Prospectus Supplement dated September 25, 2003 (to Prospectus dated
September 25, 2003)
$1,000,000,000
[LOGO] IMPAC
Impac Funding Corporation
Master Servicer
IMH Assets Corp.
Company
Impac CMB Trust Series 2003-10
Collateralized Asset-Backed Bonds, Series 2003-10
Impac CMB Grantor Trusts 2003-10-1 through 6
Collateralized Asset-Backed Grantor Trust Certificates, Series 2003-10
- --------------------------------------------------------------------------------
You should consider carefully the risk factors beginning on page S-11 in this
prospectus supplement.
- --------------------------------------------------------------------------------
The Trust
The Impac CMB Trust Series 2003-10 will consist primarily of two groups of
mortgage loans:
o the first group will consist primarily of adjustable-rate, first
lien, one- to four- family residential mortgage loans; and
o the second group will consist primarily of fixed-rate, first and
second lien, one- to four- family residential mortgage loans.
The trust will issue fifteen classes of bonds, the Class 1-A-1, Class 1-A-2 and
Class 2-A Bonds and the underlying Class M-1-1, Class M-1-2, Class M-2-1, Class
M-2-2, Class M-3-1, Class M-3-2, Class M-4-1, Class M-4-2, Class M-5-1, Class
M-5-2, Class M-6-1 and Class M-6-2 Bonds. The Class 1-A-1, Class 1-A-2 and Class
2-A Bonds are offered pursuant to this prospectus supplement. The remaining
bonds will be deposited into grantor trusts. These grantor trusts will issue the
Class M-1, Class M-2, Class M-3, Class M-4, Class M-5 and Class M-6 Certificates
which are offered pursuant to this prospectus supplement.
Credit Enhancement
The offered securities will have credit enhancement in the form of
o excess interest and overcollateralization;
o cross-collateralization between the pools to cover realized losses;
o subordination provided to the Class 1-A-1, Class 1-A-2 and Class 2-A
Bonds by the bonds underlying the Class M-1, Class M-2, Class M-3,
Class M-4, Class M-5 and Class M-6 Certificates; and
o a bond guaranty insurance policy issued by Ambac Assurance
Corporation for the benefit of the Class 1-A-2 Bonds only.
In addition, derivative contracts will be included in the trust to cover basis
risk shortfalls on the Class 1-A-1 Bonds and Class 1-A-2 Bonds and the
underlying Class M-1-1, Class M-1-2, Class M-2-1, Class M-2-2, Class M-3-1,
Class M-3-2, Class M-4-1, Class M-4-2, Class M-5-1, Class M-5-2, Class M-6-1 and
Class M-6-2 Bonds.
The price to investors will vary from time to time and will be determined at the
time of sale. The proceeds to the company from the offering will be
approximately 99.75% of the aggregate initial bond principal balance of the
Class 1-A-1, Class 1-A-2 and Class 2-A Bonds, plus accrued interest on the Class
2-A Bonds, and certificate principal balance of the grantor trust certificates,
less expenses estimated to be approximately $560,000. See "Method of
Distribution" in this prospectus supplement.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the offered securities or determined
that this prospectus supplement or the prospectus is accurate or complete. Any
representation to the contrary is a criminal offense.
The Attorney General of the State of New York has not passed on or endorsed the
merits of this offering. Any representation to the contrary is unlawful.
COUNTRYWIDE SECURITIES CORPORATION
Merrill Lynch & Co.
Underwriters
Important notice about information presented in this prospectus supplement and
the accompanying prospectus
You should rely on the information contained in this document. We have not
authorized anyone to provide you with different information.
We provide information to you about the offered securities in two separate
documents that provide progressively more detail:
o the accompanying prospectus, which provides general information, some of
which may not apply to your series of offered securities; and
o This prospectus supplement, which describes the specific terms of your
series of offered securities.
The Company's principal offices are located at 1401 Dove Street, Newport Beach,
California 92660 and its phone number is (949) 475-3600.
Table of Contents
Prospectus Supplement
Page
Summary of Prospectus Supplement.............................................S-3
Risk Factors................................................................S-11
The Mortgage Pool...........................................................S-23
Yield on the Offered Securities.............................................S-63
The Issuer .................................................................S-75
The Owner Trustee...........................................................S-75
The Indenture Trustee.......................................................S-76
The Grantor Trusts..........................................................S-76
The Bond Insurer............................................................S-76
Description of the Securities...............................................S-78
Description of the Servicing Agreement......................................S-99
The Indenture..............................................................S-100
Federal Income Tax Consequences............................................S-102
Method of Distribution.....................................................S-102
Secondary Market...........................................................S-103
Legal Opinions.............................................................S-103
Experts ................................................................S-103
Ratings ................................................................S-104
Legal Investment...........................................................S-104
Erisa Considerations.......................................................S-105
Glossary ................................................................S-107
Annex I ..................................................................I-1
S-2
- --------------------------------------------------------------------------------
SUMMARY OF PROSPECTUS SUPPLEMENT
The following summary is a very general overview of the offered securities and
does not contain all of the information that you should consider in making your
investment decision. To understand all of the terms of the offered securities,
you should read carefully this entire document and the accompanying prospectus.
Issuers................... Impac CMB Trust Series 2003-10 and Impac CMB
Grantor Trust Series 2003-10-1 through 6.
Title of Series........... Collateralized Asset-Backed Bonds, Series 2003-10
and Grantor Trust Certificates, Series 2003-10.
Cut-off Date.............. With respect to the mortgage loans, September 1,
2003, except for the high CLTV loans, for which
the cut-off date will be the close of business on
August 29, 2003.
Closing Date.............. September 29, 2003.
Mortgage Loans............ The mortgage loans in loan group 1 will primarily
be one- to four-family, adjustable-rate, first
lien residential mortgage loans. The mortgage
loans in loan group 2 will primarily be one- to
four-family, fixed-rate, first and second lien
residential mortgage loans.
Company................... IMH Assets Corp., an affiliate of the Master
Servicer and Seller.
Master Servicer........... Impac Funding Corporation.
Seller.................... Impac Mortgage Holdings, Inc., an affiliate of the
Company and the Master Servicer.
Subservicer............... Initially, with respect to substantially all of
the mortgage loans, Wendover Funding, Inc. The
subservicing of these mortgage loans will be
transferred, with respect to substantially all of
the loan group 1 mortgage loans, to Countrywide
Home Loans Servicing LP, or an affiliate thereof,
on or about December 1, 2003 and to GMAC Mortgage
Corporation on or about December 1, 2003, with
respect to the mortgage loans in loan group 2 that
are secured by first liens. Wendover Funding, Inc.
will act as subservicer with respect to all
mortgage loans in loan group 2 that are secured by
second liens on the related mortgaged property.
Indenture Trustee......... Deutsche Bank National Trust Company.
Grantor Trustee........... Deutsche Bank National Trust Company.
Owner Trustee............. Wilmington Trust Company.
- --------------------------------------------------------------------------------
S-3
- --------------------------------------------------------------------------------
Bond Insurer.............. Ambac Assurance Corporation.
Payment Date.............. The 25th of each month or, if the 25th is not a
business day, on the next business day, beginning
in October 2003.
Offered Securities........ The classes of bonds and grantor trust
certificates and their respective interest rates
and principal balances are set forth in the table
below.
- --------------------------------------------------------------------------------
S-4
- --------------------------------------------------------------------------------
Offered Securities
- ----------------------------------------------------------------------------------------------------
Interest Initial Initial Rating
Class Rate Principal Balance (Moody's/S&P)(1) Designation
======================================================================================================
Class A Bonds:
======================================================================================================
1-A-1 Adjustable Rate(2) $ 685,100,000 Aaa/AAA Senior/Adjustable Rate
- ------------------------------------------------------------------------------------------------------
1-A-2 Adjustable Rate(3) $ 75,000,000 Aaa/AAA Senior/Insured/Adjustable Rate
- ------------------------------------------------------------------------------------------------------
2-A 4.109% $ 94,900,000 Aaa/AAA Senior/Fixed Rate
- ------------------------------------------------------------------------------------------------------
Total Class A Bonds: $ 855,000,000
======================================================================================================
Class M Certificates:
======================================================================================================
M-1 Adjustable Rate(4) $ 22,500,000 Aa1/AAA Mezzanine/Adjustable Rate
- ------------------------------------------------------------------------------------------------------
M-2 Adjustable Rate(5) $ 14,500,000 Aa1/AA+ Mezzanine/Adjustable Rate
- ------------------------------------------------------------------------------------------------------
M-3 Adjustable Rate(5) $ 35,500,000 Aa2/AA Mezzanine/Adjustable Rate
- ------------------------------------------------------------------------------------------------------
M-4 Adjustable Rate(5) $ 41,000,000 A1/AA Mezzanine/Adjustable Rate
- ------------------------------------------------------------------------------------------------------
M-5 Adjustable Rate(5) $ 24,000,000 A2/AA Mezzanine/Adjustable Rate
- ------------------------------------------------------------------------------------------------------
M-6 Adjustable Rate(5) $ 7,500,000 A3/AA Mezzanine/Adjustable Rate
- ------------------------------------------------------------------------------------------------------
Total Class M Certificates: $ 145,000,000
- ------------------------------------------------------------------------------------------------------
Total Offered Securities: $1,000,000,000
====================================================================================================
- --------------------------------------------------------------------------------
(1) See "Ratings" in this prospectus supplement.
(2) The least of (a) one-month LIBOR plus 0.35% per annum (or 0.70% per annum
beginning on the payment date after the first payment date on which the
majority holder of the owner trust certificates can redeem the bonds as
provided in this prospectus supplement), (b) 11.50% per annum and (c) the
related available funds rate described in this prospectus supplement.
(3) The least of (a) one-month LIBOR plus 0.27% per annum (or 0.54% per annum
beginning on the payment date after the first payment date on which the
majority holder of the owner trust certificates can redeem the bonds as
provided in this prospectus supplement), (b) 11.50% per annum and (c) the
related available funds rate described in this prospectus supplement.
(4) The weighted average of the interest rates on the two related underlying
bonds, each of which pays the least of (a) one-month LIBOR plus the
related margin (or 2.0 times the related margin beginning on the payment
date after the first payment date on which the majority holder of the
owner trust certificates can redeem the bonds as provided in this
prospectus supplement), (b) 11.50% per annum and (c) the related available
funds rate described in this prospectus supplement. The initial margin for
the bonds underlying the Class M-1 Certificates is equal to 0.47%.
(5) The weighted average of the interest rates on the two related underlying
bonds, each of which pays the least of (a) one-month LIBOR plus the
related margin (or 1.5 times the related margin beginning on the payment
date after the first payment date on which the majority holder of the
owner trust certificates can redeem the bonds as provided in this
prospectus supplement), (b) 11.50% per annum and (c) the related available
funds rate described in this prospectus supplement. The initial margins
for the bonds underlying the Class M-2, Class M-3, Class M-4, Class M-5
and Class M-6 Certificates are equal to 0.57%, 0.67%, 1.25%, 1.55% and
1.70%, respectively.
- --------------------------------------------------------------------------------
S-5
- --------------------------------------------------------------------------------
The Trust
The company will establish Impac CMB Trust Series 2003-10, a Delaware statutory
trust, pursuant to a trust agreement among the company, the owner trustee and
the certificate registrar. The trust will issue the bonds pursuant to an
indenture between the issuer and the indenture trustee.
The trust will also include a bond guaranty insurance policy provided by Ambac
Assurance Corporation, which will guarantee certain payments on the Class 1-A-2
Bonds.
In addition, the company will assign to the trust various derivative contracts,
which may cover basis risk shortfalls on certain bonds.
Payments of interest and principal on the bonds will be made from payments
received from the assets of the trust as described in this prospectus
supplement.
The beneficial ownership interest in the trust will be represented by the owner
trust certificates, which are not offered by this prospectus supplement.
See "Description of the Securities" in this prospectus supplement.
The Grantor Trusts
The company will establish six separate grantor trusts titled Impac CMB Grantor
Trust Series 2003-10-1, Impac CMB Grantor Trust Series 2003-10-2, Impac CMB
Grantor Trust Series 2003-10-3, Impac CMB Grantor Trust Series 2003-10-4, Impac
CMB Grantor Trust Series 2003-10-5 and Impac CMB Grantor Trust Series 2003-10-6,
each pursuant to a grantor trust agreement between the company and the grantor
trustee. Each grantor trust will issue a single class of grantor trust
certificates pursuant to the grantor trust agreement as described in this
prospectus supplement. On the closing date, the company will deposit into each
grantor trust two classes of the underlying Class M Bonds.
Payments of interest and principal on each of the grantor trust certificates
will be made from principal and interest payments received on the related
underlying Class M Bonds as described in this prospectus supplement.
See "Description of the Securities" in this prospectus supplement.
The Mortgage Loans
The mortgage loans will be divided into two mortgage loan groups, loan group 1
and loan group 2.
Loan Group 1
The mortgage loans in loan group 1 are one- to four-family, adjustable-rate
residential mortgage loans secured by first liens on the related mortgaged
property.
The interest rate on the mortgage loans in loan group 1 will adjust on each
adjustment date to equal the sum of the related index and the related gross
margin on such mortgage loan, subject to a maximum and minimum interest rate, as
described in this prospectus supplement.
Loan Group 2
The mortgage loans in loan group 2 are one- to four-family, fixed-rate
residential mortgage loans secured by first and second liens on the related
mortgaged property.
The mortgage loans in loan group 2 include high CLTV loans, which generally were
originated with combined loan-to-value ratios of up to 125%. As a result, the
mortgage loans in loan group 2 include mortgage loans where the related
mortgagor generally has less equity in the related mortgaged property than
mortgage loans with lower combined loan-to-value ratios. The high CLTV loans
were underwritten pursuant to standards with a limited expectation of recovering
any amounts from the foreclosure of the related mortgaged property.
- --------------------------------------------------------------------------------
S-6
- --------------------------------------------------------------------------------
With respect to each loan group, the statistical information included in this
prospectus supplement with respect to the mortgage loans in such loan group is
based on a pool of sample mortgage loans. The characteristics of the final
groups will not materially differ from the information provided with respect to
the sample groups. Unless otherwise specified, all percentages described with
respect to the sample mortgage loans are calculated based on the aggregate
principal balance of the sample mortgage loans as of the cut-off date. It is
expected that mortgage loans will be added to and certain sample mortgage loans
will be deleted from the pool of sample mortgage loans to constitute the final
pool of mortgage loans.
The sample mortgage loans in loan group 1 have original terms to maturity of not
greater than 30 years and the following characteristics as of the cut-off date:
Range of mortgage rates
(approximate): 3.000% to 15.250%
Weighted average mortgage
rate (approximate): 5.533%
Weighted average remaining
term to stated maturity
(approximate): 355 months
Range of principal balances
(approximate): $48 to $1,500,000
Average principal balance: $246,156
Range of loan-to-value ratios
(approximate): 16.67% to 100.00%
Weighted average of loan-to-
value ratios (approximate): 78.42%
Approximately 8.42% of the sample mortgage loans in loan group 1 are seasoned
mortgage loans.
The sample mortgage loans in loan group 2 have original terms to maturity of not
greater than 30 years and the following characteristics as of the cut-off date:
Range of mortgage rates
(approximate): 4.625% to 16.990%
Weighted average mortgage rate
(approximate): 6.808%
Weighted average remaining term
to stated maturity (approximate): 338 months
Range of principal balances
(approximate): $4,143 to $989,039
Average principal balance: $190,585
Range of loan-to-value ratios and
combined loan-to-value ratios
(approximate): 26.42% to 132.30%
Weighted average of loan-to-
value ratios and combined loan-
to-value ratios (approximate): 74.24%
Approximately 1.39% of the sample mortgage loans in loan group 2 are high CLTV
loans.
Approximately 2.85% of the sample mortgage loans in loan group 2 are seasoned
mortgage loans.
For additional information regarding the mortgage loans, see "The Mortgage Pool"
in this prospectus supplement.
The Bonds and Grantor Trust Certificates
Priority of Payments from Loan Group 1. In general, on any payment date, funds
available in respect of the mortgage loans in loan group 1 for distribution from
payments and other amounts received on the related mortgage loans, after the
payment of certain fees, will be distributed in the following order:
Interest Payments
First, concurrently, to pay accrued interest on the Class 1-A-1 Bonds and Class
1-A-2 Bonds; and
second, to pay accrued interest, sequentially, on the underlying Class M-1-1,
Class M-2-1, Class M-3- 1, Class M-4-1, Class M-5-1 and Class M-6-1 Bonds.
Principal Payments
Amounts available after paying interest on the Class 1-A-1 Bonds and Class 1-A-2
Bonds, and
- --------------------------------------------------------------------------------
S-7
- --------------------------------------------------------------------------------
the underlying Class M-1-1, Class M-2-1, Class M-3-1, Class M-4-1, Class M-5-1
and Class M-6- 1 Bonds will be used to pay principal on such bonds on a pro rata
basis as described in this prospectus supplement to the extent of principal
received on the mortgage loans in loan group 1.
Net Monthly Excess Cashflow Distributions
Amounts available after paying interest and principal as described above will be
the related net monthly excess cashflow and will be used for various purposes,
including reimbursing the bond insurer, paying principal on the Class 1-A-1
Bonds and Class 1-A-2 Bonds, and the underlying Class M-1-1, Class M-2-1, Class
M-3-1, Class M-4-1, Class M-5-1 and Class M-6-1 Bonds, pro rata, and then to the
Class 2-A Bonds and the underlying Class M-1-2, Class M-2-2, Class M-3-2, Class
M- 4-2, Class M-5-2 and Class M-6-2 Bonds, pro rata, in each case to maintain
the amount of required overcollateralization.
Priority of Payments from Loan Group 2. In general, on any payment date, funds
available in respect of the mortgage loans in loan group 2 for distribution from
payments and other amounts received on the related mortgage loans, after the
payment of certain fees, will be distributed in the following order:
Interest Payments
First, to pay accrued interest on the Class 2-A Bonds; and
second, to pay accrued interest, sequentially, on the underlying Class M-1-2,
Class M-2-2, Class M-3- 2, Class M-4-2, Class M-5-2 and Class M-6-2 Bonds.
Principal Payments
Amounts available after paying interest on the Class 2-A Bonds and the
underlying Class M-1-2, Class M-2-2, Class M-3-2, Class M-4-2, Class M- 5-2 and
Class M-6-2 Bonds will be used to pay principal on such bonds on a pro rata
basis as described in this prospectus supplement to the extent of principal
received on the mortgage loans in loan group 2.
Net Monthly Excess Cashflow Distributions
Amounts available after paying interest and principal as described above will be
the related net monthly excess cashflow and will be used for various purposes,
including reimbursing the bond insurer, and paying principal on the Class 2-A
Bonds and the underlying Class M-1-2, Class M-2- 2, Class M-3-2, Class M-4-2,
Class M-5-2 and Class M-6-2 Bonds pro rata, and then to the Class 1-A-1 Bonds
and Class 1-A-2 Bonds, and the underlying Class M-1-1, Class M-2-1, Class M-3-
1, Class M-4-1, Class M-5-1 and Class M-6-1 Bonds, pro rata, in each case to
maintain the amount of required overcollateralization.
Principal and Interest Payments on the Grantor Trust Certificates. The grantor
trust certificates will be entitled to receive all principal and interest
payments on the related underlying Class M Bonds.
See "Description of the Securities--Principal and Interest Payments on the
Grantor Trust Certificates" in this prospectus supplement for additional
information.
Subordinated Transfer Realized Loss Amounts. In addition to the foregoing, in
some circumstances if realized losses on a loan group are allocated to the
overcollateralization amount or the underlying Class M Bonds of the other loan
group, interest and principal collections from the loan group to which the
losses were allocated may be directed to the bonds related to the loan group
where the losses were incurred.
See "Description of the Securities" in this prospectus supplement for additional
information.
Credit Enhancement
The credit enhancement provided for the benefit of the holders of the offered
securities consists of excess interest, overcollateralization related to each
loan group, the subordination provided to the Class 1-A-1, Class 1-A-2 and Class
2-A Bonds by
- --------------------------------------------------------------------------------
S-8
- --------------------------------------------------------------------------------
the Class M-1, Class M-2, Class M-3, Class M-4, Class M-5 and Class M-6
Certificates, cross- collateralization between the loan groups to cover realized
losses and, with respect to the Class 1-A-2 Bonds only, a bond guaranty
insurance policy issued by Ambac Assurance Corporation for the benefit of the
Class 1-A-2 Bonds.
See "The Bond Insurer" and "Description of the Securities--Overcollateralization
Provisions," "--Allocation of Realized Losses," "--Description of the Bond
Insurance Policy," "--Subordination," and "--Allocation of Losses" in this
prospectus supplement.
The Derivative Contracts
The trust will include derivative contracts. On the closing date, either the
seller will assign to the company, and the company will assign to the issuer for
the benefit of the bonds, its rights under the derivative contracts, or the
seller will cause the issuer to enter into the derivative contracts with the
derivative counterparty. The derivative contracts will be divided into two
groups, the senior derivative contracts and the subordinate derivative
contracts. Payments under the derivative contracts will be made pursuant to the
formulas described in this prospectus supplement. Net amounts paid under the
senior derivative contracts will be available to cover basis risk shortfalls on
the Class 1-A-1 Bonds and Class 1-A-2 Bonds, pro rata, and net amounts paid
under the subordinate derivative contracts will be available to cover basis risk
shortfalls on the Underlying Class M-1-1 Bonds and Class M-1-2 Bonds, pro rata,
then to the Underlying Class M-2-1 Bonds and Class M-2-2 Bonds, pro rata, then
to the Underlying Class M-3- 1 Bonds and Class M-3-2 Bonds, pro rata, then to
the Underlying Class M-4-1 Bonds and Class M-4- 2 Bonds, pro rata, then to the
Underlying Class M- 5-1 Bonds and Class M-5-2 Bonds, pro rata, and then to the
Underlying Class M-6-1 Bonds and Class M-6-2 Bonds, pro rata. Payments from the
derivative contracts to the underlying subordinated bonds will be paid to the
related grantor trust certificates as described in this prospectus supplement.
Any amounts received from the derivative contracts not used to cover basis risk
shortfalls as described in this prospectus supplement shall be paid to the
holder of the owner trust certificates.
See "Description of the Securities--The Derivative Contracts" in this prospectus
supplement.
Optional Redemption
At its option, the holder of the owner trust certificates, or, if there is no
single holder, the majority holder of the owner trust certificates, may purchase
the bonds from the trust, effecting an early retirement of the bonds and the
grantor trust certificates, on or after the earlier of (i) the payment date on
which the aggregate stated principal balance of the mortgage loans has been
reduced to less than or equal to 25% of the sum of the aggregate stated
principal balance of the mortgage loans as of the cut-off date, and (ii) the
payment date occurring in October 2013.
See "Description of the Securities--Optional Redemption" in this prospectus
supplement.
Federal Income Tax Consequences
For federal income tax purposes, the bonds will be treated as indebtedness to a
bondholder other than the owner of the owner trust certificates and not as an
equity interest in the issuer. Each Grantor Trust Fund will be classified as a
grantor trust under subpart E, part I of subchapter J of Chapter 1 of the Code
and not as a partnership or an association taxable as a corporation.
See "Federal Income Tax Consequences" in this prospectus supplement.
Ratings
When issued, the offered securities will receive ratings not lower than the
ratings set forth on page S-5 of this prospectus supplement. The ratings on the
offered securities address the likelihood that holders of the offered securities
will receive all distributions on the underlying mortgage loans and underlying
bonds to which they are entitled. However, the ratings do not address the
possibility
- --------------------------------------------------------------------------------
S-9
that securityholders might suffer a lower than anticipated yield.
A security rating is not a recommendation to buy, sell or hold a security and is
subject to change or withdrawal at any time by the assigning rating agency. The
ratings also do not address the rate of principal prepayments on the mortgage
loans.
In particular, the rate of prepayments, if different than originally
anticipated, could adversely affect the yield realized by holders of the offered
securities.
See "Ratings" in this prospectus supplement.
Legal Investment
The offered securities will not constitute "mortgage related securities" for
purposes of SMMEA.
See "Legal Investment" in this prospectus supplement and in the prospectus.
ERISA Considerations
The offered securities may be eligible for purchase by persons investing assets
of employee benefit plans or individual retirement accounts, subject to
important considerations. Plans should consult with their legal advisors before
investing in the offered securities.
See "ERISA Considerations" in this prospectus supplement.
S-10
RISK FACTORS
You should carefully consider, among other things, the following factors
in connection with the purchase of the offered securities:
The Offered Securities May Have Limited Liquidity, So You May Be Unable to Sell
Your Offered Securities or May Be Forced to Sell Them at a Discount from Their
Fair Market Value
There can be no assurance that a secondary market for the offered
securities will develop or, if one does develop, that it will provide holders of
the offered securities with liquidity of investment or that it will continue for
the life of the offered securities. As a result, any resale prices that may be
available for any security in any market that may develop may be at a discount
from the initial offering price or the fair market value thereof. The bonds and
grantor trust certificates will not be listed on any securities exchange.
The Credit Enhancement Is Limited, and the Potential Inadequacy of the Credit
Enhancement May Cause Losses or Shortfalls to Be Incurred on the Offered
Securities
The credit enhancement features described in the summary of this
prospectus supplement are intended to enhance the likelihood that holders of the
Class 1-A-1, Class 1-A-2 and Class 2-A Bonds, and to a more limited extent, the
holders of the Class M-1, Class M-2, Class M-3, Class M-4, Class M-5 and Class
M-6 Certificates, will receive regular payments of interest and principal.
However, we cannot assure you that the applicable credit enhancement will
adequately cover any shortfalls in cash available to pay your securities as a
result of delinquencies or defaults on the mortgage loans. On the closing date,
with respect to each loan group, no amount of overcollateralization will be
available to cover realized losses in either loan group.
Cross-collateralization allows excess interest from one loan group to
cover realized losses in the other loan group. However, this excess interest
from a loan group is available solely to the extent the related bonds and
grantor trust certificates have received the interest and principal to which
they are entitled, and to the extent that any realized losses have been covered
by excess interest and to the extent the bond insurer has been reimbursed. In
addition to the foregoing, in some circumstances if realized losses on a loan
group are allocated to the overcollateralization amount or the underlying Class
M Bonds of the other loan group, interest and principal collections from the
loan group to which the losses were allocated may be directed to the bonds
related to the loan group where the losses were incurred.
