
Auction Securities............................................................45
Available Distribution Amount.................................................30
Balloon Payment Assets........................................................17
Banc of America Securities...................................................125
Bank of America...............................................................28
Bankruptcy Code...............................................................77
Bankruptcy Loss...............................................................64
Bankruptcy Loss Amount........................................................64
Beneficial Owners.............................................................39
Bi-weekly Assets..............................................................17
Book-Entry Securities.........................................................29
Buy Down Assets...............................................................17
Buydown Funds.................................................................90
Buydown Mortgage Loans........................................................25
Buydown Period................................................................25
California Military Code......................................................83
Capitalized Interest Account..................................................22
Cash Flow Agreement...........................................................69
CERCLA........................................................................79
Certificates..................................................................29
Class.........................................................................29
Cleanup Costs.................................................................79
Closing Date...................................................................2
Code..........................................................................87
Collection Account............................................................50
Collection Period.............................................................30
Combined Loan-to-Value Ratio..................................................18
Commission...................................................................127
Companion Class...............................................................34
Component.....................................................................32
contract borrower.............................................................72
Contract Lender...............................................................72
Contract Rate.................................................................21
Contracts.....................................................................17
Convertible Assets............................................................17
Cooperatives..................................................................18
CPR...........................................................................24
Cut-off Date..................................................................19
Cut-off Date...................................................................2
Debt Securities...............................................................88
Definitive Securities.........................................................29
Deposit Trust Agreement.......................................................46
Depositor......................................................................2
Determination Date............................................................29
Disqualified Organization....................................................101
Distribution Account..........................................................50
Distribution Date.............................................................23
DOL..........................................................................120
DTC...........................................................................40
electing large partnership...................................................101
ERISA........................................................................120
Euroclear Operator............................................................41
European Depositaries.........................................................39
Excess Bankruptcy Losses......................................................64
Excess Fraud Losses...........................................................64
excess servicing.............................................................110
Excess Special Hazard Losses..................................................64
Exchange Act..................................................................40
Excluded Plan................................................................121
Exemption....................................................................121
Financial Intermediary........................................................39
Fitch........................................................................121
Fraud Loss....................................................................64
Fraud Loss Amount.............................................................64
GEM Assets....................................................................17
GPM Assets....................................................................17
Grantor Trust Fund............................................................88
Grantor Trust Securities......................................................88
Home Equity Loans.............................................................18
Home Improvement Contracts....................................................18
HOPA..........................................................................83
Increasing Payment Assets.....................................................17
Indenture.....................................................................46
Indenture Servicing Agreement.................................................46
Indenture Trustee.............................................................47
Indirect Participants.........................................................39
Insolvency Laws...............................................................77
Insurance Proceeds............................................................30
Interest Accrual Period.......................................................23
Interest Reduction Assets.....................................................17
IRS...........................................................................54
Issuing Entity.................................................................2
Land Sale Contracts...........................................................18
Level Payment Assets..........................................................17
Liquidation Proceeds..........................................................30
Lock-out Date.................................................................20
Lock-out Period...............................................................20
Manufactured Home.............................................................21
Mark to Market Regulations...................................................104
129
Master Servicer...............................................................47
MERS..........................................................................48
Moody's......................................................................121
Mortgage Interest Rate........................................................19
Mortgage Loans................................................................17
Mortgage Notes................................................................18
Mortgaged Properties..........................................................18
Mortgages.....................................................................18
Multifamily Mortgage Loan.....................................................18
Multifamily Property..........................................................18
National Housing Act..........................................................19
NCUA.........................................................................124
new partnership..............................................................117
Non-Equity Securities........................................................122
Non-Pro Rata Security.........................................................91
Nonrecoverable Advance........................................................36
Non-SMMEA Securities.........................................................123
Non-U.S. Holder...............................................................44
Notes.........................................................................29
OCC...........................................................................28
Offered Securities............................................................29
OID Regulations...............................................................88