If delinquencies or defaults occur on the mortgage loans, neither the
master servicer nor any other entity will advance scheduled monthly payments of
interest and principal on delinquent or defaulted mortgage loans if, in the good
faith judgment of the master servicer, these advances would not be ultimately
recovered from the proceeds of the mortgage loan. In addition, if delinquencies
or defaults occur on the High CLTV loans, neither the master servicer nor any
other entity will advance scheduled monthly payments of principal on delinquent
or defaulted High CLTV loans.
If substantial losses occur as a result of defaults and delinquent
payments on the mortgage loans, you may suffer losses. Losses on the mortgage
loans in loan group 1, to the extent not covered by net monthly excess cashflow
or overcollateralization, will be allocated to the underlying Class M-6-1, Class
M-6-2, Class M-5-1, Class M-5-2, Class M-4-1, Class M-4-2, Class M-3-1, Class
M-3-2, Class M-2-1, Class M-2-2, Class M-1-1, Class M-1-2 Bonds, in that order,
and correspondingly to the Class M-6, Class M-5, Class M-4, Class M-3, Class M-2
and Class M-1 Certificates, and then, to the Class 1-A-1 Bonds, and, to the
extent not covered by the bond guaranty insurance policy, to the Class 1-A-2
Bonds, on a pro
S-11
rata basis. Losses on the mortgage loans in loan group 2, to the extent not
covered by net monthly excess cashflow or overcollateralization, will be
allocated to the underlying Class M-6-2, Class M-6-1, Class M- 5-2, Class M-5-1,
Class M-4-2, Class M-4-1, Class M-3-2, Class M-3-1, Class M-2-2, Class M-2-1,
Class M-1-2 and Class M-1-1 Bonds, in that order, and correspondingly to the
Class M-6, Class M-5, Class M-4, Class M-3, Class M-2 and Class M-1
Certificates, and then to the Class 2-A Bonds.
The ratings of the offered securities by the rating agencies may be
lowered following the initial issuance thereof as a result of losses on the
mortgage loans in excess of the levels contemplated by the rating agencies at
the time of their initial rating analysis or, in the case of the Class 1-A-2
Bonds, by a change of the financial strength rating of the bond insurer. None of
the company, the master servicer, any subservicer, the indenture trustee, the
owner trustee or any of their respective affiliates will have any obligation to
replace or supplement any credit enhancement, or to take any other action to
maintain the ratings of the offered securities. See "Description of Credit
Enhancement" in the prospectus.
Interest Generated by the Mortgage Loans May Be Insufficient to Create or
Maintain Overcollateralization, or to Provide Cross-Collateralization
The amount of interest generated by the mortgage loans (net of fees and
expenses) in a loan group is expected to be higher than the amount of interest
required to be paid to the related bonds and grantor trust certificates. Any
such excess interest will be used to reimburse the bond insurer, to maintain the
current level of overcollateralization by covering realized losses on the
mortgage loans, and to create additional overcollateralization until the
required level of overcollateralization is reached. We cannot assure you,
however, that enough excess interest will be available to create or maintain the
required level of overcollateralization. The factors described below will affect
the amount of excess interest that the mortgage loans will generate:
o Every time a mortgage loan is prepaid in full, excess interest may
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, excess interest may be
reduced because such mortgage loans will no longer be outstanding
and generating interest.
o If the rates of delinquencies, defaults or losses on the mortgage
loans turn out to be higher than expected, excess interest will be
reduced by the amount necessary to compensate for any shortfalls in
cash available on such date to make required payments on the bonds
and grantor trust certificates.
o If prepayments, defaults and liquidations occur more rapidly on the
mortgage loans with relatively higher interest rates than on the
mortgage loans with relatively lower interest rates, the amount of
excess interest generated by the mortgage loans will be less than
would otherwise be the case.
Net Payments by the Issuer to the Derivative Counterparty under the Derivative
Contracts May Reduce Excess Interest and the Interest Rates for the Offered
Securities
The amount of excess interest generated by the mortgage loans will be
reduced by net payments to the counterparty under the derivative contracts in
the event that One-Month LIBOR is below the levels set forth in the derivative
contracts as described in this prospectus supplement. In addition, the related
S-12
available funds rate and therefore the bond interest rate on the related bonds
may be reduced by the requirement of the issuer to pay net payments to the
counterparty under the derivative contracts.
The Difference Between the Interest Rates on the Offered Securities and the
Related Mortgage Loans May Result in Basis Risk Shortfall with Respect to Such
Securities
The bond interest rates with respect to the Class 1-A-1 Bonds and Class
1-A-2 Bonds adjust each month and are based upon the value of an index
(One-Month LIBOR) plus the related margin, limited by the related maximum bond
rate and the related available funds rate. However, the mortgage rate of a
substantial majority of the mortgage loans in loan group 1 is based upon a
different index (Six-Month LIBOR) plus the related gross margin, and adjusts
semi-annually, commencing, in many cases, after an initial fixed-rate period.
One-Month LIBOR and Six-Month LIBOR may respond differently to economic and
market factors, and there is not necessarily any correlation between them.
Moreover, the mortgage loans in loan group 1 are subject to periodic rate caps,
maximum mortgage rates and minimum mortgage rates. Also, because the mortgage
rates on the mortgage loans in loan group 1 generally adjust semi- annually,
and, in many cases, after an initial fixed-rate period, there will be a delay
between the change in Six-Month LIBOR and the rate on the related mortgage loan.
Thus, it is possible, for example, that One- Month LIBOR may rise during periods
in which Six-Month LIBOR is stable or falling or that, even if both One-Month
LIBOR and Six-Month LIBOR rise during the same period, One-Month LIBOR may rise
much more rapidly than Six-Month LIBOR. To the extent that the related bond
interest rate is limited to the related available funds rate, basis risk
shortfalls may occur. See "Description of the Securities--Interest Payments on
the Bonds."
The bond interest rate with respect to the underlying Class M Bonds
related to the Class M-1, Class M-2, Class M-3, Class M-4, Class M-5 and Class
M-6 Certificates adjusts each month and is based upon the value of an index
(One-Month LIBOR) plus the related margin, limited by the related maximum bond
rate and the related available funds rate. However, the mortgage rate of a
substantial majority of the mortgage loans in loan group 1 is based upon a
different index (Six-Month LIBOR) plus the related gross margin, and adjusts
semi-annually, commencing, in many cases, after an initial fixed-rate period.
Also, the mortgage rate on each mortgage loan in loan group 2 is a fixed rate.
One-Month LIBOR and Six-Month LIBOR may respond differently to economic and
market factors, and there is not necessarily any correlation between them.
Moreover, the mortgage loans in loan group 1 are subject to periodic rate caps,
maximum mortgage rates and minimum mortgage rates. Also, because the mortgage
rates on the mortgage loans in loan group 1 generally adjust semi-annually, and,
in many cases, after an initial fixed-rate period, there will be a delay between
the change in Six-Month LIBOR and the rate on the related mortgage loan. Thus,
it is possible, for example, that One-Month LIBOR may rise during periods in
which Six-Month LIBOR is stable or falling or that, even if both One-Month LIBOR
and Six-Month LIBOR rise during the same period, One-Month LIBOR may rise much
more rapidly than Six-Month LIBOR. To the extent that the related bond interest
rate on an underlying Class M Bonds is limited to the related available funds
rate, basis risk shortfalls may occur. See "Description of the
Securities--Interest Payments on the Bonds."
The derivative contracts will be assigned to, or entered into by, the
trust and the net amounts payable from these contracts will provide some
protection against any basis risk shortfalls on the Class 1- A-1 Bonds, Class
1-A-2 Bonds and the underlying Class M Bonds related to the Class M-1, Class
M-2, Class M-3, Class M-4, Class M-5 and Class M-6 Certificates. However, net
amounts payable under the derivative contracts are based on the parameters
described in this prospectus supplement, and to the extent the actual
performance of the mortgage loans differs from the expectations on which these
parameters were based, the derivative contracts may provide insufficient funds
to cover these shortfalls.
S-13
To the extent that net amounts payable under the derivative contracts for
a loan group are insufficient to cover basis risk shortfalls on the related
securities, related net monthly excess cashflow may be used, subject to the
priorities described in this prospectus supplement. However, there can be no
assurance that available net monthly excess cashflow will be sufficient to cover
these shortfalls, particularly because in a situation where the bond interest
rate on a class of bonds is limited to the related available funds rate, there
will be little or no related net monthly excess cashflow.
Basis risk shortfalls with respect to the Class 1-A-2 Bonds are not
covered by the bond guaranty insurance policy and may remain unpaid on the final
scheduled payment date.
Statutory and Judicial Limitations on Foreclosure Procedures May Delay Recovery
with Respect to the Mortgaged Properties and, in Some Instances, Limit the
Amount That May Be Recovered by the Foreclosing Lender, Resulting in Losses on
the Mortgage Loans That Might Cause Losses or Shortfalls to Be Incurred on the
Offered Securities
Foreclosure procedures vary from state to state. Two primary methods of
foreclosing a mortgage instrument are judicial foreclosure, involving court
proceedings, and non-judicial foreclosure pursuant to a power of sale granted in
the mortgage instrument. A foreclosure action is subject to most of the delays
and expenses of other lawsuits if defenses are raised or counterclaims are
asserted. Delays may also result from difficulties in locating necessary
defendants. Non-judicial foreclosures may be subject to delays resulting from
state laws mandating the recording of notice of default and notice of sale and,
in some states, notice to any party having an interest of record in the real
property, including junior lienholders. Some states have adopted
"anti-deficiency" statutes that limit the ability of a lender to collect the
full amount owed on a loan if the property sells at foreclosure for less than
the full amount owed. In addition, United States courts have traditionally
imposed general equitable principles to limit the remedies available to lenders
in foreclosure actions that are perceived by the court as harsh or unfair. The
effect of these statutes and judicial principles may be to delay and/or reduce
payments with respect to the bonds and grantor trust certificates. See "Legal
Aspects of Mortgage Loans -- Foreclosure on Mortgages and Some Contracts" in the
prospectus.
The Value of the Mortgage Loans May Be Affected By, among Other Things, a
Decline in Real Estate Values and Changes in the Borrowers' Financial Condition,
Which May Cause Losses or Shortfalls to Be Incurred on the Offered Securities
No assurance can be given that values of the mortgaged properties have
remained or will remain at their levels as of the dates of origination of the
related mortgage loans. If the residential real estate market should experience
an overall decline in property values so that the outstanding balances of the
mortgage loans, and any secondary financing on the mortgaged properties, become
equal to or greater than the value of the mortgaged properties, the actual rates
of delinquencies, foreclosures and losses could be higher than those now
generally experienced in the mortgage lending industry. In particular, mortgage
loans with high loan-to-value ratios or high principal balances will be affected
by any decline in real estate values. Also, in recent years, property values
have risen at a greater rate than previously. Any decrease in the value of the
mortgage loans may result in the allocation of losses to the bonds and grantor
trust certificates to the extent not covered by credit enhancement.
The Mortgage Loans Were Underwritten to Non-Conforming Underwriting Standards,
Which May Result in Losses or Shortfalls on the Offered Securities
The mortgage loans were underwritten generally in accordance with
underwriting standards which are primarily intended to provide for single family
"non-conforming" mortgage loans. A "non-
S-14
conforming" mortgage loan means a mortgage loan which is ineligible for purchase
by Fannie Mae or Freddie Mac due to either credit characteristics of the related
mortgagor or documentation standards in connection with the underwriting of the
related mortgage loan that do not meet the Fannie Mae or Freddie Mac
underwriting guidelines for "A" credit mortgagors. These credit characteristics
include mortgagors whose creditworthiness and repayment ability do not satisfy
such Fannie Mae or Freddie Mac underwriting guidelines and mortgagors who may
have a record of credit write-offs, outstanding judgments, prior bankruptcies
and other credit items that do not satisfy such Fannie Mae or Freddie Mac
underwriting guidelines. These documentation standards may include mortgagors
who provide limited or no documentation in connection with the underwriting of
the related mortgage loan. Accordingly, mortgage loans underwritten under the
seller's non-conforming credit underwriting standards are likely to experience
rates of delinquency, foreclosure and loss that are higher, and may be
substantially higher, than mortgage loans originated in accordance with the
Fannie Mae or Freddie Mac underwriting guidelines. Any resulting losses, to the
extent not covered by credit enhancement, may affect the yield to maturity of
the bonds and grantor trust certificates.
Some of the Mortgage Loans Have an Initial Interest Only Period, Which May
Result in Increased Delinquencies and Losses with Respect to These Mortgage
Loans
Approximately 43.09% and 3.28% of the sample mortgage loans in loan group
1 (by aggregate outstanding principal balance of the related sample mortgage
loans as of the cut-off date) have initial interest only periods of five years
and ten years, respectively, and approximately 3.04% of the sample mortgage
loans in loan group 2 (by aggregate outstanding principal balance of the related
sample mortgage loans as of the cut-off date) have initial interest only periods
of five years. During this period, the payment made by the related borrower will
be less than it would be if the mortgage loan amortized. In addition, the
mortgage loan balance will not be reduced by the principal portion of scheduled
monthly payments during this period. As a result, no principal payments will be
made to the bonds and grantor trust certificates from these mortgage loans
during their interest only period except in the case of a prepayment.
After the initial interest only period, the scheduled monthly payment on
these mortgage loans will increase, which may result in increased delinquencies
by the related borrowers, particularly if interest rates have increased and the
borrower is unable to refinance. In addition, losses may be greater on these
mortgage loans as a result of the mortgage loan not amortizing during the early
years of these mortgage loans. Although the amount of principal included in each
scheduled monthly payment for a traditional mortgage loan is relatively small
during the first few years after the origination of a mortgage loan, in the
aggregate the amount can be significant. Any resulting delinquencies and losses,
to the extent not covered by credit enhancement, will be allocated to the bonds
and grantor trust certificates.
Mortgage loans with an initial interest only period are relatively new in
the mortgage marketplace. The performance of these mortgage loans may be
significantly different than mortgage loans that fully amortize. In particular,
there may be a higher expectation by these borrowers of refinancing their
mortgage loans with a new mortgage loan, in particular one with an initial
interest only period, which may result in higher or lower prepayment speeds than
would otherwise be the case. In addition, the failure to build equity in the
property by the related mortgagor may affect the delinquency and prepayment of
these mortgage loans.
S-15
Some of the Mortgage Loans in Loan Group 2 Were Underwritten With a Limited
Expectation of Recovering Amounts From the Related Mortgaged Property
Approximately 1.39% of the sample mortgage loans in loan group 2 (by
aggregate outstanding principal balance as of the cut-off date) (the "High CLTV
Loans"), all of which are secured by second liens on the related mortgaged
property, were originated with a limited expectation of recovering any amounts
from the foreclosure of the related mortgaged property and were underwritten
with an emphasis on the creditworthiness of the related borrower.
In the event of a delinquency or a default on a High CLTV loan, the master
servicer will not have an obligation to advance the principal portion of
scheduled monthly payments on such mortgage loan, and may only advance interest
under the circumstances described herein.
The Mortgage Loans Are Concentrated in the State of California, Which May Result
in Losses with Respect to These Mortgage Loans
Investors should note that some geographic regions of the United States
from time to time will experience weaker regional economic conditions and
housing markets, and, consequently, will experience higher rates of loss and
delinquency than will be experienced on mortgage loans generally. For example, a
region's economic condition and housing market may be directly, or indirectly,
adversely affected by natural disasters such as earthquakes, hurricanes, floods
and eruptions, civil disturbances such as riots, and by other disruptions such
as ongoing power outages or terrorist actions or acts of war. The economic
impact of any of these types of events may also be felt in areas beyond the
region immediately affected by the disaster or disturbance. Approximately 69.10%
and 60.43% of the sample mortgage loans in loan group 1 and loan group 2,
respectively (by aggregate outstanding principal balance of the related sample
mortgage loans as of the cut-off date), are in the state of California. The
concentration of the mortgage loans in the state of California may present risk
considerations in addition to those generally present for similar
mortgage-backed securities without this concentration. In particular, property
values in California have increased at a rate greater than previously in recent
years, and may as a result be subject to decline in the future. Any risks
associated with mortgage loan concentration may affect the yield to maturity of
the bonds and grantor trust certificates to the extent losses caused by these
risks which are not covered by credit enhancement are allocated to the bonds and
grantor trust certificates.
The Mortgage Loans With High LTVs Without Primary Mortgage Insurance Will Be
More Affected Than the Other Mortgage Loans By a Decline in Value of the Related
Mortgaged Property, Which May Result in a Greater Risk of Loss With Respect to
Those Mortgage Loans
All of the second lien sample mortgage loans in loan group 2 had combined
loan-to-value ratios at origination in excess of 80.00% but are not covered by a
primary mortgage insurance policy. These mortgage loans will be affected to a
greater extent than the other mortgage loans in the mortgage pool by any decline
in the value of the related mortgaged property. No assurance can be given that
values of the mortgaged properties have remained or will remain at their levels
on the dates of origination. If the residential real estate market should
experience an overall decline in property values such that the outstanding
balances of the mortgage loans, and any secondary financing on the mortgaged
properties, become equal to or greater than the value of the mortgaged
properties, the actual rates of delinquencies, foreclosures and losses could be
higher than those now generally experienced in the mortgage lending industry.
Any decrease in the value of the mortgaged properties underlying such mortgage
loans may result in the allocation of losses to the Bonds, to the extent such
losses are not covered by credit support.
S-16
Some of the Mortgage Loans in Loan Group 2 Provide for Balloon Payments at
Maturity, Which May Result in a Greater Risk of Loss with Respect to These
Mortgage Loans
Approximately 0.91% of the sample mortgage loans in loan group 2 (by
aggregate outstanding principal balance as of the cut-off date) are balloon
loans. These mortgage loans will require a substantial payment of principal, or
"balloon payment," at their stated maturity in addition to their scheduled
monthly payment. Mortgage loans of this type involve a greater degree of risk
than self-amortizing loans because the ability of a mortgagor to make a balloon
payment typically will depend upon its ability either to fully refinance the
loan or to sell the related mortgaged property at a price sufficient to permit
the mortgagor to make the balloon payment. The ability of a mortgagor to
accomplish either of these goals will be affected by a number of factors,
including the value of the related mortgaged property, the level of available
mortgage rates at the time of sale or refinancing, the mortgagor's equity in the
related mortgaged property, prevailing general economic conditions, the
availability of credit for loans secured by comparable real properties. Any
risks associated with the balloon loans may affect the yield to maturity of the
bonds to the extent losses or delays in payment caused by these risks which are
not covered by credit enhancement are allocated to, or result in a slower rate
of principal payments on, the bonds.
The Rate and Timing of Prepayments Will Affect Your Yield
Borrowers may prepay their mortgage loans in whole or in part at any time.
We cannot predict the rate at which borrowers will repay their mortgage loans. A
prepayment of a mortgage loan generally will result in a prepayment on the bonds
and grantor trust certificates:
o If you purchase your securities at a discount and principal is repaid
slower than you anticipate, then your yield may be lower than you anticipate.
o If you purchase your securities 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 interest rates decline, mortgage loan
prepayments may increase due to the availability of other mortgage loans at
lower interest rates. Conversely, if prevailing interest rates rise
significantly, the prepayments on mortgage loans may decrease.
o Approximately 70.44% and 77.36% of all of the sample mortgage loans in
loan group 1 and loan group 2, respectively (by aggregate outstanding principal
balance of the related sample mortgage loans as of the cut-off date), require
the mortgagor to pay a charge in certain instances if the mortgagor prepays the
mortgage loan during a stated period, which may be from six months to five years
after the mortgage loan was originated. A prepayment charge may or may not
discourage a mortgagor from prepaying the mortgage loan during the applicable
period.
o The seller may be required to purchase mortgage loans from the trust in
the event certain breaches of representations and warranties occur and have not
been cured. In addition, the master servicer has the option to purchase mortgage
loans that become 90 days or more delinquent. These purchases will have the same
effect on the holders of the bonds and grantor trust certificates as a
prepayment in full of any such purchased mortgage loans.
o The overcollateralization provisions are intended to result in an
accelerated rate of principal payments to holders of the classes of bonds and
grantor trust certificates then entitled to
S-17
payments of principal whenever overcollateralization is at a level below the
required level. An earlier return of principal to the holders of the bonds and
grantor trust certificates as a result of the overcollateralization provisions
will influence the yield on the bonds and grantor trust certificates in a manner
similar to the manner in which principal prepayments on the mortgage loans will
influence the yield on the bonds and grantor trust certificates.
See "Yield on the Securities" in this prospectus supplement.
The Mortgage Loans May Have Environmental Risks, Which May Result in Increased
Losses with Respect to These Mortgage Loans
To the extent the master servicer for a mortgage loan acquires title to
any related mortgaged property contaminated with or affected by hazardous wastes
or hazardous substances, these mortgage loans may incur losses. See "Servicing
of Mortgage Loans -- Realization upon or Sale of Defaulted Mortgage Loans" and
"Legal Aspects of Mortgage Loans -- Environmental Legislation" in the
prospectus. To the extent these environmental risks result in losses on the
mortgage loans, the yield to maturity of the bonds and grantor trust
certificates, to the extent not covered by credit enhancement, may be affected.
Some Additional Risks Are Associated with the Class M-1, Class M-2, Class M-3,
Class M-4, Class M-5 and Class M-6 Certificates
The weighted average life of, and the yield to maturity on, the Class M-1,
Class M-2, Class M-3, Class M-4, Class M-5 and Class M-6 Certificates will be
sensitive to the rate and timing of mortgagor defaults and the severity of
ensuing losses on the mortgage loans. If the actual rate and severity of losses
on the mortgage loans are higher than those assumed by an investor in the Class
M-1, Class M-2, Class M- 3, Class M-4, Class M-5 and Class M-6 Certificates, the
actual yield to maturity of such grantor trust certificates may be lower than
assumed. The timing of losses on the mortgage loans will also affect an
investor's actual yield to maturity, even if the rate of defaults and severity
of losses over the life of the mortgage pool are consistent with an investor's
expectations. In general, the earlier a loss occurs, the greater the effect on
an investor's yield to maturity. Realized losses on the mortgage loans in each
loan group, to the extent they exceed the amount of overcollateralization
following payments of principal on the related payment date, will be allocated
to the related bonds, and thereby reduce the certificate principal balance of
the Class M-1, Class M-2, Class M-3, Class M-4, Class M-5 and Class M-6
Certificates, in reverse order of their priority. As a result of such
reductions, less interest will accrue on such class of Class M-1, Class M-2,
Class M-3, Class M-4, Class M-5 and Class M-6 Certificates than would otherwise
be the case. Furthermore, the timing of receipt of principal and interest by the
Class M-1, Class M-2, Class M-3, Class M-4, Class M-5 and Class M-6 Certificates
may be adversely affected by losses even if such class of certificates does not
ultimately bear such loss, to the extent losses affect the required amount of
overcollateralization.
Once a realized loss is allocated to a Class M-1, Class M-2, Class M-3,
Class M-4, Class M-5 or Class M-6 Certificate, no amounts will be distributable
with respect to such written-down amount. However, the amount of any realized
losses allocated to the Class M-1, Class M-2, Class M-3, Class M-4, Class M-5
and Class M-6 Certificates, may be repaid to the holders thereof from the net
monthly excess cashflow to the extent reimbursed to the related underlying bonds
according to the priorities set forth under "Description of the Securities --
Overcollateralization Provisions" in this prospectus supplement.
S-18
Prepayment Interest Shortfalls and Relief Act Shortfalls Will Affect Your Yield
When a principal prepayment in full is made on a mortgage loan, the
mortgagor is charged interest only up to the date of the principal prepayment,
instead of for a full month. When a partial principal prepayment is made on a
mortgage loan, the mortgagor is not charged interest on the amount of the
prepayment for any days in the month in which the prepayment is made. In
addition, the application of the Soldiers' and Sailors' Civil Relief Act of
1940, as amended, to any mortgage loan will adversely affect, for an
indeterminate period of time, the ability of the master servicer to collect full
amounts of interest on the mortgage loan. This may result in a shortfall in
interest collections available for payment to bondholders and grantor trust
certificateholders on the next payment date. The master servicer is required to
cover a portion of the shortfall in interest collections that are attributable
to prepayments in full, but only up to the lesser of (a) one-twelfth of 0.125%
of the aggregate stated principal balance of the mortgage loans immediately
preceding such payment date and (b) the amount of the master servicer's
aggregate master servicing fee and any subservicing fee for the related due
period. Prepayment interest shortfalls resulting from prepayments in part will
not be covered by the master servicer, any subservicer or otherwise. In
addition, certain shortfalls in interest collections arising from the
application of the Relief Act will not be covered by the master servicer or any
subservicer. Further, any such shortfalls on the Class 1-A-2 Bonds will not be
covered by the bond guaranty insurance policy.
On any payment date, any shortfalls resulting from the application of the
Relief Act and any prepayment interest shortfalls to the extent not covered by
compensating interest paid by the master servicer will be allocated to the bonds
and grantor trust certificates on a pro rata basis based on the respective
amounts of interest accrued on such bonds and grantor trust certificates for
such payment date. The holders of the bonds and grantor trust certificates will
be entitled to reimbursement for any such interest shortfalls with interest
thereon solely from the net monthly excess cashflow in accordance with the
payment provisions in this prospectus supplement. If these shortfalls are
allocated to the bonds and grantor trust certificates and are not reimbursed on
any payment date, the amount of interest paid to those bonds and grantor trust
certificates will be reduced, adversely affecting the yield on your investment.
Violation of Various Federal and State Laws May Result in Losses on the Mortgage
Loans
Applicable state laws generally regulate interest rates and other charges,
require specific disclosure, and require licensing of the seller. In addition,
other state laws, public policy and general principles of equity relating to the
protection of consumers, unfair and deceptive practices and debt collection
practices may apply to the origination, servicing and collection of the mortgage
loans.
The mortgage loans will be subject to federal laws, including:
o the Federal Truth-in-Lending Act and Regulation Z promulgated
thereunder, which require specific disclosures to the borrowers regarding the
terms of the mortgage loans;
o the Equal Credit Opportunity Act and Regulation B promulgated
thereunder, which prohibit discrimination on the basis of age, race, color, sex,
religion, marital status, national origin, receipt of public assistance or the
exercise of any right under the Consumer Credit Protection Act, in the extension
of credit; and
o the Fair Credit Reporting Act, which regulates the use and reporting of
information related to the borrower's credit experience.
S-19
Depending on the provisions of the applicable law and the specific facts
and circumstances involved, violations of these federal or state laws, policies
and principles may limit the ability of the trust to collect all or part of the
principal of or interest on the mortgage loans, may entitle the borrower to a
refund of amounts previously paid and, in addition, could subject the trust to
damages and administrative enforcement. In addition, certain of the mortgage
loans in loan group 2, including all of the High CLTV loans, are also subject to
the Homeownership Act (such mortgage loans, "High Cost Loans"), if such mortgage
loans were originated on or after October 1, 1995, are not mortgage loans made
to finance the purchase of the mortgaged property and have interest rates or
origination costs in excess of certain prescribed levels. The Homeownership Act
requires certain additional disclosures, specifies the timing of such
disclosures and limits or prohibits inclusion of certain provisions in mortgages
subject to the Homeownership Act. Remedies available to the mortgagor include
monetary penalties, as well as recission rights if the appropriate disclosures
were not given as required or if the particular mortgage includes provisions
prohibited by the law. The Homeownership Act also provides that any purchaser or
assignee of a mortgage covered by the Homeownership Act is subject to all of the
claims and defenses to loan payment, whether under the Federal Truth-in-Lending
Act, as amended by the Homeownership Act or other law, which the borrower could
assert against the original lender unless the purchaser or assignee did not know
and could not with reasonable diligence have determined that the mortgage loan
was subject to the provisions of the Homeownership Act. The maximum damages that
may be recovered under the Homeownership Act from an assignee is the remaining
amount of indebtedness plus the total amount paid by the borrower in connection
with the mortgage loan. If the trust fund owns mortgage loans subject to the
Homeownership Act, it will be subject to all of the claims and defenses which
the borrower could assert against the seller. Recently, lawsuits have been
brought under the Federal Truth-in-Lending Act naming as defendants
securitization trusts such as the trust and the grantor trusts.
The seller will represent that as of the closing date each mortgage loan
at the time it was originated complied in all material respects with applicable
local, state and federal laws, including, without limitation, usury, equal
credit opportunity, truth-in-lending and disclosure laws. The seller will also
represent that each mortgage loan is being serviced in all material respects in
accordance with applicable local, state and federal laws, including, without
limitation, usury, equal credit opportunity and disclosure laws. In the event of
a breach of this representation, it will be obligated to cure the breach or
repurchase or replace the affected mortgage loan in the manner described in the
prospectus.
The High CLTV Loans Include Mortgage Loans That Had Prior Compliance Violations;
Although Remedies Have Been Taken, These Mortgage Loans Might Be Subject to
Recission, Resulting in a Complete Loss
The originator of approximately 0.10% of the sample mortgage loans (by
aggregate outstanding principal balance as of the cut-off date), the majority of
which are High CLTV loans, Preferred Credit Corporation, or Preferred, was
subject, beginning in April 1997, to examination by the California Department of
Corporations, or the CDC, and the California Department of Real Estate, or the
CDRE. On or about March 1997, the CDC received complaints from California
borrowers that Preferred was not remitting loan proceeds to such borrowers in a
timely fashion. The CDC commenced a regulatory examination on April 1, 1997 in
response to these complaints. The examination confirmed the validity of the
complaints and that Preferred had also improperly charged borrowers interest on
their mortgage loans prior to the actual disbursement of funds. Such practices
were characterized by the CDC as "widespread" and in violation of several
provisions of the California Residential Mortgage Lender Law, RML Law. The
examination also determined that Preferred had altered and falsified its books
and records in connection with such practices, and that its principals had
falsified and/or misrepresented information to the CDC.
S-20
On June 23, 1997, the CDC issued to Preferred an Order to Refund Excess
Interest pursuant to FC 50504, as well as commenced administrative proceedings
to revoke Preferred's license and to bar its principals from the industry.
Following the June 1997 Order, Preferred and its principals entered into a
settlement with the CDC requiring the parties, among other things, to pay a $1
million civil money penalty for RML Law violations and, to the extent that any
interest accrual period on loans funded by Preferred since March 1, 1996
commenced prior to the actual disbursement of checks to customers, Preferred is
to refund such excess interest charged plus 10 percent interest.
A compliance review of all the Preferred Mortgage Loans was performed by
independent consultants to ensure that the types of violations discovered by the
CDC and the CDRE would not give rise to claims, defenses, or liabilities that
could be asserted against an assignee of the Preferred Mortgage Loans. Such
compliance review included procedures to determine whether such loans complied
with California state laws and federal laws. Based on the results of such
compliance reviews, the Preferred Mortgage Loans include only those loans which
were either (i) not in violation of California state law and/or federal law or
(ii) had been in violation of either California state law and/or federal law,
but such violation had been fully cured prior to the closing date and hence,
would not subject the holder or subsequent assignee to monetary liability or
result in the loan being rescinded against either the holder or subsequent
assignee thereof.
The seller will make representations and warranties in connection with the
High CLTV loans and repurchase from the trust fund any such loan which had
violations of any local, state or federal law which were not satisfactorily
cured that materially and adversely affect the securityholders. The seller will
also indemnify the trust for any losses arising from such violations. To the
extent that the above procedures are inadequate to identify all mortgage loans
that could be subject to violations under federal or state law that may give
rise to claims, defenses, or liabilities as specified in this prospectus
supplement, and any such mortgage loans are not repurchased by the seller, such
mortgage loans may be subject to a recission right of the borrower, and expose
the trust fund holding the mortgage loans to significant monetary liability. Any
such liability may reduce the funds available to satisfy the debt on the bonds
to the extent not covered by the seller or by credit support. See also " --
Violation of Various Federal and State Laws May Result in Losses on the Mortgage
Loans" above.
There May Be Variations in the Mortgage Loans from the Sample Mortgage Loans
The sample mortgage loans include mortgage loans whose characteristics may
vary from the specific characteristics reflected in the mortgage loans, although
the extent of such variance is not expected to be material. Within 15 days of
the closing date, tables will be filed on Form 8-K reflecting the mortgage
loans.
The Ratings on the Offered Securities Are Not a Recommendation to Buy, Sell or
Hold the Offered Securities and Are Subject to Withdrawal at Any Time, Which May
Result in Losses on the Offered Securities
It is a condition to the issuance of the Class 1-A-1, Class 1-A-2 and
Class 2-A Bonds and the Class M-1, Class M-2, Class M-3, Class M-4, Class M-5
and Class M-6 Certificates that each such class of securities be rated no lower
than the ratings described on page S-5 of this prospectus supplement. A security
rating is not a recommendation to buy, sell or hold securities and may be
subject to revision or withdrawal at any time. No person is obligated to
maintain the rating on any security, and, accordingly, there can be no assurance
that the ratings assigned to any security on the date on which the bonds and
grantor trust certificates are initially issued will not be lowered or withdrawn
by a rating agency at any time thereafter. In the event any rating is revised or
withdrawn, the liquidity or the market value of the
S-21
bonds and grantor trust certificates may be adversely affected. See "Ratings" in
this prospectus supplement and in the prospectus.
A Transfer of Subservicing May Result in Increased Losses and Delinquencies on
the Mortgage Loans
Substantially all of the mortgage loans will initially be subserviced by
Wendover Funding, Inc. as described in this prospectus supplement under
"Description of the Servicing Agreement -- The Subservicers." However, the
master servicer has entered into a contract to transfer the subservicing with
respect to such mortgage loans in respect of loan group 1 to Countrywide Home
Loans Servicing LP, or an affiliate thereof, on or about December 1, 2003 and
with respect to such mortgage loans secured by first liens on the related
mortgaged property in loan group 2 to GMAC Mortgage Corporation on or about
December 1, 2003. Investors should note, however, that when the servicing of
mortgage loans is transferred, there is generally a rise in delinquencies
associated with such transfer. Such increase in delinquencies may result in
losses, which, to the extent they are not absorbed by credit enhancement, will
cause losses or shortfalls to be incurred by the holders of the offered
securities. In addition, any higher default rate resulting from such transfer
may result in an acceleration of prepayments on these mortgage loans.
The Recording of Mortgages in the Name of MERS May Affect the Yield on the
Offered Securities.
The mortgages or assignments of mortgage for some of the mortgage loans
have been or may be recorded in the name of Mortgage Electronic Registration
Systems, Inc., or MERS, solely as nominee for the seller and its successors and
assigns. Subsequent assignments of those mortgages are registered electronically
through the MERS(R) System. However, if MERS discontinues the MERS(R) System and
it becomes necessary to record an assignment of the mortgage to the indenture
trustee, then any related expenses shall be paid by the trust and will reduce
the amount available to pay principal of and interest on the offered securities.
The recording of mortgages in the name of MERS is a 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 additional costs could in turn delay the payment of
liquidation proceeds to bondholders and grantor trust certificateholders and
increase the amount of losses on the mortgage loans.
For additional information regarding MERS and the MERS(R) System, see "The
Mortgage Pool -- Sample Mortgage Loan Characteristics" and "Yield on the
Securities -- General Yield and Prepayment Considerations" in this prospectus
supplement.
S-22
THE MORTGAGE POOL
General
The mortgage pool will consist of two groups of mortgage loans, referred
to in this prospectus supplement as "Loan Group 1" and "Loan Group 2" (and each,
a "Loan Group"), and also designated as the "Group 1 Loans" and the "Group 2
Loans", respectively. The Group 1 Loans are one- to four-family,
adjustable-rate, fully-amortizing residential mortgage loans secured by first
liens on mortgaged properties. The Group 2 Loans are one- to four-family,
fully-amortizing and balloon payment residential mortgage loans, all of which
have fixed rates that are secured by first liens on mortgaged properties. The
mortgage loans will have original terms to maturity of not greater than 30
years.
The company will convey the mortgage loans to the trust on the Closing
Date pursuant to the Trust Agreement. The Seller will make certain
representations and warranties with respect to the mortgage loans in the
Mortgage Loan Sale and Contribution Agreement. These representations and
warranties will be assigned to the indenture trustee for the benefit of the
Bondholders and the Bond Insurer. As more particularly described in the
prospectus, the Seller will have certain repurchase or substitution obligations
in connection with a breach of any such representation or warranty, as well as
in connection with an omission or defect in respect of certain constituent
documents required to be delivered with respect to the mortgage loans, if such
breach, omission or defect cannot be cured and it materially and adversely
affects the interests of the Bondholders or the Bond Insurer. See "The Mortgage
Pools -- Representations by Sellers" in the prospectus.
The mortgage loans will have been originated or acquired by the Seller in
accordance with the underwriting criteria described in this prospectus
supplement. See "--Underwriting Standards" Below.
Substantially all of the mortgage loans will initially be subserviced by
Wendover Funding, Inc. The subservicing with respect to such Group 1 Loans will
be transferred to Countrywide Home Loans Servicing LP, or an affiliate thereof,
on or about December 1, 2003 and, with respect to such Group 2 Loans that are
secured by first liens on the related mortgaged property, will be transferred to
GMAC Mortgage Corporation on or about December 1, 2003. Wendover Funding, Inc.
will act as subservicer with respect to all mortgage loans in loan group 2 that
are secured by second liens on the related mortgaged property. See "Description
of the Servicing Agreement -- The Subservicers" in this prospectus supplement.
None of the mortgage loans were 30 days or more delinquent as of the
Cut-off Date.
Substantially all of the mortgage loans have scheduled monthly payments
due on the first of the month. Each Group 1 Loan is generally assumable in
accordance with the terms of the related mortgage note.
Each mortgage loan is required to be covered by a standard hazard
insurance policy. See "Primary Mortgage Insurance, Hazard Insurance; Claims
Thereunder--Hazard Insurance Policies" in the prospectus.
Certain of the mortgage loans will have their first scheduled monthly
payments due on November 1, 2003. As to those mortgage loans, no principal
amortization payments will be distributed (unless prepayments are received
thereon) until the payment date occurring in November 2003, the month in which
the first scheduled monthly payment is due. However, on the Closing Date, cash
will be deposited in the Payment Account in an amount equal to one month's
interest accrued from September 1, 2003 (at the related mortgage rates) on such
mortgage loans, to be remitted to the Indenture Trustee for distribution on the
payment date occurring in October 2003, the month prior to the month in which
the first scheduled monthly payment is due on such mortgage loans.
S-23
Mortgage Rate Adjustment
The mortgage rate on substantially all of the mortgage loans in Loan Group
1will generally adjust semi-annually commencing after an initial period after
origination of generally six months, two years, three years or five years, in
each case on each applicable adjustment date to a rate equal to the sum,
generally rounded to the nearest one-eighth of one percentage point (12.5 basis
points), of (i) the related index and (ii) the gross margin. In addition, the
mortgage rate on each adjustable-rate mortgage loan is subject on its first
adjustment date following its origination to an initial rate cap and on each
adjustment date thereafter to a periodic rate cap. All of the adjustable-rate
mortgage loans are also subject to maximum and minimum lifetime mortgage rates.
The adjustable-rate mortgage loans were generally originated with an initial
mortgage rate below the sum of the index at origination and the gross margin.
Due to the application of the initial rate caps, periodic rate caps, maximum
mortgage rates and minimum mortgage rates, the mortgage rate on any
adjustable-rate mortgage loan, as adjusted on any related adjustment date, may
not equal the sum of the index and the gross margin.
The mortgage rate on substantially all of the sample mortgage loans in
Loan Group 1 adjusts based on an index equal to either Six-Month LIBOR. In the
event that the related index is no longer available, an index that is based on
comparable information will be selected by the Master Servicer, to the extent
that it is permissible under the terms of the related mortgage and mortgage
note.
Substantially all of the adjustable-rate sample mortgage loans (other than
the Seasoned Mortgage Loans) will not have reached their first adjustment date
as of the Closing Date. The initial mortgage rate is generally lower than the
rate that would have been produced if the applicable gross margin had been added
to the index in effect at origination. Adjustable-rate mortgage loans that have
not reached their first adjustment date are subject to the initial rate cap on
their first adjustment date, and periodic rate caps thereafter.
Indices on the Mortgage Loans
The index applicable to the determination of the mortgage rate on
approximately 98.98% of the sample mortgage loans in Loan Group 1 is the average
of the interbank offered rates for six-month United States dollar deposits in
the London market as published by Fannie Mae or The Wall Street Journal and, in
most cases, as most recently available as of the first business day of the month
preceding such adjustment date, or Six-Month LIBOR.
The table below sets forth historical average rates of Six-Month LIBOR for
the months indicated as made available from Fannie Mae. The rates are determined
from information that is available as of 11:00 a.m. (London time) on the second
to last business day of each month. Such average rates may fluctuate
significantly from month to month as well as over longer periods and may not
increase or decrease in a constant pattern from period to period. There can be
no assurance that levels of Six-Month LIBOR published by Fannie Mae, or
published on a different reference date would have been at the same levels as
those set forth below. The following does not purport to be representative of
future levels of Six-Month LIBOR (as published by Fannie Mae). No assurance can
be given as to the level of Six-Month LIBOR on any adjustment date or during the
life of any adjustable-rate mortgage loan based on Six-Month LIBOR.
S-24
Six-Month LIBOR
Month 1996 1997 1998 1999 2000 2001 2002 2003
- ----- ---- ---- ---- ---- ---- ---- ---- ----
January 5.34% 5.71% 5.75% 5.04% 6.23% 5.36% 1.99% 1.35%
February 5.29 5.68 5.78 5.17 6.32 4.96 2.06 1.34
March 5.52 5.96 5.80 5.08 6.53 4.71 2.33 1.26
April 5.42 6.08 5.87 5.08 6.61 4.23 2.10 1.29
May 5.64 6.01 5.81 5.19 7.06 3.91 2.09 1.22
June 5.84 5.94 5.87 5.62 7.01 3.83 1.95 1.12
July 5.92 5.83 5.82 5.65 6.88 3.70 1.86 1.15
August 5.74 5.86 5.69 5.90 6.83 3.48 1.82 1.21
September 5.75 5.85 5.36 5.96 6.76 2.53 1.75
October 5.58 5.81 5.13 6.13 6.72 2.17 1.62
November 5.55 6.04 5.28 6.04 6.68 2.10 1.47
December 5.62 6.01 5.17 6.13 6.20 1.98 1.38
Prepayment Charges
Approximately 70.44% and 77.36% of the sample Group 1 Loans and sample
Group 2 Loans, respectively (by aggregate outstanding principal balance of the
related sample mortgage loans as of the cut-off date), provide for payment by
the mortgagor of a prepayment charge in limited circumstances on prepayments.
Generally, mortgage loans with prepayment charges provide for payment of a
prepayment charge on some partial or full prepayments made within one year, five
years or other period as provided in the related mortgage note from the date of
origination of the mortgage loan. No mortgage loan provides for payment of a
prepayment charge on partial or full prepayments made more than five years from
the date of origination of that mortgage loan. The amount of the prepayment
charge is as provided in the related mortgage note. The prepayment charge will
generally apply if, in any twelve-month period during the first year, five years
or other period as provided in the related mortgage note from the date of
origination of the mortgage loan, the mortgagor prepays an aggregate amount
exceeding 20% of the original principal balance of the mortgage loan. The amount
of the prepayment charge on these loans will generally be equal to 6 months'
advance interest calculated on the basis of the mortgage rate in effect at the
time of the prepayment on the amount prepaid in excess of 20% of the original
principal balance of the mortgage loan. The prepayment charges may, in certain
circumstances, be waived by the Master Servicer or the related subservicer. Some
of these prepayment charges may not be enforceable in cases where the mortgagor
sells the related mortgaged property. There can be no assurance that the
prepayment charges will have any effect on the prepayment performance of the
mortgage loans. The Master Servicer or the related subservicer will be entitled
to all prepayment charges received on the mortgage loans, and these amounts will
not be available for payment on the Securities.
Primary Mortgage Insurance and the Radian Lender-Paid PMI Policy
Substantially all of the initial Group 1 Loans and Group 2 Loans (other
than the Seasoned Mortgage Loans) and approximately 93.06% of the Seasoned
Mortgage Loans with a loan-to-value ratio at origination in excess of 80.00%
will be insured by one of the following: (1) a Primary Insurance Policy issued
by a private mortgage insurer (other than a Radian Lender-Paid PMI Policy) or
(2) the Radian Lender-Paid PMI Policy.
Each Primary Insurance Policy will insure against default under each
insured mortgage note as follows: (A) for which the outstanding principal
balance at origination of such mortgage loan is greater than or equal to 80.01%
and up to and including 90.00% of the lesser of the Appraised Value and the sale
price,
S-25
such mortgage loan is covered by a Primary Insurance Policy in an amount equal
to at least 12.00% of the Allowable Claim and (B) for which the outstanding
principal balance at origination of such mortgage loan exceeded 90.00% of the
lesser of the Appraised Value and the sales price, such mortgage loan is covered
by a Primary Insurance Policy in an amount equal to at least 20.00% of the
Allowable Claim.
The Radian Lender-Paid PMI Policy will insure against default under each
insured mortgage note as follows: (A) for which the outstanding principal
balance at origination of such mortgage loan is greater than or equal to 80.01%
and up to and including 89.99% of the lesser of the Appraised Value and the
sales price, such mortgage loan is covered in an amount equal to at least 22.00%
of the Allowable Claim, (B) for which the outstanding principal balance at
origination of such mortgage loan is at least 90.00% and up to and including
95.00% of the lesser of the Appraised Value and the sales price, such mortgage
loan is covered in an amount equal to at least 22.00% of the Allowable Claim and
(C) for which the outstanding principal balance at origination of such mortgage
loan is at least 95.01% and up to and including 97.00% of the lesser of the
Appraised Value and the sales price, such mortgage loan is covered in an amount
equal to at least 35.00% of the Allowable Claim.
With respect to the Radian Lender-Paid PMI Policy, the premium will be
payable by the Master Servicer out of interest collections on the mortgage loans
at a rate equal to the related Radian PMI Rate. The Radian PMI Rates for the
sample mortgage loans will range from 0.28% per annum to 1.94% per annum of the
Stated Principal Balance of the related Radian PMI Insured Loan.
To the extent of a default by Radian under the Radian Lender-Paid PMI
Policy, the Master Servicer will use its best efforts to find a replacement
policy with substantially similar terms, with the approval of the Bond Insurer.
See "Primary Mortgage Insurance, Hazard Insurance; Claims Thereunder --
Hazard Insurance Policies" in the Prospectus.
Sample Mortgage Loan Characteristics
The statistical information included in this prospectus supplement with
respect to the mortgage loans is based on a pool of 3,865 sample mortgage loans,
88.85% of which are in Loan Group 1 and 11.15% of which are in Loan Group 2.
References to percentages of the sample mortgage loans unless otherwise noted
are calculated based on the aggregate principal balance of the sample mortgage
loans as of the Cut-off Date.
The original mortgages for some of the mortgage loans have been, or in the
future may be, at the sole discretion of the Master Servicer, recorded in the
name of Mortgage Electronic Registration Systems, Inc., or MERS, solely as
nominee for the Seller and its successors and assigns, and subsequent
assignments of those mortgages have been, or in the future may be, at the sole
discretion of the Master Servicer, registered electronically through the MERS(R)
System. In some other cases, the original mortgage was recorded in the name of
the originator of the mortgage loan, record ownership was later assigned to
MERS, solely as nominee for the owner of the mortgage loan, and subsequent
assignments of the mortgage were, or in the future may be, at the sole
discretion of the Master Servicer, registered electronically through the MERS(R)
System. For each of these mortgage loans, MERS serves as mortgagee of record on
the mortgage solely as a nominee in an administrative capacity on behalf of the
indenture trustee, and does not have any interest in the mortgage loan. Some of
the Sample Group 1 Loans and sample Group 2 Loans were recorded in the name of
MERS. For additional information regarding the recording of mortgages in the
name of MERS see "Yield on the Securities--Yield Sensitivity of the Grantor
Trust Certificates" in this prospectus supplement.
S-26
Loan Group 1
The sample Group 1 Loans had an aggregate principal balance as of the
Cut-off Date of approximately $818,715,284, after application of scheduled
payments due on or before the Cut-off Date, whether or not received. All of the
sample Group 1 Loans are secured by first liens on the related mortgaged
property.
The average principal balance of the sample Group 1 Loans at origination
was approximately $247,501. No sample Group 1 Loan had a principal balance at
origination of greater than approximately $1,500,000 or less than approximately
$15,000. The average principal balance of the sample Group 1 Loans as of the
Cut-off Date was approximately $246,156. No sample Group 1 Loan had a principal
balance as of the Cut-off Date of greater than approximately $1,500,000 or less
than approximately $48.
As of the Cut-off Date, the sample Group 1 Loans had mortgage rates
ranging from approximately 3.000% per annum to approximately 15.250% per annum
and the weighted average mortgage rate was approximately 5.533% per annum. The
weighted average remaining term to stated maturity of the sample Group 1 Loans
was approximately 355 months as of the Cut-off Date. None of the sample Group 1
Loans will have a first Due Date prior to January 1, 1994, or after November 1,
2003, or will have a remaining term to maturity of less than 91 months or
greater than 360 months as of the Cut-off Date. The latest maturity date of any
sample Group 1 Loan is October 1, 2033.
Approximately 43.09% and 3.28% of the sample Group 1 Loans have initial
interest only periods of five and ten years, respectively.
The loan-to-value ratio of a mortgage loan secured by a first lien is
equal to the ratio, expressed as a percentage, of the principal amount of the
loan at origination, to the lesser of the appraised value of the related
mortgaged property at the time of origination and the sales price. The weighted
average of the loan-to-value ratios at origination of the sample Group 1 Loans
was approximately 78.42%. No loan-to-value ratio at origination of any sample
Group 1 Loan was greater than approximately 100.00% or less than approximately
16.67%.
None of the sample Group 1 Loans are buydown mortgage loans.
None of the Group 1 Loans will be a "high-cost home loan" as defined in
the Georgia Fair Lending Act, in New York Predatory Lending Law, codified as
N.Y. Banking Law ss.6-I, N.Y. Gen. Bus. Law ss.771-a, and N.Y. Real Prop. Acts
Law ss.1302, in the Arkansas Home Loan Protection Act or in the Kentucky Revised
Statutes ss.360.100.
None of the Group 1 Loans will be subject to the Home Ownership and Equity
Protection Act of 1994 or any comparable state law.
Approximately 99.82% of the sample Group 1 Loans (other than the Seasoned
Mortgage Loans in Loan Group 1) have not reached their first adjustment date as
of the Closing Date.
Approximately 70.44% of the sample Group 1 Loans provide for prepayment
charges.
Approximately 17.98% and 5.35% of the sample Group 1 Loans are covered by
a Primary Insurance Policy and the Radian Lender-Paid PMI Policy, respectively.
For the sample Group 1 Loans, the weighted average of the Radian PMI Rates for
the mortgage loans covered by the Radian Lender-Paid PMI Policy is approximately
0.901% per annum.
S-27
Set forth below is a description of certain additional characteristics of
the sample Group 1 Loans as of the Cut-off Date, except as otherwise indicated.
All percentages of the sample Group 1 Loans are approximate percentages by
aggregate principal balance as of the Cut-off Date, except as otherwise
indicated. Dollar amounts and percentages may not add up to totals due to
rounding.