old partnership..............................................................117
Originator....................................................................18
OTS...........................................................................81
PAC...........................................................................33
PAC I.........................................................................33
PAC II........................................................................33
Par Price.....................................................................46
Parity Act....................................................................81
Participants..................................................................39
Parties in Interest..........................................................120
Partnership Securities........................................................88
Partnership Trust Fund........................................................88
Pass-Through Entity..........................................................101
Pass-Through Rate.............................................................31
PCBs..........................................................................79
Periodic Reports.............................................................127
Plans........................................................................120
PMI...........................................................................83
Pooling and Servicing Agreement...............................................46
Pre-Funded Amount.............................................................22
Pre-Funding Account...........................................................22
Pre-Funding Period............................................................22
Prepayment Assumption.........................................................92
Prepayment Charge.............................................................20
PTCE.........................................................................123
PTE..........................................................................121
Purchase Price................................................................48
Qualified Intermediary........................................................44
Rating Agency................................................................126
RCRA..........................................................................80
Record Date...................................................................29
Registration Statement.......................................................127
Regular Securities............................................................88
Regular Securityholder........................................................91
Related Proceeds..............................................................36
Relevant Depositary...........................................................39
Relief Act....................................................................83
REMIC.........................................................................88
REMIC Pool....................................................................88
REMIC Provisions..............................................................88
REMIC Regulations.............................................................88
REMIC Securities..............................................................88
REO Property..................................................................37
Residual Holders..............................................................97
Residual Securities...........................................................88
Restricted Group.............................................................121
Retained Interest.............................................................57
Revolving Credit Line Loans...................................................20
Rules.........................................................................39
S&P..........................................................................121
secured-creditor exemption....................................................80
Securities....................................................................29
Security......................................................................47
Security Balance..............................................................24
Securityholder................................................................22
Senior Certificates...........................................................29
Senior Notes..................................................................29
Senior Securities.............................................................29
Series........................................................................29
Servicer.......................................................................2
Servicers.....................................................................47
Servicing Standard............................................................52
Single Family Mortgage Loan...................................................18
Single Family Property........................................................18
SMMEA........................................................................123
Special Hazard Loss...........................................................64
Special Hazard Loss Amount....................................................64
Special Servicer..............................................................58
Sponsor........................................................................2
Standard Securities..........................................................108
Startup Day...................................................................88
Step-up Rate Assets...........................................................17
Strip Securities..............................................................29
Stripped Securities..........................................................111
Stripped Securityholder......................................................112
Subordinated Certificates.....................................................29
Subordinated Securities.......................................................29
Subsequent Assets.............................................................22
Superliens....................................................................79
super-premium.................................................................92
TAC...........................................................................34
Taxable Mortgage Pools........................................................88
Texas Home Equity Laws........................................................83
Tiered REMICs.................................................................90
Title V.......................................................................82
Title VIII....................................................................82
Trust.........................................................................29
Trust Fund....................................................................29
Trustee.......................................................................47
U.S. Person..................................................................103
130
U.S. Withholding Agent........................................................44
UCC...........................................................................75
Underlying Servicing Agreement................................................46
Underwriter..................................................................121
Unsecured Home Improvement Loans..............................................17
UST...........................................................................80
Value.........................................................................18
Voting Rights.................................................................59
Warranting Party..............................................................49
131
[This page intentionally left blank.]
$468,270,000
(APPROXIMATE)
ASSET BACKED FUNDING CORPORATION
DEPOSITOR
FIRST FRANKLIN MORTGAGE LOAN TRUST 2006-FFH1
ISSUING ENTITY
BANK OF AMERICA, NATIONAL ASSOCIATION
SPONSOR
NATIONAL CITY HOME LOAN SERVICES, INC.
SERVICER
FIRST FRANKLIN MORTGAGE LOAN TRUST 2006-FFH1,
ASSET-BACKED CERTIFICATES, SERIES 2006-FFH1
PROSPECTUS SUPPLEMENT
BANC OF AMERICA SECURITIES LLC
We are not offering the Offered 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 the
respective covers.
Upon request, dealers will deliver a free writing prospectus and
prospectus when acting as underwriters of the Offered Certificates and with
respect to their unsold allotments or subscriptions. In addition, upon request,
all dealers selling the Offered Certificates will be required to deliver a free
writing prospectus and prospectus for ninety days following the date of this
free writing prospectus.
February 24, 2006