S-28
Principal Balances at Origination
Percentage of
Original Number of Aggregate Cut-off Date
Sample Group 1 Loan Sample Unpaid Aggregate
Principal Balances ($) Group 1 Loans Principal Balance Principal Balance
- ---------------------------------------- ------------- ----------------- -----------------
0.01 - 50,000.00 ............ 75 $ 2,511,956 0.31%
50,000.01 - 100,000.00 ............ 277 21,408,667 2.61
100,000.01 - 150,000.00 ............ 544 67,714,181 8.27
150,000.01 - 200,000.00 ............ 547 94,883,929 11.59
200,000.01 - 250,000.00 ............ 499 111,807,093 13.66
250,000.01 - 300,000.00 ............ 464 126,504,521 15.45
300,000.01 - 350,000.00 ............ 276 89,189,510 10.89
350,000.01 - 400,000.00 ............ 223 83,456,222 10.19
400,000.01 - 450,000.00 ............ 129 54,831,411 6.70
450,000.01 - 500,000.00 ............ 114 54,027,268 6.60
500,000.01 - 550,000.00 ............ 54 28,552,340 3.49
550,000.01 - 600,000.00 ............ 41 23,600,476 2.88
600,000.01 - 650,000.00 ............ 43 27,193,661 3.32
650,000.01 - 700,000.00 ............ 8 5,473,012 0.67
700,000.01 - 750,000.00 ............ 10 7,347,345 0.90
750,000.01 - 800,000.00 ............ 4 3,092,227 0.38
800,000.01 - 850,000.00 ............ 6 4,981,567 0.61
850,000.01 - 900,000.00 ............ 2 1,760,000 0.21
900,000.01 - 950,000.00 ............ 1 940,000 0.11
950,000.01 - 1,000,000.00 ............ 7 6,823,398 0.83
1,100,000.01 - 1,150,000.00 ............ 1 1,116,500 0.14
1,450,000.01 - 1,500,000.00 ............ 1 1,500,000 0.18
------- ------------- -------
Total ........................... 3,326 $ 818,715,284 100.00%
======= ============= =======
The average principal balance of the sample Group 1 Loans at origination
was approximately $247,501.
S-29
Principal Balances as of the Cut-off Date
Percentage of
Aggregate Cut-off Date
Current Sample Group 1 Loan Number of Sample Unpaid Aggregate
Principal Balances ($) Group 1 Loans Principal-Balance Principal Balance
- ---------------------------------------- ---------------- ----------------- -----------------
0.01 - 50,000.00 ............ 84 $ 2,888,161 0.35%
50,000.01 - 100,000.00 ............ 286 22,710,816 2.77
100,000.01 - 150,000.00 ............ 543 68,432,148 8.36
150,000.01 - 200,000.00 ............ 542 94,725,964 11.57
200,000.01 - 250,000.00 ............ 495 111,383,661 13.60
250,000.01 - 300,000.00 ............ 460 125,679,924 15.35
300,000.01 - 350,000.00 ............ 280 90,706,183 11.08
350,000.01 - 400,000.00 ............ 218 81,828,722 9.99
400,000.01 - 450,000.00 ............ 128 54,487,868 6.66
450,000.01 - 500,000.00 ............ 112 53,491,310 6.53
500,000.01 - 550,000.00 ............ 54 28,552,340 3.49
550,000.01 - 600,000.00 ............ 41 23,600,476 2.88
600,000.01 - 650,000.00 ............ 43 27,193,661 3.32
650,000.01 - 700,000.00 ............ 8 5,473,012 0.67
700,000.01 - 750,000.00 ............ 10 7,347,345 0.90
750,000.01 - 800,000.00 ............ 4 3,092,227 0.38
800,000.01 - 850,000.00 ............ 6 4,981,567 0.61
850,000.01 - 900,000.00 ............ 2 1,760,000 0.21
900,000.01 - 950,000.00 ............ 1 940,000 0.11
950,000.01 - 1,000,000.00 ............ 7 6,823,398 0.83
1,100,000.01 - 1,150,000.00 ............ 1 1,116,500 0.14
1,450,000.01 - 1,500,000.00 ............ 1 1,500,000 0.18
------- ------------- -------
Total ........................... 3,326 $ 818,715,284 100.00%
======= ============= =======
As of the Cut-off Date, the average current principal balance of the
sample Group 1 Loans will be approximately $246,156.
S-30
Mortgage Rates
Percentage of
Aggregate Cut-off Date
Number of Sample Unpaid Aggregate
Mortgage Rates (%) Group 1 Loans Principal-Balance Principal Balance
- ---------------------------------------- ---------------- ----------------- -----------------
3.000 - 3.499 ........................ 9 $ 2,385,093 0.29%
3.500 - 3.999 ........................ 87 28,629,617 3.50
4.000 - 4.499 ........................ 238 69,499,451 8.49
4.500 - 4.999 ........................ 655 189,947,407 23.20
5.000 - 5.499 ........................ 586 160,852,566 19.65
5.500 - 5.999 ........................ 569 147,776,463 18.05
6.000 - 6.499 ........................ 320 71,941,088 8.79
6.500 - 6.999 ........................ 289 63,336,227 7.74
7.000 - 7.499 ........................ 131 27,196,048 3.32
7.500 - 7.999 ........................ 130 22,653,431 2.77
8.000 - 8.499 ........................ 63 9,600,909 1.17
8.500 - 8.999 ........................ 66 8,380,963 1.02
9.000 - 9.499 ........................ 43 5,170,306 0.63
9.500 - 9.999 ........................ 64 5,618,992 0.69
10.000 - 10.499 ........................ 20 2,111,417 0.26
10.500 - 10.999 ........................ 17 1,302,283 0.16
11.000 - 11.499 ........................ 15 1,081,802 0.13
11.500 - 11.999 ........................ 11 674,367 0.08
12.000 - 12.499 ........................ 1 27,102 0.00
12.500 - 12.999 ........................ 2 40,862 0.00
13.000 - 13.499 ........................ 3 133,493 0.02
13.500 - 13.999 ........................ 2 67,451 0.01
14.000 - 14.499 ........................ 3 191,478 0.02
15.000 - 15.499 ........................ 2 96,469 0.01
------- ------------- -------
Total ........................... 3,326 $ 818,715,284 100.00%
======= ============= =======
The weighted average mortgage rate of the sample Group 1 Loans was
approximately 5.533% per annum.
S-31
Next Adjustment Date
Percentage of
Aggregate Cut-off Date
Number of Sample Unpaid Aggregate
Next Adjustment Date Group 1 Loans Principal Balance Principal Balance
- ---------------------------------------- ---------------- ----------------- -----------------
October 1, 2003 ........................ 96 $ 14,868,924 1.82%
November 1, 2003 ....................... 78 9,857,251 1.20
December 1, 2003 ....................... 86 10,435,403 1.27
January 1, 2004 ........................ 275 61,131,280 7.47
February 1, 2004 ....................... 422 106,993,324 13.07
March 1, 2004 .......................... 272 58,757,954 7.18
April 1, 2004 .......................... 29 6,876,265 0.84
June 1, 2004 ........................... 1 113,473 0.01
August 1, 2004 ......................... 1 40,088 0.00
September 1, 2004 ...................... 2 208,384 0.03
October 1, 2004 ........................ 1 260,892 0.03
January 1, 2005 ........................ 1 115,563 0.01
February 1, 2005 ....................... 3 706,666 0.09
March 1, 2005 .......................... 1 111,087 0.01
May 1, 2005 ............................ 5 842,871 0.10
June 1, 2005 ........................... 29 7,471,613 0.91
July 1, 2005 ........................... 348 85,911,648 10.49
August 1, 2005 ......................... 743 185,174,235 22.62
September 1, 2005 ...................... 185 43,847,685 5.36
October 1, 2005 ........................ 24 5,882,900 0.72
June 1, 2006 ........................... 5 1,497,527 0.18
July 1, 2006 ........................... 94 27,521,785 3.36
August 1, 2006 ......................... 155 46,439,586 5.67
September 1, 2006 ...................... 65 15,396,467 1.88
October 1, 2006 ........................ 10 2,689,900 0.33
March 1, 2008 .......................... 3 601,130 0.07
April 1, 2008 .......................... 4 874,503 0.11
May 1, 2008 ............................ 2 199,471 0.02
June 1, 2008 ........................... 29 6,482,725 0.79
July 1, 2008 ........................... 108 32,521,393 3.97
August 1, 2008 ......................... 227 79,447,227 9.70
September 1, 2008 ...................... 9 2,270,208 0.28
October 1, 2008 ........................ 3 401,500 0.05
July 1, 2010 ........................... 1 358,698 0.04
August 1, 2010 ......................... 8 2,080,658 0.25
August 1, 2013 ......................... 1 325,000 0.04
------- ------------- -------
Total ............................. 3,326 $ 818,715,284 100.00%
======= ============= =======
As of the Cut-off Date, the weighted average remaining months to the next
adjustment date of the sample Group 1 Loans will be approximately 24 months.
S-32
Gross Margin
Percentage of
Aggregate Cut-off Date
Number of Sample Unpaid Aggregate
Range of Gross Margins (%) Group 1 Loans Principal Balance Principal Balance
- ---------------------------------------- ---------------- ----------------- -----------------
2.000 - 2.249 .......................... 11 $ 3,119,765 0.38%
2.250 - 2.499 .......................... 329 115,678,847 14.13
2.500 - 2.749 .......................... 90 22,603,539 2.76
2.750 - 2.999 .......................... 298 79,293,486 9.69
3.000 - 3.249 .......................... 639 170,811,213 20.86
3.250 - 3.499 .......................... 985 245,784,145 30.02
3.500 - 3.749 .......................... 262 63,904,656 7.81
3.750 - 3.999 .......................... 198 41,599,529 5.08
4.000 - 4.249 .......................... 74 15,316,484 1.87
4.250 - 4.499 .......................... 64 12,272,911 1.50
4.500 - 4.749 .......................... 52 8,860,039 1.08
4.750 - 4.999 .......................... 48 7,835,448 0.96
5.000 - 5.249 .......................... 53 9,513,450 1.16
5.250 - 5.499 .......................... 41 6,739,482 0.82
5.500 - 5.749 .......................... 24 2,687,959 0.33
5.750 - 5.999 .......................... 37 3,754,320 0.46
6.000 - 6.249 .......................... 23 1,981,823 0.24
6.250 - 6.499 .......................... 20 1,982,604 0.24
6.500 - 6.749 .......................... 15 1,012,078 0.12
6.750 - 6.999 .......................... 21 1,265,341 0.15
7.000 - 7.249 .......................... 17 1,273,526 0.16
7.250 - 7.499 .......................... 7 473,804 0.06
7.500 - 7.749 .......................... 6 249,253 0.03
7.750 - 7.999 .......................... 3 112,511 0.01
8.250 - 8.499 .......................... 3 214,522 0.03
8.500 - 8.749 .......................... 2 173,104 0.02
8.750 - 8.999 .......................... 2 104,976 0.01
9.000 - 9.249 .......................... 1 80,952 0.01
9.250 - 9.499 .......................... 1 15,517 0.00
------- ------------- -------
Total ............................ 3,326 $ 818,715,284 100.00%
======= ============= =======
As of the Cut-off Date, the weighted average Gross Margin of the sample
Group 1 Loans will be approximately 3.220% per annum.
S-33
Maximum Mortgage Rate
Percentage of
Aggregate Cut-off Date
Number of Sample Unpaid Aggregate
Range of Maximum Mortgage Rate (%) Group 1 Loans Principal Balance Principal Balance
- ---------------------------------------- ---------------- ----------------- -----------------
8.000 - 8.499 ...................... 1 $ 336,000 0.04%
8.500 - 8.999 ...................... 15 5,620,593 0.69
9.000 - 9.499 ...................... 25 9,549,232 1.17
9.500 - 9.999 ...................... 114 41,555,900 5.08
10.000 - 10.499 ...................... 252 75,103,448 9.17
10.500 - 10.999 ...................... 592 169,537,753 20.71
11.000 - 11.499 ...................... 497 137,734,233 16.82
11.500 - 11.999 ...................... 471 126,982,016 15.51
12.000 - 12.499 ...................... 238 57,809,537 7.06
12.500 - 12.999 ...................... 290 65,708,752 8.03
13.000 - 13.499 ...................... 132 26,998,053 3.30
13.500 - 13.999 ...................... 124 22,082,565 2.70
14.000 - 14.499 ...................... 88 15,226,393 1.86
14.500 - 14.999 ...................... 136 23,162,604 2.83
15.000 - 15.499 ...................... 103 16,395,169 2.00
15.500 - 15.999 ...................... 105 12,511,441 1.53
16.000 - 16.499 ...................... 41 4,234,583 0.52
16.500 - 16.999 ...................... 37 3,900,330 0.48
17.000 - 17.499 ...................... 23 1,783,176 0.22
17.500 - 17.999 ...................... 18 1,282,709 0.16
18.000 - 18.499 ...................... 7 303,587 0.04
18.500 - 18.999 ...................... 5 329,932 0.04
19.000 - 19.499 ...................... 1 63,906 0.01
19.500 - 19.999 ...................... 4 142,624 0.02
20.000 or greater ...................... 7 360,745 0.04
------- ------------- -------
Total ............................... 3,326 $ 818,715,284 100.00%
======= ============= =======
As of the Cut-off Date, the weighted average Maximum Mortgage Rate of the
sample Group 1 Loans will be approximately 11.674% per annum.
S-34
Initial Fixed-Rate Period
Percentage of
Aggregate Cut-off Date
Number of Sample Unpaid Aggregate
Initial Fixed-Rate Period Group 1 Loans Principal Balance Principal Balance
- ---------------------------------------- ---------------- ----------------- -----------------
One Month .............................. 6 $ 549,035 0.07%
Six Months ............................. 885 214,718,978 26.23
One Year ............................... 4 267,551 0.03
Two Years .............................. 1634 373,558,561 45.63
Three Years ............................ 394 102,539,763 12.52
Five Years ............................. 393 124,317,040 15.18
Seven Years ............................ 9 2,439,356 0.30
Ten Years .............................. 1 325,000 0.04
------- ------------- -------
Total ............................. 3,326 $ 818,715,284 100.00%
======= ============= =======
Initial Rate Cap
Percentage of
Aggregate Cut-off Date
Number of Sample Unpaid Aggregate
Initial Rate Cap Group 1 Loans Principal Balance Principal Balance
- ---------------------------------------- ---------------- ----------------- -----------------
0.00 ................................... 6 $ 549,035 0.07%
1.00 ................................... 836 209,272,687 25.56
1.50 ................................... 74 7,358,940 0.90
2.00 ................................... 15 2,698,324 0.33
3.00 ................................... 2,130 512,051,009 62.54
5.00 ................................... 189 60,810,080 7.43
6.00 ................................... 76 25,975,209 3.17
------- ------------- -------
Total ............................. 3,326 $ 818,715,284 100.00%
======= ============= =======
Periodic Rate Cap
Percentage of
Aggregate Cut-off Date
Number of Sample Unpaid Aggregate
Periodic Rate Cap Group 1 Loans Principal Balance Principal Balance
- ---------------------------------------- ---------------- ----------------- -----------------
0.00 ................................... 6 $ 549,035 0.07%
1.00 ................................... 3,088 776,070,350 94.79
1.50 ................................... 131 15,726,856 1.92
2.00 ................................... 101 26,369,043 3.22
------- ------------- -------
Total ............................. 3,326 $ 818,715,284 100.00%
======= ============= =======
S-35
Original Loan-to-Value Ratios
Percentage of
Aggregate Cut-off Date
Number of Sample Unpaid Aggregate
Original Loan-to-Value Ratios (%) Group 1 Loans Principal-Balance Principal Balance
- ---------------------------------------- ---------------- ----------------- -----------------
0.01 - 20.00 ......................... 2 $ 682,833 0.08%
20.01 - 25.00 ......................... 2 296,991 0.04
25.01 - 30.00 ......................... 9 2,397,698 0.29
30.01 - 35.00 ......................... 9 2,206,190 0.27
35.01 - 40.00 ......................... 16 2,257,425 0.28
40.01 - 45.00 ......................... 24 5,019,350 0.61
45.01 - 50.00 ......................... 36 8,546,898 1.04
50.01 - 55.00 ......................... 47 11,135,352 1.36
55.01 - 60.00 ......................... 65 14,769,424 1.80
60.01 - 65.00 ......................... 129 34,112,243 4.17
65.01 - 70.00 ......................... 334 90,815,654 11.09
70.01 - 75.00 ......................... 182 46,032,692 5.62
75.01 - 80.00 ......................... 1,491 406,938,564 49.70
80.01 - 85.00 ......................... 91 21,462,222 2.62
85.01 - 90.00 ......................... 550 107,793,192 13.17
90.01 - 95.00 ......................... 317 60,605,968 7.40
95.01 - 100.00 ......................... 22 3,642,590 0.44
------- ------------- -------
Total ................................ 3,326 $ 818,715,284 100.00%
======= ============= =======
The minimum and maximum loan-to-value ratios of the sample Group 1 Loans
at origination were approximately 16.67% and 100.00%, respectively, and the
weighted average of the loan-to-value ratios of the sample Group 1 Loans at
origination was approximately 78.42%.
Occupancy Types
Percentage of
Aggregate Cut-off Date
Number of Sample Unpaid Aggregate
Occupancy Type Group 1 Loans Principal Balance Principal Balance
- ---------------------------------------- ---------------- ----------------- -----------------
Owner Occupied ......................... 2,785 $ 706,308,246 86.27%
Investor ............................... 464 94,184,142 11.50
Second Home ............................ 77 18,222,896 2.23
------- ------------- -------
Total .......................... 3,326 $ 818,715,284 100.00%
======= ============= =======
Occupancy type is based on the representation of the borrower at the time
of origination.
S-36
Mortgage Loan Program and Documentation Type
Percentage of
Number of Aggregate Cut-off Date
Sample Unpaid Aggregate
Loan Program and Documentation Type Group 1 Loans Principal Balance Principal Balance
- ------------------------------------------------ ------------- ----------------- -----------------
Progressive Series Program (Limited
(Stated) Documentation) ........................ 1,302 $354,181,578 43.26%
Progressive Series Program
(Full Documentation) ........................... 704 175,165,214 21.40
Progressive Express(TM)Program
(Non Verified Assets) .......................... 595 123,725,446 15.11
Progressive Express(TM)Program
(Verified Assets) .............................. 439 103,695,768 12.67
Progressive Express(TM)No Doc
Program (No Documentation) ..................... 202 46,537,126 5.68
Progressive Express(TM)Program No Doc
Program (Verified Assets) ...................... 51 11,469,197 1.40
Progressive Series Program (Lite/Reduced
Documentation SE)) ............................. 12 896,529 0.11
Progressive Series Program (Full
Income/Stated Assets Documentation) ............ 3 863,575 0.11
Progressive Series Program (Alternative
Documentation) ................................. 8 819,172 0.10
Progressive Series Program (No Income/No
Assets Documentation) .......................... 3 490,107 0.06
Progressive Series Program (No Ratio) .......... 6 486,571 0.06
Progressive Express(TM)Program (Express
Self-Employed) ................................. 1 385,000 0.05
------- ------------ -------
Total .................................. 3,326 $818,715,284 100.00%
======= ============ =======
See "--Underwriting Standards" below for a detailed description of the
Seller's loan programs and documentation requirements.
S-37
Risk Categories
Percentage of
Aggregate Cut-off Date
Number of Sample Unpaid Aggregate
Credit Grade Group 1 Loans Principal Balance Principal Balance
- ---------------------------------------- ---------------- ----------------- -----------------
A+(1) .................................. 1,292 $ 370,917,827 45.30%
A (1) .................................. 622 168,587,147 20.59
A-(1) .................................. 166 26,291,059 3.21
B ...................................... 57 4,410,132 0.54
C(1) ................................... 24 1,407,345 0.17
CX(1) .................................. 16 855,814 0.10
Progressive Express(TM)I(2) ............ 549 121,397,184 14.83
Progressive Express(TM)II(2) ........... 481 101,816,255 12.44
Progressive Express(TM)III(2) .......... 57 11,037,109 1.35
Progressive Express(TM)IV(2) ........... 31 6,795,352 0.83
Progressive Express(TM)V(2) ............ 20 3,604,719 0.44
Progressive Express(TM)VI(2) ........... 11 1,595,341 0.19
------- ------------- -------
Total ............................... 3,326 $ 818,715,284 100.00%
======= ============= =======
- ----------
(1) All of these sample Group 1 Loans were reviewed and placed into risk
categories based on the credit standards of the Progressive Series
Program. Credit grades of A+, A, A-, B, C and CX correspond to Progressive
Series I+, I and II, III and III+, IV, V, and VI, respectively. All of the
Seasoned Mortgage Loans in Loan Group 1 have been assigned credit grades
by Impac Funding. All of the mortgage loans originated pursuant to the
Express Priority Refi(TM) Program have been placed in Progressive
Express(TM) Programs II and III.
(2) These sample Group 1 Loans were originated under the Seller's Progressive
Express(TM) Program. The underwriting for these sample Group 1 Loans is
generally based on the borrower's "FICO" score and therefore these sample
Group 1 Loans do not correspond to the alphabetical risk categories listed
above.
See "--Underwriting Standards" below for a description of the
Seller's risk categories.
S-38
Property Types
Percentage of
Aggregate Cut-off Date
Number of Sample Unpaid Aggregate
Property Type Group 1 Loans Principal Balance Principal Balance
- ---------------------------------------- ---------------- ----------------- -----------------
Single-Family .......................... 2,307 $ 563,764,143 68.86%
Condominium ............................ 405 86,695,346 10.59
De Minimis PUD ......................... 257 75,135,007 9.18
Planned Unit Development ............... 177 45,065,639 5.50
Two-Family ............................. 87 22,541,233 2.75
Four-Family ............................ 40 13,842,046 1.69
Hi-Rise Condo .......................... 22 5,644,102 0.69
Three-Family ........................... 29 5,598,880 0.68
Townhouse .............................. 2 428,889 0.05
------- ------------- -------
Total ............................... 3,326 $ 818,715,284 100.00%
======= ============= =======
Geographic Distribution of Mortgaged Properties
Percentage of
Aggregate Cut-off Date
Number of Sample Unpaid Aggregate
State Group 1 Loans Principal Balance Principal Balance
- -------------------------------------------- ---------------- ----------------- -----------------
California ................................. 1,909 $ 565,718,697 69.10%
Florida .................................... 334 58,044,219 7.09
Other (less than 3% in any one state) ...... 1,083 194,952,368 23.81
------- ------------- -------
Total ................................... 3,326 $ 818,715,284 100.00%
======= ============= =======
No more than approximately 0.68% of the sample Group 1 Loans (by aggregate
outstanding principal balance as of the Cut-off Date) are secured by mortgaged
properties located in any one zip code.
Loan Purposes
Percentage of
Aggregate Cut-off Date
Number of Sample Unpaid Aggregate
Loan Purpose Group 1 Loans Principal Balance Principal Balance
- ---------------------------------------- ---------------- ----------------- -----------------
Purchase ............................... 2,016 $ 491,590,203 60.04%
Cash-Out Refinance ..................... 902 216,234,232 26.41
Rate and Term Refinance ................ 408 110,890,849 13.54
------- ------------- -------
Total ............................... 3,326 $ 818,715,284 100.00%
======= ============= =======
S-39
In general, in the case of a mortgage loan made for "rate and term"
refinance purposes, substantially all of the proceeds are used to pay in full
the principal balance of a previous mortgage loan of the mortgagor with respect
to a mortgaged property and to pay origination and closing costs associated with
such refinancing. Mortgage loans made for "cash-out" refinance purposes may
involve the use of the proceeds to pay in full the principal balance of a
previous mortgage loan and related costs except that a portion of the proceeds
are generally retained by the mortgagor for uses unrelated to the mortgaged
property. The amount of these proceeds retained by the mortgagor may be
substantial.
Loan Group 2
The sample Group 2 Loans had an aggregate principal balance as of the
Cut-off Date of approximately $102,725,255, after application of scheduled
payments due on or before the Cut-off Date, whether or not received. All of the
sample Group 2 Loans are secured by first liens on the related mortgaged
property.
The average principal balance of the sample Group 2 Loans at origination
was approximately $191,849. No sample Group 2 Loan had a principal balance at
origination of greater than approximately $991,800 or less than approximately
$10,000. The average principal balance of the sample Group 2 Loans as of the
Cut-off Date was approximately $190,585. No sample Group 2 Loan had a principal
balance as of the Cut-off Date of greater than approximately $989,039 or less
than approximately $4,143.
As of the Cut-off Date, the sample Group 2 Loans had mortgage rates
ranging from approximately 4.625% per annum to approximately 16.990% per annum
and the weighted average mortgage rate was approximately 6.808% per annum. The
weighted average remaining term to stated maturity of the sample Group 2 Loans
was approximately 338 months as of the Cut-off Date. None of the sample Group 2
Loans will have a first Due Date prior to June 1, 1995, or after November 1,
2003, or will have a remaining term to maturity of less than 8 months or greater
than 360 months as of the Cut-off Date. The latest maturity date of any sample
Group 2 Loan is October 1, 2033.
Approximately 3.04% of the sample Group 2 Loans have initial interest only
periods of five years.
The loan-to-value ratio of a mortgage loan secured by a first lien is
equal to the ratio, expressed as a percentage, of the principal amount of the
loan at origination, to the lesser of the appraised value of the related
mortgaged property at the time of origination and the sales price. The weighted
average of the loan-to-value ratios at origination of the sample Group 2 Loans
was approximately 74.24%. No loan-to-value ratio at origination of any sample
Group 2 Loan was greater than approximately 100.00% or less than approximately
26.42%.
Approximately 1.39% of the sample Group 2 Loans (by aggregate outstanding
principal balance as of the Cut-off Date), are High CLTV Loans.
Some of the High CLTV Loans will include provisions allowing the related
borrower to substitute the related mortgaged property. The Servicing Agreement
provides that this substitution will only be permitted if the following
requirements are met:
o the combined loan-to-value ratio of the High CLTV Loan after such
substitution must be less than or equal to the combined loan-to-value ratio
prior to such substitution,
S-40
o the loan-to-value ratio of the obligation secured by a first lien on the
new mortgaged property must be less than or equal to the loan-to-value ratio of
the obligation secured by a first lien on the released mortgaged property at the
time such High CLTV Loan was originated, and
o both the released and the new mortgaged property must be a single-family
owner occupied property.
In addition, the Servicing Agreement will provide that with respect to any
High CLTV Loan the Master Servicer may allow the refinancing of a senior lien on
the related mortgaged property, provided that certain requirements are met,
including, except under certain limited circumstances, that the resulting
combined loan- to-value ratio of such High CLTV Loan is no higher than the
combined loan-to-value ratio prior to such refinancing and the interest rate on
the refinancing senior loan is no higher than the interest rate on the
refinanced senior loan.
Approximately 0.91% of the sample mortgage pool (by aggregate outstanding
principal balance as of the Cut-off Date), are balloon loans. The amount of the
balloon payment on each of these sample mortgage loans is substantially in
excess of the amount of the scheduled monthly payment on such sample mortgage
loan for the period prior to the Due Date of the balloon payment. These sample
mortgage loans have a weighted average remaining term to maturity of
approximately 152 months.
None of the sample Group 2 Loans are buydown mortgage loans.
None of the Group 2 Loans will be a "high-cost home loan" as defined in
the Georgia Fair Lending Act, in New York Predatory Lending Law, codified as
N.Y. Banking Law ss.6-I, N.Y. Gen. Bus. Law ss.771-a, and N.Y. Real Prop. Acts
Law ss.1302, in the Arkansas Home Loan Protection Act or in the Kentucky Revised
Statutes ss.360.100.
None of the Group 2 Loans will be subject to the Home Ownership and Equity
Protection Act of 1994 or any comparable state law.
Approximately 77.36% of the sample Group 2 Loans provide for prepayment
charges.
Approximately 14.19% and 2.95% of the sample Group 2 Loans are covered by
a Primary Insurance Policy and the Radian Lender-Paid PMI Policy, respectively.
For the sample Group 2 Loans, the weighted average of the Radian PMI Rates for
the mortgage loans covered by the Radian Lender-Paid PMI Policy is approximately
0.598% per annum.
Set forth below is a description of certain additional characteristics of
the sample Group 2 Loans as of the Cut-off Date, except as otherwise indicated.
All percentages of the sample Group 2 Loans are approximate percentages by
aggregate principal balance as of the Cut-off Date, except as otherwise
indicated. Dollar amounts and percentages may not add up to totals due to
rounding.
S-41
Principal Balances at Origination
Percentage of
Number of Cut-off Date
Original Sample Group 2 Loan Sample Group 2 Aggregate Unpaid Aggregate
Principal Balances ($) Loans Principal Balance Principal Balance
- ---------------------------------------- -------------- ----------------- -----------------
0.01 - 50,000.00 .............. 84 $ 2,110,000 2.05%
50,000.01 - 100,000.00 .............. 79 6,258,429 6.09
100,000.01 - 150,000.00 .............. 88 11,121,799 10.83
150,000.01 - 200,000.00 .............. 84 14,491,434 14.11
200,000.01 - 250,000.00 .............. 60 13,412,266 13.06
250,000.00 - 300,000.00 .............. 45 12,384,240 12.06
300,000.00 - 350,000.00 .............. 29 9,502,019 9.25
350,000.00 - 400,000.00 .............. 20 7,566,810 7.37
400,000.00 - 450,000.00 .............. 15 6,334,455 6.17
450,000.00 - 500,000.00 .............. 13 6,189,045 6.02
500,000.00 - 550,000.00 .............. 6 3,125,771 3.04
550,000.01 - 600,000.00 .............. 8 4,559,462 4.44
600,000.01 - 650,000.00 .............. 5 3,181,914 3.10
700,000.01 - 750,000.00 .............. 2 1,498,573 1.46
950,000.01 - 1,000,000.00 .............. 1 989,039 0.96
------- ------------- -------
Total ............................. 539 $ 102,725,255 100.00%
======= ============= =======
The average principal balance of the sample Group 2 Loans at origination
was approximately $191,849.
S-42
Principal Balances as of the Cut-off Date
Percentage of
Number of Cut-off Date
Current Sample Group 2 Loan Sample Group 2 Aggregate Unpaid Aggregate
Principal Balances ($) Loans Principal Balance Principal Balance
- ---------------------------------------- -------------- ----------------- -----------------
0.01 - 50,000.00 ................. 85 $ 2,156,819 2.10%
50,000.01 - 100,000.00 ................ 78 6,211,609 6.05
100,000.01 - 150,000.00 ................ 88 11,121,799 10.83
150,000.01 - 200,000.00 ................ 84 14,491,434 14.11
200,000.01 - 250,000.00 ................ 60 13,412,266 13.06
250,000.01 - 300,000.00 ................ 45 12,384,240 12.06
300,000.01 - 350,000.00 ................ 29 9,502,019 9.25
350,000.01 - 400,000.00 ................ 20 7,566,810 7.37
400,000.01 - 450,000.00 ................ 15 6,334,455 6.17
450,000.01 - 500,000.00 ................ 13 6,189,045 6.02
500,000.01 - 550,000.00 ................ 6 3,125,771 3.04
550,000.01 - 600,000.00 ................ 8 4,559,462 4.44
600,000.01 - 650,000.00 ................ 5 3,181,914 3.10
700,000.01 - 750,000.00 ................ 2 1,498,573 1.46
950,000.01 - 1,000,000.00 .............. 1 989,039 0.96
------- ------------- -------
Total ............................. 539 $ 102,725,255 100.00%
======= ============= =======
As of the Cut-off Date, the average current principal balance of the
sample Group 2 Loans will be approximately $190,585.
S-43
Mortgage Rates
Percentage of
Aggregate Cut-off Date
Number of Sample Unpaid Aggregate
Mortgage Rates (%) Group 2 Loans Principal Balance Principal Balance
- ---------------------------------------- ---------------- ----------------- -----------------
4.500 - 4.999 ........................ 1 $ 469,395 0.46%
5.000 - 5.499 ........................ 20 7,430,235 7.23
5.500 - 5.999 ........................ 67 20,967,825 20.41
6.000 - 6.499 ........................ 77 20,175,219 19.64
6.500 - 6.999 ........................ 107 21,338,121 20.77
7.000 - 7.499 ........................ 58 10,659,784 10.38
7.500 - 7.999 ........................ 66 11,469,596 11.17
8.000 - 8.499 ........................ 19 3,252,063 3.17
8.500 - 8.999 ........................ 20 2,951,876 2.87
9.000 - 9.499 ........................ 4 423,511 0.41
9.500 - 9.999 ........................ 4 692,715 0.67
11.500 - 11.999 ........................ 2 64,060 0.06
12.000 - 12.499 ........................ 2 61,447 0.06
12.500 - 12.999 ........................ 6 135,736 0.13
13.000 - 13.499 ........................ 5 169,124 0.16
13.500 - 13.999 ........................ 27 838,357 0.82
14.000 - 14.499 ........................ 19 472,321 0.46
14.500 - 14.999 ........................ 20 705,007 0.69
15.000 - 15.499 ........................ 6 216,518 0.21
15.500 - 15.999 ........................ 6 197,761 0.19
16.000 - 16.499 ........................ 2 30,440 0.03
16.500 - 16.999 ........................ 1 4,143 0.00
------- ------------- -------
Total ........................... 539 $ 102,725,255 100.00%
======= ============= =======
S-44
Original Loan-to-Value Ratios or Combined Loan-to-Value Ratios
Percentage of
Original Loan-to-Value Ratios Number of Cut-off Date
or Combined Loan-to-Value Sample Group 2 Aggregate Unpaid Aggregate
Ratios (%) Loans Principal Balance Principal Balance
- ---------------------------------------- -------------- ----------------- -----------------
25.01 - 30.00 .......................... 2 $ 186,601 0.18%
30.01 - 35.00 .......................... 3 914,618 0.89
35.01 - 40.00 .......................... 6 1,582,083 1.54
40.01 - 45.00 .......................... 9 2,034,954 1.98
45.01 - 50.00 .......................... 10 2,623,000 2.55
50.01 - 55.00 .......................... 16 4,517,392 4.40
55.01 - 60.00 .......................... 19 6,245,754 6.08
60.01 - 65.00 .......................... 15 3,549,931 3.46
65.01 - 70.00 .......................... 84 20,790,474 20.24
70.01 - 75.00 .......................... 22 4,692,101 4.57
75.01 - 80.00 .......................... 157 35,128,380 34.20
80.01 - 85.00 .......................... 11 2,084,194 2.03
85.01 - 90.00 .......................... 59 8,833,881 8.60
90.01 - 95.00 .......................... 37 6,341,432 6.17
95.01 - 100.00 ......................... 41 1,774,587 1.73
100.01 - 105.00 ........................ 4 126,745 0.12
105.01 - 110.00 ........................ 3 105,845 0.10
110.01 - 115.00 ........................ 9 234,646 0.23
115.01 - 120.00 ........................ 8 271,066 0.26
120.01 - 125.00 ........................ 23 657,074 0.64
130.01 - 135.00 ........................ 1 30,498 0.03
------- ------------- -------
Total ............................. 539 $ 102,725,255 100.00%
======= ============= =======
The minimum and maximum loan-to-value ratios or combined loan-to-value
ratios of the sample Group 2 Loans at origination were approximately 26.42% and
132.30%, respectively, and the weighted average of the loan-to-value ratios or
combined loan-to-value ratios of the sample Group 2 Loans at origination was
approximately 74.24%.
Occupancy Types
Percentage of
Number of Cut-off Date
Sample Group 2 Aggregate Unpaid Aggregate
Occupancy Type Loans Principal Balance Principal Balance
- ---------------------------------------- -------------- ----------------- -----------------
Owner Occupied ......................... 441 $ 83,505,800 81.29%
Investor ............................... 92 18,133,379 17.65
Second Home ............................ 6 1,086,076 1.06
------- ------------- -------
Total ............................. 539 $ 102,725,255 100.00%
======= ============= =======
Occupancy type is based on the representation of the borrower at the time
of origination.
S-45
Mortgage Loan Program and Documentation Type
Percentage of
Number of Cut-off Date
Sample Group 2 Aggregate Unpaid Aggregate
Loan Program and Documentation Type Loans Principal Balance Principal Balance
- -------------------------------------------------- -------------- ----------------- -----------------
Progressive Series Program (Limited
(Stated) Documentation) .......................... 188 $ 44,521,853 43.34%
Progressive Series Program
(Full Documentation) ............................. 185 28,836,794 28.07
Progressive Express(TM)Program
(Non Verified Assets) ............................ 77 14,090,149 13.72
Progressive Express(TM)Program
(Verified Assets) ................................ 35 7,299,069 7.11
Progressive Express(TM)No Doc
Program (No Documentation) ....................... 34 5,528,114 5.38
Progressive Express(TM)Program No Doc
Program (Verified Assets) ........................ 6 1,083,869 1.06
Progressive Series Program (Full
Income/Stated Assets Documentation ............... 4 610,269 0.59
Progressive Series Program (No Ratio) ............ 1 318,144 0.31
Progressive Series Program (Alternative
Documentation) ................................... 8 257,282 0.25
Progressive Series Program (Lite Income/Stated
Assets Documentation) ............................ 1 179,711 0.17
------- ------------- -------
Total ....................................... 539 $ 102,725,255 100.00%
======= ============= =======
See "--Underwriting Standards" below for a detailed description of the
Seller's loan programs and documentation requirements.
S-46
Risk Categories
Percentage of
Number of Cut-off Date
Sample Group 2 Aggregate Unpaid Aggregate
Credit Grade Loans Principal Balance Principal Balance
- ---------------------------------------- -------------- ----------------- -----------------
A+(1) .................................. 233 $ 59,205,533 57.63%
A(1) ................................... 144 17,043,217 16.59
A-(1) .................................. 19 1,243,156 1.21
B(1) ................................... 1 20,357 0.02
Progressive Express(TM) I(2) ........... 69 11,135,476 10.84
Progressive Express(TM) II(2) .......... 69 13,406,151 13.05
Progressive Express(TM) III(2) ......... 2 427,644 0.42
Progressive Express(TM) V(2) ........... 2 243,720 0.24
------- ------------- -------
Total ............................. 539 $ 102,725,255 100.00%
======= ============= =======
(1) All of these sample Group 2 Loans were reviewed and placed into risk
categories based on the credit standards of the Progressive Series
Program. Credit grades of A+, A, A- and B correspond to Progressive Series
I+, I and II, III and III+, and IV, respectively. All of the Seasoned
Mortgage Loans in Loan Group 2 have been assigned credit grades by Impac
Funding. All of the mortgage loans originated pursuant to the Express
Priority Refi(TM) Program have been placed in Progressive Express(TM)
Programs II and III.
(2) These sample Group 2 Loans were originated under the Seller's Progressive
Express(TM) Program. The underwriting for these sample Group 2 Loans is
generally based on the borrower's "FICO" score and therefore these sample
Group 2 Loans do not correspond to the alphabetical risk categories listed
above.
See "--Underwriting Standards" below for a description of
the Seller's risk categories.
S-47
Property Types
Percentage of
Number of Cut-off Date
Sample Group 2 Aggregate Unpaid Aggregate
Property Type Loans Principal Balance Principal Balance
- ---------------------------------------- -------------- ----------------- -----------------
Single Family .......................... 436 $ 81,087,203 78.94%
Condominium ............................ 34 5,434,453 5.29
Four-Family ............................ 18 4,789,026 4.66
Planned Unit Development ............... 19 4,038,402 3.93
Two-Family ............................. 15 2,959,519 2.88
De Minimis PUD ......................... 10 2,569,128 2.50
Three-Family ........................... 6 1,706,151 1.66
Rowhouse Condo ......................... 1 141,373 0.14
------- ------------- -------
Total ............................. 539 $ 102,725,255 100.00%
======= ============= =======
Geographic Distribution of Mortgaged Properties
Percentage of
Number of Cut-off Date
Sample Group 2 Aggregate Unpaid Aggregate
State Loans Principal Balance Principal Balance
- ---------------------------------------- -------------- ----------------- -----------------
California ............................. 266 $ 62,077,834 60.43%
Florida ................................ 79 11,383,703 11.08
Texas .................................. 27 3,881,690 3.78
New York ............................... 9 3,351,473 3.26
Other (less than 3% in any one state) .. 158 22,030,556 21.45
------- ------------- -------
Total ............................. 539 $ 102725255 100.00%
======= ============= =======
No more than approximately 1.78% of the sample Group 2 Loans (by aggregate
outstanding principal balance as of the Cut-off Date) are secured by mortgaged
properties located in any one zip code.
Loan Purposes
Percentage of
Number of Cut-off Date
Sample Group 2 Aggregate Unpaid Aggregate
Loan Purpose Loans Principal Balance Principal Balance
- ---------------------------------------- -------------- ----------------- -----------------
Purchase ............................... 205 $ 37,964,035 36.96%
Cash-Out Refinance ..................... 191 37,196,285 36.21
Rate and Term Refinance ................ 95 26,113,740 25.42
Debt Consolidation ..................... 48 1,451,195 1.41
------- ------------- -------
Total ............................. 539 $ 102,725,255 100.00%
======= ============= =======
S-48
Underwriting Standards
General
Approximately 7.80% of the sample mortgage loans are Seasoned Mortgage
Loans. Approximately 55.92% and 63.67% of the sample Non-Seasoned Mortgage Loans
in Loan Group 1 and Loan Group 2, respectively, were underwritten pursuant to,
or in accordance with, the standards of the Seller's Progressive Series Program
which is described below. Approximately 26.29% and 25.26% of the sample
Non-Seasoned Mortgage Loans in Loan Group 1 and Loan Group 2, respectively, were
underwritten pursuant to, or in accordance with, the standards of the
Progressive Express(TM) Program, each of which is described below. Approximately
17.79% and 11.07% of the sample Non-Seasoned Mortgage Loans in Loan Group 1 and
Loan Group 2 were acquired in bulk purchases from underwriters, the underwriting
standards of whom were reviewed for acceptability by the Master Servicer.
Details of Specific Programs
The following provisions apply to all of the Non-Seasoned Mortgage Loans
originated under the Seller's Progressive Series Program and Progressive
Express(TM) Program.
Eligibility. The Seller generally performs a pre-funding audit on each
mortgage loan. This audit includes a review for compliance with the related
program parameters and accuracy of the legal documents.
Quality Control. The Seller performs a post-closing quality control review
on a minimum of 25% of the mortgage loans originated or acquired under the
programs described below for complete re-verification of employment, income and
liquid assets used to qualify for such mortgage loan. Such review also includes
procedures intended to detect evidence of fraudulent documentation and/or
imprudent activity during the processing, funding, servicing or selling of the
mortgage loan. Verification of occupancy and applicable information is made by
regular mail.
Variations. The Seller uses the following parameters as guidelines only.
On a case-by-case basis, the Seller may determine that the prospective mortgagor
warrants an exception outside the standard program guidelines. An exception may
be allowed if the loan application reflects certain compensating factors,
including instances where the prospective mortgagor:
(1) has demonstrated an ability to save and devote a greater portion of
income to basic housing needs;
(2) may have a potential for increased earnings and advancement because
of education or special job training, even if the prospective
mortgagor has just entered the job market;
(3) has demonstrated an ability to maintain a debt free position;
(4) may have short term income that is verifiable but could not be
counted as stable income because it does not meet the remaining term
requirements; and
(5) has net worth substantial enough to suggest that repayment of the
loan is within the prospective mortgagor's ability.
Appraisals. The Seller does not publish an approved appraiser list for the
conduit seller. Each conduit seller maintains its own list of appraisers,
provided that each appraiser must:
S-49
(6) be a state licensed or certified appraiser;
(7) meet the independent appraiser requirements for staff appraisers,
or, if appropriate, be on a list of appraisers specified by the
Office of the Comptroller of the Currency, the Board of Governors of
the Federal Reserve System, the FDIC and the Office of Thrift
Supervision under their respective real estate appraisal regulations
adopted in accordance with Title XI of the Financial Institutions
Reform Recovery and Enforcement Act of 1989, regardless of whether
the seller is subject to those regulations;
(8) be experienced in the appraisal of properties similar to the type
being appraised;
(9) be actively engaged in appraisal work; and
(10) subscribe to a code of ethics that is at least as strict as the code
of the American Institute of Real Estate Appraisers or the Society
of Real Estate Appraisers.
With respect to the Seller's Progressive Series Program or Progressive
Express(TM) Program in general one full appraisal is required on each loan. In
addition, an automated valuation model, or AVM, or a quantitative appraisal
report (Fannie Mae Form 2055), or a Hansen Pro, or enhanced desk review is
obtained either (a) when the loan-to-value ratio is 90.01% to 95% or (b) when
the property has multiple units and the loan-to-value ratio is greater than 80%,
or (c) the loan is a Progressive Express(TM) No Doc Program and the
loan-to-value ratio is 80.01% to 90%. In addition, a quantitative appraisal
report (Fannie Mae Form 2055), or a Hansen Pro, or enhanced desk review is
obtained when the loan is a Progressive Express(TM) No Doc Program and the
loan-to-value ratio is equal to or greater than 90.01%. An enhanced field review
is also required when the loan-to-value ratio is equal to or greater than 95.01%
or when the loan amount is above $500,000. At the underwriter's discretion, any
one of the above appraisal reviews may be required when program parameters do
not require an appraisal review.
The Progressive Series Program
General. The underwriting guidelines utilized in the Progressive Series
Program, as developed by the Seller, are intended to assess the borrower's
ability and willingness to repay the mortgage loan obligation and to assess the
adequacy of the mortgaged property as collateral for the mortgage loan. The
Progressive Series Program is designed to meet the needs of borrowers with
excellent credit, as well as those whose credit has been adversely affected. The
Progressive Series Program consists of seven mortgage loan programs. Each
program has different credit criteria, reserve requirements, qualifying ratios
and loan-to-value ratio restrictions. Series I is designed for credit history
and income requirements typical of "A" credit borrowers. In the event a borrower
does not fit the Series I criteria, the borrower's mortgage loan is placed into
either Series II, III, III+, IV, V or VI, depending on which series' mortgage
loan parameters meets the borrower's unique credit profile. Series II, III,
III+, IV, V or VI allow for less restrictive standards because of certain
compensating or offsetting factors such as a lower loan-to-value ratio, verified
liquid assets, job stability, pride of ownership and, in the case of refinanced
mortgage loans, length of time owning the mortgaged property. The philosophy of
the Progressive Series Program is that no single borrower characteristic should
automatically determine whether an application for a mortgage loan should be
approved or disapproved. Lending decisions are based on a risk analysis
assessment after the review of the entire mortgage loan file. Each mortgage loan
is individually underwritten with emphasis placed on the overall quality of the
mortgage loan. The Progressive Series I, II, III, III+, IV, V and VI Program
borrowers are required to have debt service-to-income ratios within the range of
45% to 60% calculated on the basis of monthly income and depending on the
loan-to-value ratio of the mortgage loan.
S-50
Under the Progressive Series Program, the Seller underwrites one- to
four-family mortgage loans with loan-to-value ratios at origination of up to
100%, depending on, among other things, a borrower's credit history, repayment
ability and debt service-to-income ratio, as well as the type and use of the
mortgaged property. Second lien financing of the mortgaged properties may be
provided by lenders other than the Seller at origination; however, the combined
loan-to-value ratio ("CLTV") generally may not exceed 100%. Generally, when the
LTV is 97.00% to 100.00%, second liens are ineligible. Mortgage loans with a LTV
of up to 95.00% on owner-occupied mortgage properties are allowed a CLTV of up
to 100%. Generally, second home-owner-occupied and non-owner-occupied mortgage
properties are allowed a maximum CLTV of up to 90%. Under the Seller's 80/20
program, which is available to Progressive Series I and II borrowers only, the
Seller may allow second lien financing at the same time as the origination of
the first lien with CLTVs of up to 100%.
The mortgage loans in the Progressive Series Program generally bear rates
of interest that are greater than those which are originated in accordance with
Freddie Mac and Fannie Mae standards. In general, the maximum amount for
mortgage loans originated under the Progressive Series Program is $750,000;
however, the Seller may approve mortgage loans in excess of such amount on a
case-by-case basis where generally the maximum loan amount is up to $1 million,
owner-occupied, with a minimum credit score of 681, the maximum loan-to-value is
80% on full documentation and 75% on reduced documentation, the CLTV is 100% on
full documentation and 90% on reduced documentation and the property must be a
single-family residence, excluding condominiums.
All of the mortgage loans originated under the Progressive Series I, II
and III Programs are prior approved and/or underwritten either by employees of
the Seller or underwritten by contracted mortgage insurance companies or
delegated conduit sellers. Generally all of the mortgage loans originated under
the Series III+, IV, V and VI Programs are prior approved and/or underwritten by
employees of the Seller and underwritten by designated conduit sellers. All of
the Series I Program mortgage loans and all of the Series II and III Program
mortgage loans with loan-to-value ratios at origination in excess of 80% are
insured by a Radian, Republic Mortgage Insurance Corporation, General Electric
Mortgage Insurance, PMI or United Guaranty Insurance. The borrower can elect to
have primary mortgage insurance covered by their loan payment. If the borrower
makes such election, a loan-to-value ratio between 80.01% and 90.00% requires
22% coverage, a loan-to-value ratio between 90.01% and 95.00% requires 30%
coverage and a loan-to-value ratio between 95.01% and 100% requires 35%
coverage. If the borrower does not make such election, the related mortgage loan
will be covered by a modified primary mortgage insurance policy issued by Radian
to the Seller providing coverage in the amount of (i) 22% coverage for a
mortgage loan with a loan-to-value ratio between 80.01% and 90.00%, (ii) 30%
coverage for a mortgage loan with a loan-to-value ratio between 90.01% and
95.00% and (iii) 35% coverage for a mortgage loan with a loan-to-value ratio
between 95.01% and 100%. None of the Series III+ Program mortgage loans with
loan-to-value ratios at origination in excess of 80% will be insured by a
Primary Insurance Policy. All Series IV, V and VI Program mortgage loans have
loan-to-value ratios at origination which are less than or equal to 85% and do
not require a Primary Insurance Policy. The Seller receives verbal verification
from the conduit seller of employment prior to funding or acquiring each
Progressive Series Program mortgage loan.
Full/Alternative Documentation and Reduced Documentation Progressive
Series Programs. Each prospective borrower completes a mortgage loan application
which includes information with respect to the applicant's liabilities, income,
credit history, employment history and personal information. The Seller requires
a credit report on each applicant from a credit reporting company. The report
typically contains information relating to credit history with local and
national merchants and lenders, installment debt payments and any record of
defaults, bankruptcies, repossessions or judgments.
S-51
The Progressive Series Program allows for approval of an application
pursuant to the (a) Full/Alternative Documentation Program, or (b) the Limited
Documentation Program or the "No Income, No Assets" Program (any of the
foregoing, a "Reduced Documentation Program"). The Full/Alternative
Documentation Program requires the following documents: (i) Uniform Residential
Loan Application (Fannie Mae Form 1003 or Freddie Mac Form 65), (ii) Statement
of Assets and Liabilities (Fannie Mae Form 1003A or Freddie Mac Form 65A), (iii)
In-File Tri-Merged Credit Report or Residential Mortgage Credit Report with
records obtained from at least two separate repositories, (iv) Verification of
Employment Form providing a complete two year employment history, (v)
Verification of Deposit Form for all liquid assets, verifying minimum cash
reserves based upon the loan-to-value ratio and borrower's income, and (vi) a
Uniform Residential Appraisal Report (Fannie Mae Form 1004 or Freddie Mac Form
70). The Full/Alternative Documentation Program allows for the use of certain
alternative documents in lieu of the Verification of Deposit Form and
Verification of Employment Form. These include W-2 Statements, tax returns and
one pay check from the most recent full month for verification of income and the
most recent one month personal bank statement for verification of liquid assets.
In addition, self-employed borrowers must provide federal tax returns for the
previous two years, including K-1's, federal business tax returns for two years,
year-to-date financial statements and a signed IRS Form 4506 (Request for Copy
of Tax Returns).
Under the Full Income Documentation/Stated Assets Program available to
borrowers in the Series I, II and III programs, the borrower provides full
income and employment documentation information, which the Seller is required to
verify. The borrower states assets on the Residential Loan Application (Fannie
Mae Form 1003 or Freddie Mac Form 65); however, verification of assets is not
required. With respect to the Full Income Documentation/Stated Assets Program, a
mortgage loan is allowed to have an LTV at origination of up to 100%.
Under each Reduced Documentation Program (other than the Lite
Income/Stated Assets Program), which is available to borrowers in every
Progressive Series Program, the Seller obtains from prospective borrowers either
a verification of deposits or bank statements for the most recent one-month
period preceding the mortgage loan application. Under this program the borrower
provides income information on the mortgage loan application, and the debt
service-to-income ratio is calculated. However, income is not verified.
Permitted maximum loan-to-value ratios (including secondary financing) under the
Reduced Documentation Program generally are limited.
Under the "No Ratio" program available to borrowers in the Series I and II
program, the borrower provides no income information, but provides employment
and asset information, which the Seller is required to verify, on the mortgage
loan application. With respect to the "No Ratio" program, a mortgage loan with a
Loan-to-Value Ratio at origination in excess of 80% is generally not eligible.
Under the "No Income, No Assets" Program available to borrowers in the
Series I Program, the borrower provides no income information, but provides
employment and unverified asset information on the mortgage loan application.
With respect to the "No Income, No Assets" Program, a mortgage loan with a
Loan-to-Value Ratio at origination in excess of 80% is generally not eligible.
Under the Lite Income/Stated Assets Program (LISA), which is available to
borrowers for the Series I, II and III programs, the Seller obtains from
prospective salaried borrowers a 30-day pay stub and from prospective
self-employed borrowers, bank statements for the most recent twelve-month period
preceding the mortgage loan application and a year-to-date profit and loss
statement. Under this program, the borrower provides income information on the
mortgage loan application, and the debt service-to-income ratio is provided. The
maximum loan-to-value ratio under this program is 95%.
S-52
Under all Progressive Series Programs, the Seller or the conduit seller
verbally verifies the borrower's employment prior to closing. Credit history,
collateral quality and the amount of the down payment are important factors in
evaluating a mortgage loan submitted under one of the Reduced Documentation
Programs. In addition, in order to qualify for a Reduced Documentation Program,
a mortgage loan must conform to certain criteria regarding maximum loan amount,
property type and occupancy status. Mortgage loans having a loan-to-value ratio
at origination in excess of 90% where the related mortgaged property is used as
a second or vacation home or is a non-owner occupied home are not eligible for
the Series I, II or III Reduced Documentation Program. In general, the maximum
loan amount for mortgage loans underwritten in accordance with Series I, II and
III Reduced Documentation Program is $750,000 for purchase transactions,
rate-term transactions and cash out refinance transactions. The maximum loan
amount is $500,000 for mortgage loans underwritten in accordance with Series
III+ Reduced Documentation Program, $400,000 for mortgage loans underwritten in
accordance with Series IV and V Reduced Documentation Program, and $175,000 for
mortgage loans underwritten in accordance with Series VI Reduced Documentation
Program, however, exceptions are granted on a case-by-case basis. Secondary
financing is allowed in the origination of the Reduced Documentation Program but
must meet the CLTV requirements described above and certain other requirements
for subordinate financing. In all cases, liquid assets must support the level of
income of the borrower as stated in proportion to the type of employment of the
borrower. Full Documentation is requested by the underwriter if it is the
judgment of the underwriter that the compensating factors are insufficient for
loan approval.
Credit History. The Progressive Series Program defines an acceptable
credit history in each of the Series I, II and III Programs. The Series I
Program defines an acceptable credit history as a borrower who has "A" credit,
meaning a minimum of four trade accounts, including a mortgage and/or rental
history, along with one non-traditional trade account to satisfy five trades,
with 24 months credit history, no 30-day delinquent mortgage payments in the
last 12 months, and a maximum of one 30-day delinquent payments on any revolving
credit account within the past 12 months and a maximum of one 30-day delinquent
payment on installment credit account within the past 12 months. However, if the
Loan-to-Value Ratio of the loan is 90% or less, consumer credit is disregarded.
Bankruptcies must be at least 24 months old, fully discharged and the borrower
must have re-established or re-affirmed satisfactory credit history.
Foreclosures are not allowed in the past 3 years. No judgments, suits, tax
liens, other liens, collections or charge-offs in the past 24 months, generally
older items must be paid prior to or at closing.
With respect to the Series II Program, a borrower must have a minimum of
four trade accounts including a mortgage and/or rental history, along with one
non-traditional trade account to satisfy five trades, and no 30-day delinquent
mortgage payments in the past 12 months. A borrower may not have more than three
30-day delinquent payments on any revolving credit account and a maximum of
three 30-day delinquent payments within the past 12 months on any installment
credit account. However, if the Loan-to-Value Ratio of the loan is 90% or less,
consumer credit is disregarded. All bankruptcies must be at least 24 months old,
fully discharged and the borrower must have re-established or re-affirmed
satisfactory credit history. Foreclosures are not allowed in the past 3 years.
No judgments, suits, tax liens, other liens, collections or charge-offs in the
past 24 months, generally older items must be paid prior to or at closing.
With respect to the Series III Program, a borrower must have a minimum of
four trade accounts including a mortgage and/or rental history, along with one
non-traditional trade account to satisfy five trades, with 24-months credit
history, a borrower may not have more than two 30-day delinquent mortgage
payments within the past 12 months. Bankruptcies must be at least 24 months old,
fully discharged and the borrower must have re-established or re-affirmed
satisfactory credit history. Foreclosures are not allowed in the past 3 years.
No judgments, suits, tax liens, other liens, collections or charge-offs in the
past 24 months, generally older items must be paid prior to or at closing.
S-53
With respect to the Series III+ Program, a borrower must have a minimum of
two trade accounts including a mortgage and/or rental history, along with one
non-traditional trade account to satisfy three trades, with 12 months credit
history, a borrower may not have more than two 30-day delinquent mortgage
payments within the past 12 months. Any open judgments, suits, liens,
collections and charge-offs not to exceed $500 cumulatively within the past 12
months generally are paid prior to or at closing. Bankruptcies must be at least
24 months old, fully discharged and the borrower must have re-established or
re-affirmed satisfactory credit history. Foreclosures are not allowed during the
past 24 months. Tax liens are not allowed within the last 12 months.
With respect to the Series IV Program, a borrower must have a minimum of
two trade accounts including a mortgage and/or rental history, along with one
non-traditional trade account to satisfy three trades, with 12 months credit
history, a borrower may not have more than four 30-day delinquent mortgage
payments or three 30-day delinquent mortgage payments and one 60-day delinquent
mortgage payment within the past 12 months. Any open judgments, suits, liens,
collections and charge-offs not to exceed $1,000 cumulatively within the past 12
months generally are paid prior to or at closing. Bankruptcies must be at least
18 months old, fully discharged and the borrower must have re-established or
re-affirmed satisfactory credit history. Foreclosures are not allowed in the
past 18 months. Tax liens are not allowed within the last 12 months.
With respect to the Series V Program, a borrower must have a minimum of
two trade accounts including a mortgage and/or rental history, along with one
non-traditional trade account to satisfy three trades, with 12 months credit
history, a borrower may not have more than five 30-day delinquent mortgage
payments or two 60-day delinquent mortgage payments or one 90-day delinquent
mortgage payment within the past 12 months. Any open judgments, suits, liens,
collections and charge-offs not to exceed $4,000 cumulatively within the past 12
months generally are paid prior to or at closing. Bankruptcies must be at least
12 months old, fully discharged and the borrower must have re-established or
re-affirmed satisfactory credit history. Foreclosures are not allowed in the
past 12 months. Tax liens are not allowed within the last 12 months.
With respect to the Series VI program, a borrower must have a minimum of
two trade accounts including a mortgage and/or rental history, along with one
non-traditional trade account to satisfy three trades, with 12 months credit
history, a borrower may not have more than one 90-day delinquent mortgage
payment within the past 12 months. Any open judgments, suits, liens, collections
and charge-offs generally are paid prior to or at closing. Bankruptcies must be
at least 6 months old. Foreclosures are not allowed in the past 6 months. Tax
liens are not allowed within the last 6 months.
The Progressive Express(TM) Programs
Progressive Express(TM) Programs with Documentation
General. In July 1996, the Seller developed an additional series to the
Progressive Program, the "Progressive Express(TM) Program." The concept of the
Progressive Express(TM) Program is to underwrite the loan focusing on the
borrower's Credit Score, ability and willingness to repay the mortgage loan
obligation, and assess the adequacy of the mortgaged property as collateral for
the loan. The Credit Score is an electronic evaluation of past and present
credit accounts on the borrower's credit bureau report. This includes all
reported accounts as well as public records and inquiries. The Progressive
Express(TM) Program offers six levels of mortgage loan programs. The Progressive
Express(TM) Program has a minimum Credit Score that must be met by the
borrower's primary wage earner and does not allow for exceptions to the Credit
Score requirement. The Credit Score requirement is as follows: Progressive
Express(TM) I above 680, Progressive Express(TM) II 680- 620, Progressive
Express(TM) III 619-601, Progressive Express(TM) IV 600-581,
S-54
Progressive Express(TM) V 580- 551, and Progressive Express(TM) VI 550-500. Each
Progressive Express(TM) program has different Credit Score requirements, credit
criteria, reserve requirements, and loan-to-value ratio restrictions.
Progressive Express(TM) I is designed for credit history and income requirements
typical of "A+" credit borrowers. In the event a borrower does not fit the
Progressive Express(TM) I criteria, the borrower's mortgage loan is placed into
either Progressive Express(TM) II, III, IV, V, or VI, depending on which series'
mortgage loan parameters meets the borrowers unique credit profile.
All of the mortgage loans originated under the Progressive Express(TM)
program are prior approved and/or underwritten either by employees of the Seller
or underwritten by contracted mortgage insurance companies or delegated conduit
sellers. Under the Progressive Express(TM) Program, the Seller underwrites
single family dwellings with loan-to-value ratios at origination of up to 100%.
In general, the maximum amount for mortgage loans originated under the
Progressive Express Program is $750,000; however, the Seller may approve
mortgage loans on a case-by-case basis where generally the maximum loan amount
is up to $1 million, owner-occupied, with a minimum credit score of 681. The
borrower must disclose employment and assets which both are verified by the
Seller, the loan-to-value must not be greater than 70%, the combined LTV must
not be greater than 80% and the property must be single-family residence,
excluding condominiums. For loans that exceed a 97% loan-to-value ratio to a
maximum of a 100% loan-to-value ratio, (i) such loans must be for purchase
transactions only, (ii) the borrower must have a minimum credit score of 700,
(iii) the mortgaged property must be an owner-occupied, primary residence, (iv)
the borrower must state income and assets on the Residential Loan Application
and meet a debt ratio not to exceed 50% and (v) such loan must be underwritten
utilizing the Impac Direct Access System for Lending (IDASL) automated
underwriting system. Condominiums are not allowed on the 100% loan-to-value
ratio feature. In order for the property to be eligible for the Progressive
Express(TM) Program, it must be a single family residence (1 unit only) or on
Express I and II 2-units, condominium, and/or planned unit development (PUD).
Progressive Express(TM) I loans are permitted on non-owner occupied properties
subject to a maximum loan-to-value ratio of 90%. Progressive Express(TM) II
loans are permitted on non-owner occupied properties subject to a maximum
loan-to-value ratio of 80%. Progressive Express(TM) I loans are permitted on
owner occupied properties subject to a maximum loan-to-value ratio of 95% and a
maximum combined loan-to-value ratio of 100%. Progressive Express(TM) II loans
are permitted on owner occupied properties subject to a maximum loan-to-value
ratio of 80% and a maximum combined loan-to-value ratio of 90%. Progressive
Express(TM) Programs I through IV loans with loan-to-value ratios at origination
in excess of 80% are insured by MGIC, Radian or RMIC. The borrower can elect to
have primary mortgage insurance covered by their loan payment. If the borrower
makes such election, a loan-to- value ratio between 80.01% and 89.99% requires
22% coverage, and a loan-to-value ratio between 90.00% and 95.00% requires 30%
coverage and a loan-to-value ratio between 95.01% and 100% requires 35%
coverage. If the borrower does not make such election, the related mortgage loan
will be covered by a modified primary mortgage insurance policy issued by Radian
to the Seller providing coverage in the amount of (i) 22% for a mortgage loan
with a loan-to-value ratio between 80.01% and 89.99%, (ii) 30% for a mortgage
loan with a loan-to-value ratio between 90% and 95% and (iii) 35% for mortgage
loan with a loan-to-value ratio between 95.01% and 100%.
Each borrower completes a Residential Loan Application (Fannie Mae Form
1003 or Freddie Mac Form 65). The borrower must disclose employment and assets
on the application, however, there is no verification of the information. If the
borrower elects to verify assets, the Seller obtains from the borrower either
verification of deposits or bank statements for the most recent one-month period
preceding the mortgage loan application. The conduit seller obtains a verbal
verification of employment on each borrower.
The Seller uses the foregoing parameters as guidelines only. The Seller
may include certain provisions in the note that the Seller may not enforce. Full
documentation is requested by the underwriter if it is the judgment of the
underwriter that the compensating factors are insufficient for loan approval
under the Progressive Express(TM) Product Line.
S-55
Credit History. The Progressive Express(TM) Program defines an acceptable
credit history in each of the programs I through VI. Progressive Express(TM) I
defines an acceptable credit history as a borrower who has "A+" credit, meaning
a minimum of four trade accounts including a mortgage and/or rental history,
along with one non-traditional trade account to satisfy five trades, no 30-day
delinquent mortgage payments in the past 12 months, and a maximum of one 30-day
delinquent payments on any revolving credit accounts within the past 12 months
and one 30-day delinquent payment on any installment credit accounts within the
past 12 months. However, if the Loan-to-Value Ratio of the loan is 90% or less,
consumer credit is disregarded. All bankruptcies must be at least 24 months old,
fully discharged and the borrower must have re-established or re- affirmed
satisfactory credit history. Foreclosures are not allowed in the past 3 years.
No judgments, suits, tax liens, other liens, collections or charge-offs in the
past 24 months, generally older items must be paid prior to or at closing.
With respect to Progressive Express(TM) II, a borrower must have a minimum
of four trade accounts including a mortgage and/or rental history, along with
one non-traditional trade account to satisfy five trades, and no late mortgage
payments for the past 12 months. In addition, a borrower must have a maximum of
two 30-day delinquent payments on any revolving credit accounts within the past
12 months and one 30-day delinquent payment on any installment credit accounts
within the past 12 months. However, if the loan-to-value ratio of the loan is
90% or less, revolving and installment credit is disregarded. All bankruptcies
must be at least 24 months old, fully discharged and the borrower must have
re-established or re-affirmed satisfactory credit history. Foreclosures are not
allowed in the past 3 years. No judgments, suits, tax liens, other liens,
collections or charge-offs allowed within the past 24 months, generally older
items must be paid prior to or at closing.
With respect to Progressive Express(TM) III, a borrower must have a
minimum of four trade accounts including a mortgage and/or rental history, along
with one non-traditional trade account to satisfy five trades and no more than
one 30-day late mortgage payment for the past 12 months. All bankruptcies must
be at least 24 months old, fully discharged and the borrower must have
re-established or re-affirmed satisfactory credit history. Foreclosures are not
allowed in the past 3 years. No judgments, suits, tax liens, other liens,
collections or charge-offs allowed within the past 24 months, generally older
items must be paid prior to or at closing.
With respect to Progressive Express(TM) IV, a borrower must have a minimum
of four trade accounts including a mortgage and/or rental history, along with
one non-traditional trade account to satisfy five trades, no more than two
30-day late mortgage payments for the past 12 months. All bankruptcies must be
at least 24 months old, fully discharged and the borrower must have
re-established or re-affirmed satisfactory credit history. Foreclosures are not
allowed in the past 3 years. No judgments, suits, tax liens, other liens,
collections or charge-offs allowed within the past 24 months, generally older
items must be paid prior to or at closing.
With respect to Progressive Express(TM) V, a borrower must have a minimum
of two trade accounts including a mortgage and/or rental history, along with one
non-traditional trade account to satisfy three trades, with 12 months credit
history, no more than two 30-day late mortgage payments in the past 12 months.
All bankruptcies must be at least 24 months old, fully discharged and the
borrower must have re-established or re- affirmed satisfactory credit history.
Foreclosures are not allowed in the past 24 months. Judgments, suits, liens,
collections or charge-offs, may not exceed $500 cumulatively within the past 12
months, and must be paid prior to or at closing. Tax liens are not allowed
within the last 12 months.
With respect to Progressive Express(TM) VI, a borrower must have a minimum
of two trade accounts including a mortgage and/or rental history, along with one
non-traditional trade account to satisfy three trades, with 12 months credit
history, no more than four 30-day or three 30-day and one 60-day late mortgage
S-56
payments in the past 12 months. All bankruptcies must be at least 18 months old
and fully discharged. Foreclosures are not allowed in the past 18 months.
Judgments, suits, liens, collections or charge-offs, may not exceed $1,000
cumulatively within the past 12 months, and must be paid prior to or at closing.
Tax liens are not allowed within the last 12 months.
Progressive Express(TM) No Doc Program
In May, 1999, the Seller introduced a Progressive Express(TM) No Doc
Program (the "No Doc program"). The concept of the No Doc program is to
underwrite the loan focusing on the borrower's credit score, ability and
willingness to repay the mortgage loan obligation, and assess the adequacy of
the mortgaged property as collateral for the loan. The No Doc program has a
minimum credit score and does not allow for exceptions to the credit score. The
credit score requirement is as follows: 681 for Progressive Express(TM) No Doc I
and 620 for Progressive Express(TM) No Doc II. Each program has a different
credit score requirement and credit criteria.
All of the mortgage loans originated under the Progressive Express(TM) No
Doc program are prior approved and/or underwritten either by employees of the
Seller or underwritten by contracted mortgage insurance companies or delegated
conduit sellers. Under the Progressive Express(TM) No Doc program, the Seller
employees or contracted mortgage insurance companies or delegated conduit
sellers underwrite single family dwellings with loan-to-value ratios at
origination up to 95% and $400,000. In order for the property to be eligible for
the Progressive Express(TM) No Doc program, it must be a single family residence
(single unit only), condominium and/or planned unit development (PUD) or 2-units
to a maximum loan-to-value ratio of 80%. The borrower can elect to have primary
mortgage insurance covered by their loan payment. If the borrower makes such
election, the loan-to-value ratios at origination in excess of 80%, are insured
by MGIC, Radian or RMIC. For loan-to-value ratios of 80.01% to 89.99%, mortgage
insurance coverage is 22% and for loan-to-value ratios of 90% to 95%, mortgage
insurance coverage is 30%. If the borrower does not make such election, the
related mortgage loan will be covered by a modified primary insurance policy
issued by Radian to the Seller providing coverage in the amount of 22% for a
mortgage loan with a loan-to-value ratio between 80.01% and 89.99% and 30% for a
mortgage loan with a loan-to-value ratio of 90% to 95%.
Each borrower completes a Residential Loan Application (Fannie Mae Form
1003 or Freddie Mac Form 65). The borrower does not disclose income, employment,
or assets and a Verbal Verification of Employment is not provided. Generally,
borrowers provide a daytime telephone number as well as an evening telephone
number. If the prospective borrower elects to state and verify assets on the
Residential Loan Application, Seller obtains from prospective borrowers either a
verification of deposits or bank statements for the most recent one-month period
preceding the mortgage loan application.
Credit History. The Progressive Express(TM) No Doc program defines an
acceptable credit history as follows: Progressive Express(TM) No Doc I defines
an acceptable credit history as a borrower who has "A+" credit, meaning a
minimum of four trade accounts including a mortgage and/or rental history, along
with one non-traditional trade account to satisfy five trades, and no 30-day
delinquent mortgage payments in the past 12 months and a maximum of one 30-day
delinquent payments on any revolving credit accounts within the past 12 months
and one 30-day delinquent payment on any installment credit accounts within the
past 12 months. However, if the loan-to-value ratio of the loan is 90% or less,
revolving and installment credit is disregarded. All bankruptcies must be at
least 24 months old, fully discharged and the borrower must have re-established
or re-affirmed a satisfactory credit history. Foreclosures are not allowed in
the past 3 years. No judgments, suits, tax liens, other liens, collections or
charge-offs are allowed within the past 24 months, generally older items must be
paid prior to or at closing.
S-57
With respect to Progressive Express(TM) No Doc II a borrower must have a
minimum of four trade accounts including a mortgage and/or rental history, along
with one non-traditional trade account to satisfy five trades, and no late
mortgage payments for the past 12 months and a maximum of two 30-day delinquent
payments on any revolving credit accounts and one 30-day delinquent payment on
any installment credit accounts within the past 12 months. However, if the
loan-to-value ratio of the loan is 90% or less, revolving and installment credit
is disregarded. All bankruptcies must be at least 24 months old, fully
discharged and the borrower must have re-established or re-affirmed satisfactory
credit history. Foreclosures are not allowed in past 3 years. No judgments,
suits, tax liens, other liens, collections or charge-offs allowed within the
past 24 months, generally older items must be paid prior to or at closing.
In addition, see "The Mortgage Pools -- Underwriting Standards" in the
prospectus.
Delinquency and Foreclosure Experience of the Seller
Based solely upon information provided by the Seller, the following tables
summarize, for the respective dates indicated, the delinquency, foreclosure,
bankruptcy and REO property status with respect to all one- to four-family
residential mortgage loans originated or acquired by the Seller which were being
master serviced by the Seller at the dates indicated. The indicated periods of
delinquency are based on the number of days past due on a contractual basis. The
monthly payments under all of such mortgage loans are due on the first day of
each calendar month. A mortgage loan is considered "30 days" delinquent if a
payment due on the first of the month is not received by the second day of the
following month, and so forth.
A substantial majority of mortgage loan sales by the Seller during 1999
were made on a servicing- released basis. The following information does not
include statistical information on such mortgage loans. As a result, the
aggregate principal balance of non-delinquent mortgage loans serviced by the
Seller is not as high as it would otherwise be, resulting in increased
delinquency percentages for the total portfolio of mortgage loans serviced as of
December 31, 1999.
S-58
At December 31, 1999 At December 31, 2000 At December 31, 2001
Number Principal Number Principal Number Principal
of Loans Amount of Loans Amount of Loans Amount
-------- --------- -------- --------- -------- ---------
(Dollars in thousands) (Dollars in thousands) (Dollars in thousands)
Total Loan
Outstanding ......... 26,002 $2,878,701 31,971 $4,042,859 37,972 $5,568,740
DELINQUENCY(1)(2)
Period of
Delinquency:
30-59 Days ..... 1,103 $ 124,875 1,941 $ 242,081 2,064 $ 287,616
60-89 Days ..... 286 27,997 529 65,809 531 72,460
90- Days or More 369 21,113 266 25,952 705 72,544
------ ---------- ------ ---------- ------ ----------
Total
Delinquencies ....... 1,758 $ 173,985 2,736 $ 333,842 3,300 $ 432,620
====== ========== ====== ========== ====== ==========
Delinquencies as a
Percentage of Total
Loans Outstanding ... 6.76% 6.04% 8.56% 8.26% 8.69% 7.77%
At December 31, 2002 At June 30, 2003
Number Principal Number Principal
of Loans Amount of Loans Amount
-------- --------- -------- ---------
(Dollars in thousands) (Dollars in thousands)
Total Loan
Outstanding ......... 48,520 $8,694,474 54,142 $10,443,935
DELINQUENCY(1)(2)
Period of
Delinquency:
30-59 Days ..... 2,331 $ 383,855 2,314 $ 378,240
60-89 Days ..... 644 100,878 697 112,183
90- Days or More 616 71,466 599 84,910
------ ---------- ------ -----------
Total
Delinquencies ....... 3,591 $ 556,200 3,610 $ 575,333
====== ========== ====== ===========
Delinquencies as a
Percentage of Total
Loans Outstanding ... 7.40% 6.40% 6.67% 5.51%
- ----------
(1) The delinquency balances, percentages and numbers set forth under this
heading exclude (a) delinquent mortgage loans that were in foreclosure at
the respective dates indicated ("Foreclosure Loans"), (b) delinquent
mortgage loans as to which the related mortgagor was in bankruptcy
proceedings at the respective dates indicated ("Bankruptcy Loans") and (c)
REO properties that have been purchased upon foreclosure of the related
mortgage loans. All Foreclosure Loans, Bankruptcy Loans and REO properties
have been segregated into the sections of the table entitled "Foreclosures
Pending," "Bankruptcies Pending" and "REO Properties," respectively, and
are not included in the "30-59 Days," "60-89 Days," "90 Days or More" and
"Total Delinquencies" sections of the table. See the section of the table
entitled "Total Delinquencies plus Foreclosures Pending and Bankruptcies
Pending" for total delinquency balances, percentages and numbers which
include Foreclosure Loans and Bankruptcy Loans, and see the section of the
table entitled "REO Properties" for delinquency balances, percentages and
numbers related to REO properties that have been purchased upon
foreclosure of the related mortgage loans.
(2) A substantial majority of mortgage loan sales by the Seller during 1999
were made on a servicing-released basis. The information on this table
does not include statistical information on such mortgage loans. As a
result, the aggregate principal balance of non-delinquent mortgage loans
serviced by the Seller is not as high as it would otherwise be, resulting
in increased delinquency percentages for the total portfolio of mortgage
loans serviced as of December 31, 1999.
S-59
At December 31, 1999 At December 31, 2000 At December 31, 2001
Number Principal Number Principal Number Principal
of Loans Amount of Loans Amount of Loans Amount
-------- --------- -------- --------- -------- ---------
(Dollars in thousands) (Dollars in thousands) (Dollars in thousands)
FORECLOSURES PENDING(3) .......... 334 $ 46,969 396 $ 57,133 931 $132,571
Foreclosures Pending as a
Percentage of Total Loans
Outstanding ...................... 1.28% 1.63% 1.24% 1.41% 2.45% 2.38%
BANKRUPTCIES PENDING(4) .......... 419 $ 33,188 227 $ 22,556 259 $ 22,054
Bankruptcies Pending as a
Percentage of Total Loans
Outstanding ...................... 1.61% 1.15% 0.71% 0.56% 0.68% 0.40%
Total Delinquencies plus
Foreclosures Pending and
Bankruptcies Pending ............. 2,511 $254,142 3,359 $413,531 4,490 $587,245
Total Delinquencies plus
Foreclosures Pending and
Bankruptcies Pending as a
Percentage of Total Loans
Outstanding ...................... 9.66% 8.83% 10.51% 10.23% 11.82% 10.55%
REO PROPERTIES(5) ................ 119 $ 13,882 105 $ 13,944 223 $ 37,631
REO Properties as a Percentage ... 0.46% 0.48% 0.33% 0.34% 0.59% 0.68%
At December 31, 2002 At June 30, 2003
Number Principal Number Principal
of Loans Amount of Loans Amount
-------- --------- -------- ---------
(Dollars in thousands) (Dollars in thousands)
FORECLOSURES PENDING(3) .......... 1,452 $212,309 1,659 $249,431
Foreclosures Pending as a
Percentage of Total Loans
Outstanding ...................... 2.99% 2.44% 3.06% 2.39%
BANKRUPTCIES PENDING(4) .......... 328 $ 26,402 307 $ 21,982
Bankruptcies Pending as a
Percentage of Total Loans
Outstanding ...................... 0.68% 0.30% 0.57% 0.21%
Total Delinquencies plus
Foreclosures Pending and
Bankruptcies Pending ............. 5,371 $794,910 5,576 $846,747
Total Delinquencies plus
Foreclosures Pending and
Bankruptcies Pending as a
Percentage of Total Loans
Outstanding ...................... 11.07% 9.14% 10.30% 8.11%
REO PROPERTIES(5) ................ 329 $ 53,055 250 $ 40,611
REO Properties as a Percentage ... 0.68% 0.61% 0.46% 0.39%
- ----------
(3) Mortgage loans that are in foreclosure but as to which the mortgaged
property has not been liquidated at the respective dates indicated. It is
generally the Master Servicer's policy, with respect to mortgage loans
originated by the Seller, to commence foreclosure proceedings when a
mortgage loan is 60 days or more delinquent. However, the Master Servicer
may delay the foreclosure process as a result of loss mitigation efforts.
(4) Mortgage loans as to which the related mortgagor is in bankruptcy
proceedings at the respective dates indicated.
(5) REO properties that have been purchased upon foreclosure of the related
mortgage loans, including mortgaged properties that were purchased by the
Seller after the respective dates indicated.
The above data on delinquency, foreclosure, bankruptcy and REO property
status as of December 31, 1999, include mortgage loans which were sold
servicing-released by the Seller, but for which the servicing had not yet been
transferred as of such date.
S-60
A substantial majority of mortgage loan sales by the Seller during 1999
were made on a servicing- released basis. The following information does not
include statistical information on such mortgage loans. As a result, the
aggregate principal balance of non-delinquent mortgage loans serviced by the
Seller is not as high as it would otherwise be, resulting in increased loss
percentages for the total portfolio of mortgage loans serviced as of December
31, 1999.
Based solely on information provided by the Seller, the following table
presents the changes in the Seller's charge-offs and recoveries for the periods
indicated.
S-61
Twelve Months Twelve Months Twelve Months Twelve Months Six Months
Ended Ended Ended Ended Ended
December 31, December 31, December 31, December 31, June 30,
1999 2000 2001 2002 2003
------------- ------------- ------------- ------------- -----------
(Dollars in (Dollars in (Dollars in (Dollars in (Dollars in
thousands) thousands) thousands) thousands) thousands)
Charge-offs:
Mortgage Loan Properties ........ $7,026 $12,785 $ 6,475 $2,416 $1,033
REO Properties ...................... 2,165 4,779 4,584 4,043 5,912
Recoveries:
Mortgage Loan Properties ........ 713 409 849 1,509 183
REO Properties .................. 0 0 0 0 0
Net charge-offs ..................... 8,478 17,155 10,210 4,950 6,762
Ratio of net charge-offs
to average loans
outstanding during the indicated
period** ............................ 0.34%* 0.51%* 0.21%* 0.07%* 0.14%*
- ----------
* The ratio of net charge-offs was based upon annualized charge-offs for the
indicated periods. The average loans outstanding was computed using
monthly balances for the indicated periods.
** The information on this table does not include statistical information on
mortgage loans which have recently been sold on a servicing-released basis
by the Seller to third parties. In addition, it does not include
statistical information for mortgage loans for which the servicing rights
were sold by the Seller in 1999. As a result, the aggregate principal
balance of non-delinquent mortgage loans serviced has decreased, resulting
in increased loss percentages for mortgage loans serviced as of December
31, 1998 and December 31, 1999.
S-62
The above data on charge-offs and recoveries are calculated on the basis
of the total mortgage loans originated or acquired by the Seller. However, the
total amount of mortgage loans on which the above data are based includes many
mortgage loans which were not, as of the respective dates indicated, outstanding
long enough to give rise to some of the indicated charge-offs. In the absence of
such mortgage loans, the charge-off percentages indicated above would be higher
and could be substantially higher. Because the mortgage pool will consist of a
fixed group of mortgage loans, the actual charge-off percentages with respect to
the mortgage pool may therefore be expected to be higher, and may be
substantially higher, than the percentages indicated above.
The information set forth in the preceding paragraphs concerning the
Seller has been provided by the Seller.
Additional Information
The description in this prospectus supplement of the sample mortgage loans
and the mortgaged properties is based upon the sample mortgage pool as of the
Cut-off Date, as adjusted for the scheduled principal payments due on or before
this date. The sample mortgage loans consist of mortgage loans that are intended
to be included in the trust. However, many of the sample mortgage loans may not
be included in the trust as a result of incomplete documentation or otherwise if
the company deems this removal necessary or desirable, and may be prepaid at any
time. The characteristics of the final pool will not materially differ from the
information provided with respect to the sample pool. Within 15 days of the
closing date, tables reflecting the composition of the final pool of mortgage
loans will be filed on Form 8-K with the Commission.
YIELD ON THE OFFERED SECURITIES
Shortfalls in Collections of Interest
When a principal prepayment in full is made on a mortgage loan, the
mortgagor is charged interest only for the period from the Due Date of the
preceding monthly payment up to the date of the principal prepayment, instead of
for a full month. When a partial principal prepayment is made on a mortgage
loan, the mortgagor is not charged interest on the amount of the prepayment for
any days in the month in which the prepayment is made. In addition, the
application of the Relief Act to any mortgage loan will adversely affect, for an
indeterminate period of time, the ability of the Master Servicer or any
subservicer to collect full amounts of interest on the mortgage loan. See "Legal
Aspects of the Mortgage Loans--Soldiers' and Sailors' Civil Relief Act of 1940"
in the prospectus. The Master Servicer is obligated to pay from its own funds
only those interest shortfalls attributable to full prepayments by the
mortgagors on the mortgage loans, but only to the extent of the lesser of (a)
one-twelfth of 0.125% of the aggregate Stated Principal Balance of the mortgage
loans immediately preceding such payment date and (b) the sum of the Master
Servicing Fee and the Subservicing Fee for the related Due Period. See
"Description of the Servicing Agreement--Servicing and Other Compensation and
Payment of Expenses" in this prospectus supplement. Accordingly, the effect of
(1) any principal prepayments in full or in part on the mortgage loans, to the
extent that any resulting Prepayment Interest Shortfall exceeds any Compensating
Interest or (2) any shortfalls resulting from the application of the Relief Act,
will be to reduce the aggregate amount of interest collected that is available
for payment to holders of the Securities. Prepayment Interest Shortfalls and
Relief Act Shortfalls with respect to the Class 1-A-2 Bonds will not be covered
by the Bond Insurance Policy. Any resulting Unpaid Interest Shortfalls will be
allocated among the Securities as provided in this prospectus supplement under
"Description of the Securities -- Interest Payments on the Bonds" and "--
Payments on the Grantor Trust
S-63
Certificates" and will be reimbursed solely from the Net Monthly Excess Cashflow
as provided in this prospectus supplement under "Description of the Securities
- -- Overcollateralization."
General Yield and Prepayment Considerations
The yield to maturity of the Offered Securities will be sensitive to
defaults on the mortgage loans. If a purchaser of an Offered Security calculates
its anticipated yield based on an assumed rate of default and amount of losses
that is lower than the default rate and amount of losses actually incurred, its
actual yield to maturity will be lower than that so calculated. In general, the
earlier a loss occurs, the greater is the effect on an investor's yield to
maturity. There can be no assurance as to the delinquency, foreclosure or loss
experience with respect to the mortgage loans.
The mortgage loans were underwritten generally in accordance with
underwriting standards which are primarily intended to provide for single family
"non-conforming" mortgage loans. A "non-conforming" mortgage loan means a
mortgage loan which is ineligible for purchase by Fannie Mae or Freddie Mac due
to either credit characteristics of the related mortgagor or documentation
standards in connection with the underwriting of the related mortgage loan that
do not meet the Fannie Mae or Freddie Mac underwriting guidelines for "A" credit
mortgagors. These credit characteristics include mortgagors whose
creditworthiness and repayment ability do not satisfy such Fannie Mae or Freddie
Mac underwriting guidelines and mortgagors who may have a record of credit
write-offs, outstanding judgments, prior bankruptcies and other credit items
that do not satisfy such Fannie Mae or Freddie Mac underwriting guidelines.
These documentation standards may include mortgagors who provide limited or no
documentation in connection with the underwriting of the related mortgage loan.
Accordingly, mortgage loans underwritten under the seller's non-conforming
credit underwriting standards are likely to experience rates of delinquency,
foreclosure and loss that are higher, and may be substantially higher, than
mortgage loans originated in accordance with the Fannie Mae or Freddie Mac
underwriting guidelines. Any resulting losses, to the extent not covered by
credit enhancement, may affect the yield to maturity of the Offered Securities.
The rate of principal payments, the aggregate amount of payments and the
yields to maturity of the Group 1 Bonds and Group 2 Bonds will be affected by
the rate and timing of payments of principal on the Group 1 Loans and Group 2
Loans, respectively. The rate of principal payments on the mortgage loans will
in turn be affected by the amortization schedules of the mortgage loans and by
the rate of principal prepayments (including for this purpose prepayments
resulting from refinancing, liquidations of the mortgage loans due to defaults,
casualties or condemnations and repurchases by the Seller). Certain of the
mortgage loans contain prepayment charge provisions. The rate of principal
payments may or may not be less than the rate of principal payments for mortgage
loans that did not have prepayment charge provisions.
The mortgage loans typically are assumable under some circumstances if, in
the sole judgment of the master servicer or subservicer, the prospective
purchaser of a mortgaged property is creditworthy and the security for the
mortgage loan is not impaired by the assumption.
Prepayments, liquidations and purchases of the mortgage loans (including
any optional purchases) will result in payments on the Offered Securities 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 Securities may vary from the
anticipated yield will depend in the case of the Offered Securities upon the
degree to which such class of Offered Securities is purchased at a discount or
premium. Further, an investor should consider the risk that, in the case of any
Offered Security purchased at a discount, a slower than anticipated rate of
principal payments (including prepayments) on the mortgage loans could result in
an actual yield to such
S-64
investor that is lower than the anticipated yield and, in the case of any
Offered Security purchased at a premium, a faster than anticipated rate of
principal payments on the mortgage loans could result in an actual yield to such
investor that is lower than the anticipated yield.
The rate of principal payments (including prepayments) on pools of
mortgage loans may vary significantly over time and may be influenced by a
variety of economic, geographic, social and other factors, including changes in
mortgagors' housing needs, job transfers, unemployment, mortgagors' net equity
in the mortgaged properties and servicing decisions. In general, if prevailing
interest rates were to fall significantly below the mortgage rates on the
mortgage loans, such mortgage loans could be subject to higher prepayment rates
than if prevailing interest rates were to remain at or above the mortgage 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. The 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 may be inclined to refinance
their mortgage loans with a fixed-rate loan to "lock in" at a lower interest
rate or to refinance their mortgage loans with adjustable-rate mortgage loans
with low introductory interest rates. No assurances can be given as to the rate
of prepayments on the mortgage loans in stable or changing interest rate
environments.
Approximately 43.09% and 3.28% of the sample Group 1 Loans have initial
interest only periods of five and ten years, respectively. Approximately 3.04%
of the sample Group 2 Loans have initial interest only periods of five years.
During this period, the payment made by the related borrower will be less than
it would be if the mortgage loan amortized. In addition, the mortgage loan
balance will not be reduced by the principal portion of scheduled monthly
payments during this period. As a result, no principal payments will be made to
the Securities from these mortgage loans during their interest only period
except in the case of a prepayment.
Approximately 70.44% and 77.36% of the Sample Group 1 Loans and sample
Group 2 Loans, respectively, provide for payment by the borrower of a prepayment
charge in limited circumstances on certain prepayments. The Master Servicer or
the related subservicer will be entitled to all prepayment charges received on
the mortgage loans, and these amounts will not be available for payment on the
Securities. There can be no assurance that the prepayment charges will have any
effect on the prepayment performance of the mortgage loans. Investors should
conduct their own analysis of the effect, if any, that the prepayment premiums,
and decisions by the Master Servicer or the related subservicer with respect to
the waiver thereof, may have on the prepayment performance of the mortgage
loans.
The Senior Derivative Contracts and Subordinate Derivative Contracts will
be assigned to, or entered into by, the Trust and will provide some protection
against Basis Risk Shortfalls on (i) the Class 1-A-1 Bonds and Class 1-A-2 Bonds
and (ii) the Underlying Class M-1-1, Class M-1-2, Class M-2-1, Class M-2-2,
Class M-3-1, Class M-3-2, Class M-4-1, Class M-4-2, Class M-5-1, Class M-5-2,
Class M-6-1 and Class M-6-2 Bonds, respectively. However, the Derivative
Contracts may not provide sufficient funds to cover all such Basis Risk
Shortfalls on such related Bonds and, with respect to the Underlying Class M
Bonds, the corresponding Grantor Trust Certificates. In addition, payments under
the related Derivative Contracts are limited to a specified rate in effect from
time to time. To the extent that net amounts payable under the Derivative
Contracts are insufficient to cover all Basis Risk Shortfalls on the related
Bonds, some or all of the related Net Monthly Excess Cashflow may be used.
However, there can be no assurance that the related Net Monthly Excess Cashflow
will be sufficient to cover these shortfalls, particularly because on any
payment date where the Bond Interest Rate is limited to the related Available
Funds Rate, there will be little or no excess interest. Further, neither the
Bond Insurance Policy (with respect to the Class 1-A-2 Bonds) nor cross-
collateralization will cover Basis Risk Shortfalls. In the event of a decrease
in One-Month LIBOR, the amount of Net Monthly Excess Cashflow available to the
Bonds will be reduced by any Net Derivative Fees
S-65
paid to the Derivative Counterparty under the related Derivative Contracts. In
addition, the related Available Funds Rate and therefore the Bond Interest Rate
or Certificate Interest Rate on the related Offered Securities may be reduced by
the requirement of the Issuer to pay the Net Derivative Fee to the Derivative
Counterparty under the related Derivative Contracts.
The recording of mortgages in the name of MERS is a new practice in the
mortgage lending industry. While the company expects that the Master Servicer or
applicable subservicer will be able to commence foreclosure proceedings on the
mortgaged properties, when necessary and appropriate, public recording officers
and others, however, 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, defending litigation commenced by third
parties and conducting foreclosure sales of the mortgaged properties could
result. Those delays and additional costs could in turn delay the distribution
of liquidation proceeds to the bondholders and grantor trust certificateholders
and increase the amount of Realized Losses on the mortgage loans. In addition,
if, as a result of MERS discontinuing or becoming unable to continue operations
in connection with the MERS(R) System, it becomes necessary to remove any
mortgage loan from registration on the MERS(R) System and to arrange for the
assignment of the related mortgages to the Indenture Trustee, then any related
expenses shall be reimbursable by the trust to the Master Servicer, which will
reduce the amount available to pay principal of and interest on the Securities.
For additional information regarding the recording of mortgages in the name of
MERS see "The Mortgage Pool - Sample Mortgage Loan Characteristics" in this
prospectus supplement.
Yield Sensitivity of the Grantor Trust Certificates
The yield to maturity on the Grantor Trust Certificates will be extremely
sensitive to Realized Losses on the mortgage loans (and the timing thereof) on
any payment date if the amount of overcollateralization is reduced to zero,
because the entire amount of any Realized Losses (to the extent not covered by
related Net Monthly Excess Cashflow or by cross-collateralization) will be
allocated to the related Underlying Class M Bonds, correspondingly reducing the
applicable Certificate Principal Balance of the related Grantor Trust
Certificates. The initial undivided interest in the Group 1 Loans evidenced by
the Underlying Class M-1-1, Class M-2-1, Class M-3-1, Class M-4-1, Class M-5-1
and Class M-6-1 Bonds on the Closing Date will be approximately 2.25%, 1.45%,
3.55%, 4.10%, 2.40% and 0.75%, respectively. The initial undivided interest in
the Group 2 Loans evidenced by the Underlying Class M-1-2, Class M-2-2, Class
M-3-2, Class M-4-2, Class M-5-2 and Class M-6-2 Bonds on the Closing Date will
be approximately 2.25%, 1.45%, 3.55%, 4.10%, 2.40% and 0.75%, respectively.
Investors in the Grantor Trust Certificates should fully consider the risk
that Realized Losses on the mortgage loans could result in the failure of such
investors to fully recover their investments. In addition, once Realized Losses
have been allocated to the Grantor Trust Certificates, such amounts with respect
to such grantor trust certificates will no longer accrue interest and will not
be reinstated thereafter. However, Allocated Realized Loss Amounts may be paid
to the holders of the Underlying Class M Bonds, and correspondingly to the
applicable Grantor Trust Certificates, from Net Monthly Excess Cashflow in the
priority set forth under "Description of the Securities -- Overcollateralization
Provisions" 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,
S-66
the greater the effect of such principal prepayment on an investor's yield to
maturity. The effect on an investor's yield of principal prepayments occurring
at a rate higher (or lower) than the rate anticipated by the investor during the
period immediately following the issuance of the Securities may not be offset by
a subsequent like decrease (or increase) in the rate of principal prepayments.
The weighted average life of an Offered Security is the average amount of
time that will elapse from the Closing Date until each dollar of principal is
repaid to the investors in such Offered Security. Because it is expected that
there will be prepayments and defaults on the mortgage loans, the actual
weighted average lives of these Securities are expected to vary substantially
from the weighted average remaining term to stated maturity of the sample
mortgage loans as set forth under "The Mortgage Pool" in this prospectus
supplement.
Prepayments of mortgage loans are commonly measured relative to a
prepayment standard or model. The model used in this prospectus supplement for
the Group 1 Loans and Group 2 Loans is the related Prepayment Assumption. The
Prepayment Assumptions do not purport to be either a historical description of
the prepayment experience of any pool of mortgage loans or a prediction of the
anticipated rate of prepayment of any mortgage loans, including the related
mortgage loans to be included in the trust.
The following tables entitled "Percent of Initial Bond Principal Balance
Outstanding at the Following Percentages of Prepayment Assumption" and "Percent
of Initial Certificate Principal Balance Outstanding at the Following
Percentages of Prepayment Assumption", as applicable, were prepared on the basis
of the assumptions in the following paragraph and the table set forth below.
There are 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 Bond Principal
Balances or Certificate Principal Balances outstanding and weighted average
lives of the Securities set forth in the tables. In addition, since the actual
mortgage loans in the trust will have characteristics that differ from those
assumed in preparing the tables set forth below, the payments of principal of
the Securities may be made earlier or later than indicated in the tables.
The percentages and weighted average lives in the tables entitled "Percent
of Initial Bond Principal Balance Outstanding at the Following Percentages of
the Prepayment Assumption" and "Percent of Initial Certificate Principal Balance
Outstanding at the Following Percentages of the Prepayment Assumption" were
determined assuming that: (i) the mortgage groups consists of forty-one
hypothetical mortgage loans having the following characteristics:
S-67
Remaining
Age Term
Loan Loan Principal Mortgage Net Mortgage (in to Maturity
Number Group Balance Rate Rate months) (in Months) Index
- ------ ----- --------------- ------------- ------------- ------- ----------- -----------
1 1 $ 48,549,953.60 5.295568276% 4.857596335% 2 358 6 Mth LIBOR
2 1 82,222,012.00 5.054474655 4.567165031 1 359 6 Mth LIBOR
3 1 85,492,737.41 5.268333073 4.795164201 1 359 6 Mth LIBOR
4 1 126,787,424.70 5.750368560 5.233746624 1 359 6 Mth LIBOR
5 1 1,530,055.00 3.593013887 3.180813887 1 359 1 Year CMT
6 1 26,449,594.63 5.386410603 4.938554044 1 359 6 Mth LIBOR
7 1 33,207,281.00 5.155018533 4.742818533 1 359 6 Mth LIBOR
8 1 5,095,415.65 5.515007870 5.102807870 3 357 1 Year CMT
9 1 30,299,926.15 5.197885291 4.785685291 1 359 6 Mth LIBOR
10 1 51,582,025.00 5.035458706 4.623258706 1 359 6 Mth LIBOR
11 1 358,697.61 5.375000000 4.962800000 2 358 1 Year CMT
12 1 567,348.50 5.250000000 4.837800000 1 359 6 Mth LIBOR
13 2 2,548,901.76 5.943168344 5.655968344 2 178 N/A
14 2 86,152.57 6.250000000 5.962800000 2 238 N/A
15 2 32,715,777.11 6.287727650 5.980072767 2 358 N/A
16 2 1,261,200.00 5.600618459 5.313418459 2 358 N/A
17 2 125,133.90 7.750000000 7.462800000 2 178 N/A
18 1 549,034.56 3.668121536 3.255921536 103 257 1 Mth LIBOR
19 1 8,577,523.10 8.127818557 7.715618557 37 323 6 Mth LIBOR
20 1 12,876,123.33 8.096288779 7.684088779 78 282 6 Mth LIBOR
21 1 44,638,810.58 6.086929679 5.674729679 45 315 6 Mth LIBOR
22 1 797,999.60 8.972333091 8.560133091 79 281 1 Year CMT
23 1 1,518,883.27 9.195695402 8.783495402 41 319 6 Mth LIBOR
24 2 1,656,778.16 14.190460510 13.403260510 62 118 N/A
25 2 393,221.22 13.509176110 12.721976110 70 170 N/A
26 2 447,713.51 14.381307890 13.616842000 66 236 N/A
27 2 426,304.83 14.148218540 13.361018540 59 121 N/A
28 1 37,352,609.09 5.478614724 4.991179997 1 359 6 Mth LIBOR
29 1 53,109,792.40 5.250520759 4.751550892 1 359 6 Mth LIBOR
30 1 58,867,169.17 5.555174786 5.109264220 1 359 6 Mth LIBOR
31 1 89,452,802.19 5.970862905 5.487114657 1 359 6 Mth LIBOR
32 1 18,784,873.91 5.181083910 4.768883910 1 359 6 Mth LIBOR
33 1 22,402,349.69 5.740853368 5.315086021 1 359 6 Mth LIBOR
34 1 16,648,444.00 5.784472857 5.372272857 1 359 6 Mth LIBOR
35 1 29,601,474.44 5.317767743 4.905567743 1 359 6 Mth LIBOR
36 1 266,418.94 5.500000000 5.087800000 1 359 6 Mth LIBOR
37 1 1,417,952.08 5.017728905 4.605528905 1 359 6 Mth LIBOR
38 2 5,258,065.96 6.859926144 6.560996204 1 179 N/A
39 2 63,547,292.77 6.793571045 6.486973196 1 359 N/A
40 2 2,100,667.89 6.380728597 6.093528597 1 359 N/A
41 2 428,058.72 8.439266919 8.152066919 1 179 N/A
S-68
Months
Months to Between
Next Rate Rate Subsequent
Loan Loan Gross Adjustment Adjustment Initial Rate Periodic Rate Maximum Minimum
Number Group Margin Date Dates Cap Cap Mortgage Rate Mortgage Rate
- ------ ----- --------- ---------- ---------- ------------ ------------- ------------- -------------
1 1 3.041427% 4 6 1.017863552% 1.017863552% 11.411118310% 3.093619240%
2 1 3.005522 5 6 1.000000000 1.000000000 11.065252180 3.010723360
3 1 3.224513 23 6 3.000000000 1.000000000 11.279422610 3.234951518
4 1 3.388370 23 6 3.000000000 1.014907389 11.794963100 3.576444178
5 1 2.750000 35 12 2.000000000 2.000000000 9.593013887 2.750000000
6 1 3.381011 35 6 3.069683874 1.000000000 11.310773330 3.423406981
7 1 3.130364 35 6 3.295778507 1.016791498 11.112493430 3.140293427
8 1 2.706886 57 12 4.858477665 1.929238833 10.601235580 2.706886147
9 1 2.765443 59 6 4.834171701 1.229985781 10.862308650 2.765443463
10 1 2.482025 59 6 4.761617056 1.218257717 10.544720900 2.507158865
11 1 2.750000 82 12 3.000000000 1.000000000 10.375000000 2.750000000
12 1 2.250000 83 6 5.000000000 1.000000000 11.250000000 2.250000000
13 2 N/A N/A N/A N/A N/A N/A N/A
14 2 N/A N/A N/A N/A N/A N/A N/A
15 2 N/A N/A N/A N/A N/A N/A N/A
16 2 N/A N/A N/A N/A N/A N/A N/A
17 2 N/A N/A N/A N/A N/A N/A N/A
18 1 2.718133 1 1 0.000000000 0.000000000 11.961887550 2.718132564
19 1 4.209384 3 6 3.000000000 1.000000000 15.406856610 4.527815639
20 1 4.795712 4 6 1.180796939 1.180796939 14.971660270 7.343639347
21 1 4.200327 4 6 2.923338059 1.024971357 15.189757790 4.778463301
22 1 5.688550 6 12 2.664722714 2.000000000 15.589288840 8.657875518
23 1 4.391483 19 6 3.000000000 1.021289592 15.238274590 4.700182106
24 2 N/A N/A N/A N/A N/A N/A N/A
25 2 N/A N/A N/A N/A N/A N/A N/A
26 2 N/A N/A N/A N/A N/A N/A N/A
27 2 N/A N/A N/A N/A N/A N/A N/A
28 1 3.189453 5 6 1.016500938 1.016500938 11.514426310 3.230948789
29 1 3.057937 5 6 1.000000000 1.000000000 11.250520760 3.057936814
30 1 3.249598 23 6 3.000000000 1.000000000 11.557710010 3.282352292
31 1 3.437614 23 6 3.000000000 1.016318978 12.016486220 3.531522777
32 1 3.039665 35 6 3.000000000 1.000000000 11.145422260 3.063965013
33 1 3.320936 35 6 3.000000000 1.000000000 11.683974910 3.320935646
34 1 2.782396 59 6 4.014840475 1.020589448 11.240891160 2.782395705
35 1 2.460146 59 6 3.646088844 1.010857364 10.783740010 2.460146433
36 1 2.250000 83 6 3.000000000 1.000000000 11.500000000 2.250000000
37 1 2.250000 83 6 4.104129264 1.000000000 11.017728900 2.250000000
38 2 N/A N/A N/A N/A N/A N/A N/A
39 2 N/A N/A N/A N/A N/A N/A N/A
40 2 N/A N/A N/A N/A N/A N/A N/A
41 2 N/A N/A N/A N/A N/A N/A N/A
S-69
Original
Loan Loan Interest
Number Group Only Period
- ------ ----- -----------
1 1 N/A
2 1 60
3 1 60
4 1 N/A
5 1 N/A
6 1 N/A
7 1 60
8 1 N/A
9 1 N/A
10 1 60
11 1 N/A
12 1 N/A
13 2 N/A
14 2 N/A
15 2 N/A
16 2 60
17 2 N/A
18 1 N/A
19 1 N/A
20 1 N/A
21 1 N/A
22 1 N/A
23 1 N/A
24 2 N/A
25 2 N/A
26 2 N/A
27 2 N/A
28 1 N/A
29 1 60
30 1 60
31 1 N/A
32 1 60
33 1 N/A
34 1 N/A
35 1 60
36 1 N/A
37 1 60
38 2 N/A
39 2 N/A
40 2 60
41 2 N/A
(ii) the hypothetical mortgage loans with an Index indicated as "6 Mth LIBOR",
"1 Mth LIBOR" or "1 Year CMT" have an Index of Six-Month LIBOR, One-Month LIBOR
and One Year CMT which remain constant at 1.18%, 1.12% and 1.21% per annum,
respectively; (iii) hypothetical mortgage loans 17, 27 and 41 are balloon loans,
with a remaining amortization term of 358, 301 and 339 months, respectively;
(iv) payments
S-70
on the Securities are received, in cash, on the 25th day of each month,
commencing in October 2003; (v) there are no delinquencies or losses on the
mortgage loans and principal payments on the mortgage loans are timely received
together with prepayments, if any, at the respective percentages of the
Prepayment Assumption set forth in the following tables; (vi) there are no
repurchases of the mortgage loans; (vii) all of the hypothetical mortgage loans
are fully-amortizing other than as set forth in clause (iii) above; (viii) there
is no Prepayment Interest Shortfall, Basis Risk Shortfall or any other interest
shortfall in any month; (ix) the scheduled monthly payment for the mortgage loan
is calculated based on its principal balance, mortgage rate and remaining term
to maturity such that such mortgage loan will amortize in amounts sufficient to
repay the remaining principal balance of such mortgage loan by its remaining
term to maturity, in some cases following an interest only period; (x) with
respect to each mortgage loan, the Index remains constant at the rate set forth
above and the mortgage rate on each mortgage loan is adjusted on the next
adjustment date (and on subsequent adjustment dates, as necessary) to equal the
Index plus the applicable gross margin, subject to the maximum mortgage rates,
minimum mortgage rates and periodic rate caps listed above; (xi) none of the
mortgage loans provide for negative amortization; (xii) the monthly payment on
each mortgage loan is adjusted on the due date immediately following the next
related adjustment date (and on subsequent adjustment dates, as necessary) to
equal a fully amortizing payment as described in clause (ix) above, in some
cases, after an initial interest only period; (xiii) payments on the mortgage
loans earn no reinvestment return; (xiv) there are no additional ongoing
expenses payable out of the trust, other than the premium payable to the Bond
Insurer; (xv) the holder of the Owner Trust Certificates exercises its option to
redeem the Bonds on the first payment date on which it would be permitted to do
so as described in "Description of the Securities - Optional Redemption" in this
prospectus supplement; (xvi) the Securities will be purchased on September 29,
2003; (xvii) loan numbers 28 through 41will begin to pay principal and interest
on November 1, 2003, with the characteristics set forth on the previous page;
(xviii) the aggregate principal balance of loan numbers 28 through 41 is
invested for purposes of the first payment date; and (xix) scheduled payments on
the mortgage loans are received on the first day of each month commencing in the
calendar month following the Closing Date and are computed prior to giving
effect to prepayments received on the last day of the prior month. Nothing
contained in the foregoing assumptions should be construed as a representation
that the mortgage loans will not experience delinquencies or losses or will
otherwise behave in accordance with any of the above structuring assumptions.
Based on the foregoing assumptions, the following tables indicate the
projected weighted average lives of each class of the Offered Securities and set
forth the percentages of the original Bond Principal Balance or Certificate
Principal Balance of each such class of Offered Securities that would be
outstanding after each of the dates shown, at various constant percentages of
the Prepayment Assumption.
S-71
Percent of Initial Bond Principal Balance Outstanding at the
Following Percentages of the Prepayment Assumption
Class 1-A-1 Bonds and Class 1-A-2 Bonds
---------------------------------------
Prepayment Assumption 0% 80% 100% 150% 180%
- --------------------- -- --- ---- ---- ----
Payment Date
- ------------
Initial Percentage ................ 100% 100% 100% 100% 100%
September 25, 2004 ................ 99 76 70 55 46
September 25, 2005 ................ 98 57 48 30 0
September 25, 2006 ................ 97 43 33 0 0
September 25, 2007 ................ 96 32 23 0 0
September 25, 2008 ................ 95 24 0 0 0
September 25, 2009 ................ 93 0 0 0 0
September 25, 2010 ................ 90 0 0 0 0
September 25, 2011 ................ 88 0 0 0 0
September 25, 2012 ................ 85 0 0 0 0
September 25, 2013 ................ 83 0 0 0 0
September 25, 2014 and
thereafter ........................ 0 0 0 0 0
Weighted Average Life in
years (to Optional
Redemption)* ...................... 9.4 2.8 2.2 1.3 1.0
(*) The weighted average life of a Bond is determined by (i) multiplying the
net reduction, if any, of the initial Bond Principal Balance by the number
of years from the date of issuance of the Bond to the related payment
date, (ii) adding the results, and (iii) dividing the sum by the aggregate
of the net reductions of the Bond Principal Balance described in (i)
above.
S-72
Percent of Initial Bond Principal Balance Outstanding at the
Following Percentages of the Prepayment Assumption
Class 2-A Bonds
---------------
Prepayment Assumption 0% 80% 100% 150% 180%
- --------------------- -- --- ---- ---- ----
Payment Date
- ------------
Initial Percentage ................ 100% 100% 100% 100% 100%
September 25, 2004 ................ 98 89 86 80 76
September 25, 2005 ................ 97 73 68 55 0
September 25, 2006 ................ 95 60 53 0 0
September 25, 2007 ................ 94 50 42 0 0
September 25, 2008 ................ 92 41 0 0 0
September 25, 2009 ................ 90 0 0 0 0
September 25, 2010 ................ 88 0 0 0 0
September 25, 2011 ................ 85 0 0 0 0
September 25, 2012 ................ 83 0 0 0 0
September 25, 2013 ................ 80 0 0 0 0
September 25, 2014 and
thereafter ........................ 0 0 0 0 0
Weighted Average Life in
years (to Optional
Redemption)* ...................... 9.2 3.5 2.8 1.9 1.5
(*) The weighted average life of a Bond is determined by (i) multiplying the
net reduction, if any, of the initial Bond Principal Balance by the number
of years from the date of issuance of the Bond to the related payment
date, (ii) adding the results, and (iii) dividing the sum by the aggregate
of the net reductions of the Bond Principal Balance described in (i)
above.
S-73
Percent of Initial Certificate Principal Balance Outstanding at the
Following Percentages of the Prepayment Assumption
Class M-1, Class M-2, Class M-3, Class M-4,
Class M-5 and Class M-6 Certificates
-------------------------------------------
Prepayment Assumption 0% 80% 100% 150% 180%
- --------------------- -- --- ---- ---- ----
Payment Date
Initial Percentage ............... 100% 100% 100% 100% 100%
September 25, 2004 ............... 99 77 72 58 50
September 25, 2005 ............... 98 59 50 33 0
September 25, 2006 ............... 97 45 36 0 0
September 25, 2007 ............... 96 34 25 0 0
September 25, 2008 ............... 95 26 0 0 0
September 25, 2009 ............... 92 0 0 0 0
September 25, 2010 ............... 90 0 0 0 0
September 25, 2011 ............... 88 0 0 0 0
September 25, 2012 ............... 85 0 0 0 0
September 25, 2013 ............... 83 0 0 0 0
September 25, 2014 and
thereafter ....................... 0 0 0 0 0
Weighted Average Life in
years (to Optional
Redemption)* ..................... 9.4 2.8 2.2 1.4 1.1
(*) The weighted average life of a Grantor Trust Certificate is determined by
(i) multiplying the net reduction, if any, of the initial Certificate
Principal Balance by the number of years from the date of issuance of the
Grantor Trust Certificate to the related payment date, (ii) adding the
results, and (iii) dividing the sum by the aggregate of the net reductions
of the Certificate Principal Balance described in (i) above.
S-74
There is no assurance that prepayments of the mortgage loans will conform
to any of the percentages of the Prepayment Assumptions indicated in the tables
above or to any other level, or that the actual weighted average life of the
Class 1-A-1, Class 1-A-2 or Class 2-A Bonds or the Class M-1, Class M-2, Class
M-3, Class M-4, Class M-5 and Class M-6 Certificates will conform to any of the
weighted average lives set forth in the tables above. Furthermore, the
information contained in the tables with respect to the weighted average life of
each specified class of Bonds or Certificates is not necessarily indicative of
the weighted average life that might be calculated or projected under different
or varying prepayment assumptions or other structuring assumptions.
The characteristics of the mortgage loans will differ from those assumed
in preparing the tables above. In addition, it is unlikely that any mortgage
loan will prepay at any constant percentage of the Prepayment Assumption until
maturity or that all of the mortgage loans will prepay at the same rate. The
timing of changes in the rate of prepayments may significantly affect the actual
yield to maturity to investors, even if the average rate of principal
prepayments is consistent with the expectations of investors.
Final Scheduled Payment Date
The final scheduled payment date on each class of Offered Securities will
be October 2033. Due to losses and prepayments on the mortgage loans, the final
scheduled payment date on each class of Offered Securities may be substantially
earlier than the related payment dates indicated above. With respect to the
Class 1-A-2 Bonds, the Bond Insurance Policy will pay the Bond Principal Balance
of those Bonds to the extent unpaid on the applicable final scheduled payment
date.
For additional considerations relating to the yield on the Offered
Securities, see "Yield Considerations" and "Maturity and Prepayment
Considerations" in the prospectus.
THE ISSUER
The Issuer is a statutory trust formed under the laws of the State of
Delaware pursuant to the Trust Agreement for the transactions described in this
prospectus supplement. The Trust Agreement constitutes the "governing
instrument" under the laws of the State of Delaware relating to statutory
trusts. After its formation, the Issuer will not engage in any activity other
than (i) acquiring and holding the mortgage loans and the other assets of the
Trust and proceeds therefrom, (ii) issuing the Bonds and Owner Trust
Certificates, (iii) making payments on the Bonds and the Owner Trust
Certificates and (iv) engaging in other activities that are necessary, suitable
or convenient to accomplish the foregoing or are incidental thereto or connected
therewith.
The assets of the Issuer will consist of the mortgage loans, the
Derivative Contracts, the Bond Insurance Policy and certain related assets.
THE OWNER TRUSTEE
Wilmington Trust Company is the Owner Trustee under the Trust Agreement.
The Owner Trustee is a Delaware banking corporation and its principal offices
are located in Wilmington, Delaware. The Owner Trustee shall be entitled to
compensation for its services on each payment date in an amount equal to the
Owner Trustee's Fee.
S-75
Neither the Owner Trustee nor any director, officer or employee of the
Owner Trustee will be under any liability to the Issuer or the Bondholders under
the Trust Agreement under any circumstances, except for the Owner Trustee's own
misconduct, gross negligence, bad faith or grossly negligent failure to act or
in the case of the inaccuracy of certain representations made by the Owner
Trustee in the Trust Agreement. All persons into which the Owner Trustee may be
merged or with which it may be consolidated or any person resulting from such
merger or consolidation shall be the successor of the Owner Trustee under the
Trust Agreement.
THE INDENTURE TRUSTEE
Deutsche Bank National Trust Company will be the Indenture Trustee under
the Indenture. The Indenture Trustee has designated its offices located at c/o
DTC Transfer Services, 55 Water Street, Jeanette Park Entrance, New York, New
York 10041 for purposes of the transfer and exchange of the Bonds. For all other
purposes, the Indenture Trustee's "Corporate Trust Office" is located at 1761
East St. Andrew Place, Santa Ana, California 92705, Attention: IMH Assets Corp.,
Series 2003-10, or such other address as the Indenture Trustee may designate
from time to time by notice to the Bondholders, the Company and the Master
Servicer. The Indenture Trustee shall be entitled to compensation for its
services on each payment date in an amount equal to the Indenture Trustee's Fee.
THE GRANTOR TRUSTS
Each grantor trust is a common law trust formed under the laws of the
State of New York pursuant to the Grantor Trust Agreement for the transactions
described in this prospectus supplement. The Grantor Trust Agreement constitutes
the "governing instrument" under the laws of the State of New York relating to
common law trusts. After their formation, none of the Grantor Trusts will engage
in any activity other than (i) acquiring and holding the Underlying Class M
Bonds and the other assets of the Grantor Trust and proceeds therefrom, (ii)
issuing the Grantor Trust Certificates, (iii) making payments on the Grantor
Trust Certificates and (iv) engaging in other activities that are necessary,
suitable or convenient to accomplish the foregoing or are incidental thereto or
connected therewith.
The assets of Impac CMB Grantor Trust 2003-10-1, Impac CMB Grantor Trust
2003-10-2, Impac CMB Grantor Trust 2003-10-3, Impac CMB Grantor Trust 2003-10-4,
Impac CMB Grantor Trust 2003-10-5 and Impac CMB Grantor Trust 2003-10-6 shall be
(i) the Underlying Class M-1-1 Bonds and Class M-1-2 Bonds, (ii) the Underlying
Class M-2-1 Bonds and Class M-2-2 Bonds, (iii) the Underlying Class M-3-1 Bonds
and Class M-3-2 Bonds, (iv) the Underlying Class M-4-1 Bonds and Class M-4-2
Bonds, (v) the Underlying Class M-5-1 Bonds and Class M-5-2 Bonds and (vi) the
Underlying Class M-6-1 Bonds and Class M-6-2 Bonds, respectively.
THE BOND INSURER
The following information has been supplied by Ambac Assurance
Corporation, the Bond Insurer, for inclusion in this prospectus supplement. No
representation is made by the Company, the Master Servicer, the Underwriters or
any of their affiliates as to the accuracy or completeness of the information.
The Bond Insurer is a Wisconsin-domiciled stock insurance corporation
regulated by the Office of the Commissioner of Insurance of the State of
Wisconsin and licensed to do business in 50 states, the District of Columbia,
the Commonwealth of Puerto Rico, the Territory of Guam and the U.S. Virgin
Islands. The Bond
S-76
Insurer primarily insures newly-issued municipal and structured finance
obligations. The Bond Insurer is a wholly owned subsidiary of Ambac Financial
Group, Inc. (formerly, AMBAC Inc.), a 100% publicly-held company. Moody's,
Standard & Poor's and Fitch Ratings have each assigned a triple-A financial
strength rating to the Bond Insurer.
The consolidated financial statements of the Bond Insurer and subsidiaries
as of December 31, 2002 and December 31, 2001, and for each of the years in the
three year period ended December 31, 2002, prepared in accordance with
accounting principles generally accepted in the United States of America,
included in the Annual Report on Form 10-K of Ambac Financial Group, Inc. (which
was filed with the Commission on March 28, 2003; Commission File Number
1-10777), the unaudited consolidated financial statements of the Bond Insurer
and subsidiaries as of March 31, 2003 and for the periods ending March 31, 2003
and March 31, 2002 included in the Quarterly Report on Form 10-Q of Ambac
Financial Group, Inc. for the period ended March 31, 2003 (which was filed with
the Commission on May 15, 2003); the unaudited consolidated financial statements
of the Bond Insurer and subsidiaries as of June 30, 2003 and for the periods
ended June 30, 2003 and June 30, 2002, included in the Quarterly Report on Form
10-Q of Ambac Financial Group, Inc. for the period ended June 30, 2003 (which
was filed with the Commission on August 14, 2003); and the Current Reports on
Form 8-K filed with the Commission on January 24, 2003, February 28, 2003, March
4, 2003, March 20, 2003, March 26, 2003, March 31, 2003, April 21, 2003 and July
18, 2003 as each related to Ambac Assurance Corporation, are hereby incorporated
by reference into this prospectus supplement and shall be deemed to be a part of
this prospectus supplement. Any statement contained in a document incorporated
in this prospectus supplement by reference shall be modified or superseded for
the purposes of this prospectus supplement to the extent that a statement
contained in this prospectus supplement by reference in this prospectus
supplement also modifies or supersedes the statement. Any statement so modified
or superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this prospectus supplement.
All financial statements of the Bond Insurer and subsidiaries included in
documents filed by Ambac Financial Group, Inc. with the Commission pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Exchange Act, subsequent to the date of
this prospectus supplement and prior to the termination of the offering of the
bonds shall be deemed to be incorporated by reference into this prospectus
supplement and to be a part hereof from the respective dates of filing the
documents.
The following table sets forth the capitalization of the Bond Insurer as
of December 31, 2001, December 31, 2002, and June 30, 2003, in conformity with
accounting principles generally accepted in the United States of America.
S-77
Ambac Assurance Corporation and Subsidiaries
Consolidated Capitalization Table
(Dollars in Millions)
December 31, December 31, June 30, 2003
2001 2002 (unaudited)
------------ ------------ -------------
Unearned premiums ................................... $1,790 $2,137 $2,381
Notes payable to affiliates ......................... $ 64 $ 111 $ 57
Other liabilities ................................... 908 1,865 2,232
------ ------ ------
Total liabilities ............................. 2,762 4,113 4,670
------ ------ ------
Stockholder's equity:
Common stock .................................. 82 82 82
Additional paid-in capital .................... 928 920 1,003
Accumulated other comprehensive
income ................................... 81 231 309
Retained earnings ............................. 2,386 2,849 3,121
------ ------ ------
Total stockholder's equity .................... 3,477 4,082 4,515
------ ------ ------
Total liabilities and stockholder's equity .... $6,239 $8,195 $9,185
====== ====== ======
For additional financial information concerning the Bond Insurer, see the
audited consolidated financial statements of the Bond Insurer incorporated by
reference in this prospectus supplement. Copies of the consolidated financial
statements of the Bond Insurer incorporated by reference and copies of the Bond
Insurer's annual statement for the year ended December 31, 2002 prepared on the
basis of statutory accounting practices prescribed or permitted by the State of
Wisconsin Office of the Commissioner of Insurance are available, without charge,
from the Bond Insurer. The address of the Bond Insurer's administrative offices
and its telephone number are One State Street Plaza, 19th Floor, New York, New
York 10004 and (212) 668-0340.
The Bond Insurer makes no representation regarding the bonds or the
advisability of investing in the bonds and makes no representation regarding,
nor has it participated in the preparation of, this prospectus supplement other
than the information supplied by the Bond Insurer and presented under the
headings "The Bond Insurer" and "Description of the Securities-Description of
the Bond Insurance Policy" in this prospectus supplement and in the financial
statements incorporated in this prospectus supplement by reference.
IN THE EVENT THAT THE BOND INSURER WERE TO BECOME INSOLVENT, ANY CLAIMS
ARISING UNDER THE POLICY WOULD BE EXCLUDED FROM COVERAGE BY THE CALIFORNIA
INSURANCE GUARANTY ASSOCIATION, ESTABLISHED PURSUANT TO THE LAWS OF THE STATE OF
CALIFORNIA.
DESCRIPTION OF THE SECURITIES
General
The Series 2003-10 Bonds will consist of fifteen classes of Bonds, the
Class 1-A-1, Class 1-A-2 and Class 2-A Bonds and the underlying Class M-1-1,
Class M-1-2, Class M-2-1, Class M-2-2, Class M-3-1, Class M-3-2, Class M-4-1,
Class M-4-2, Class M-5-1, Class M-5-2, Class M-6-1 and Class M-6-2 Bonds. Only
the Class 1-A-1, Class 1-A-2 and Class 2-A Bonds are offered under this
prospectus supplement. In addition, the Series 2003-10 Grantor Trust
Certificates will consist of six classes of Certificates, the Class M-1, Class
M-2,
S-78
Class M-3, Class M-4, Class M-5 and Class M-6 Certificates, each of which are
offered under this prospectus supplement.
The Owner Trust Certificates, which are not offered hereby, will be
entitled to payments on any payment date only after all required payments have
been made on the Bonds. The principal balance of the Owner Trust Certificates as
of any date of determination will be equal to the aggregate principal balance of
the mortgage loans minus the aggregate Bond Principal Balance of all the Bonds.
The Owner Trust Certificates will be entitled to payments as provided in the
Agreements.
The Bonds will be issued by a trust, the assets of which on the closing
date will consist primarily of the mortgage loans. The assets of Impac CMB
Grantor Trust 2003-10-1, Impac CMB Grantor Trust 2003-10-2, Impac CMB Grantor
Trust 2003-10-3, Impac CMB Grantor Trust 2003-10-4, Impac CMB Grantor Trust
2003-10-5 and Impac CMB Grantor Trust 2003-10-6 shall be (i) the Underlying
Class M-1-1 Bonds and Class M-1-2 Bonds, (ii) the Underlying Class M-2-1 Bonds
and Class M-2-2 Bonds, (iii) the Underlying Class M-3-1 Bonds and Class M-3-2
Bonds, (iv) the Underlying Class M-4-1 Bonds and Class M-4-2 Bonds, (v) the
Underlying Class M-5-1 Bonds and Class M-5-2 Bonds and (vi) the Underlying Class
M-6-1 Bonds and Class M-6-2 Bonds, respectively. The grantor trusts will issue
the Grantor Trust Certificates.
Each class of the Offered Securities will have the related initial Bond
Principal Balance or Certificate Principal Balance as set forth on page S-5
hereof and will have the related Bond Interest Rate or Certificate Interest Rate
as defined under "Glossary" in this prospectus supplement. The Bond Interest
Rate on each class of the Bonds will be limited to the related Available Funds
Rate. In addition, the Bond Interest Rate on each class of the Bonds will be
subject to increase on and after the Step-Up Date.
The Offered Securities will be issued, maintained and transferred on the
book-entry records of DTC, Clearstream and Euroclear and their participants in
minimum denominations representing Bond Principal Balances or Certificate
Principal Balances of $25,000 and integral multiples of $1 in excess thereof.
The Offered Securities will be issued as Global Securities. See Annex I" to this
prospectus supplement and "Description of the Securities -- Global Securities"
in the prospectus.
No person acquiring an interest in any class of the Book-Entry Securities
will be entitled to receive an Offered Security representing such person's
interest, except as set forth below under " --Definitive Securities." Unless and
until definitive securities are issued under the limited circumstances described
in this prospectus supplement, all references to actions by holders of the
Offered Securities with respect to the Book-Entry Securities shall refer to
actions taken by DTC, Clearstream and Euroclear upon instructions from its
participants and all references in this prospectus supplement to payments,
notices, reports and statements to holders of the Offered Securities with
respect to the Book-Entry Securities shall refer to payments, notices, reports
and statements to DTC or Cede & Co., as the registered holder of the Book-Entry
Securities, for payment to Security Owners in accordance with DTC procedures.
See "--Registration of the Book-Entry Securities" and "--Definitive Securities"
in this prospectus supplement.
The definitive securities, if ever issued, will be transferable and
exchangeable at the offices of the Indenture Trustee and Grantor Trustee, as
applicable, designated by the Indenture Trustee and Grantor Trustee from time to
time for these purposes. The Indenture Trustee and Grantor Trustee have each
initially designated its offices located at c/o DTC Transfer Services, 55 Water
Street, Jeanette Park Entrance, New York, New York 10041 for such purpose. No
service charge will be imposed for any registration of transfer or exchange, but
the Indenture Trustee may require payment of a sum sufficient to cover any tax
or other governmental charge imposed in connection therewith.
S-79
All payments to holders of the Offered Securities, other than the final
payment on any class of Offered Securities, will be made on each payment date by
or on behalf of the Indenture Trustee and Grantor Trustee, as applicable, to the
persons in whose names the Offered Securities are registered at the close of
business on the related Record Date. Payments will be made by wire transfer in
immediately available funds to the account of the holders of the Offered
Securities specified in the request. The final payment on any class of Offered
Securities will be made in like manner, but only upon presentment and surrender
of the Offered Securities at the location specified by the Indenture Trustee and
Grantor Trustee, as applicable, in the notice to holders of the Offered
Securities of the final payment.
Registration of the Book-Entry Securities
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 the provisions of Section 17A of the
Exchange Act. DTC was created to hold securities for its participants and to
facilitate the clearance and settlement of securities transactions between
participants through electronic book entries, thereby eliminating the need for
physical movement of Securities.
Security Owners that are not participants or indirect participants but
desire to purchase, sell or otherwise transfer ownership of, or other interests
in, the Book-Entry Securities may do so only through participants and indirect
participants in DTC. As a result, Clearstream and Euroclear will hold positions
on behalf of their participants through their relevant depositary which in turn
will hold those positions in their accounts as DTC participants. Secondary
market trading between DTC participants will be settled using the procedures
applicable to prior mortgage loan asset-backed bonds issues in same-day funds.
Secondary market trading between Clearstream participants or Euroclear
participants will be settled using the procedures applicable to conventional
eurobonds in same-day funds. See "Description of the Securities -- The Global
Securities" in the prospectus. In addition, Security Owners will receive all
payments of principal of and interest on the Book-Entry Securities from the
Indenture Trustee through DTC and DTC participants. Accordingly, Security Owners
may experience delays in their receipt of payments. Unless and until definitive
bonds are issued, it is anticipated that the only Securityholders of the
Book-Entry Securities will be Cede & Co., as nominee of DTC. Security Owners
will not be recognized by the Indenture Trustee as Securityholders, as such term
is used in the Indenture and Security Owners will be permitted to exercise the
rights of Securityholders only indirectly through DTC and its participants.
Under the Rules, DTC is required to make book-entry transfers of
Book-Entry Securities among participants and to receive and transmit payments of
principal of, and interest on, the Book-Entry Securities. Participants and
indirect participants with which Security Owners have accounts with respect to
the Book-Entry Securities similarly are required to make book-entry transfers
and receive and transmit these payments on behalf of their respective Security
Owners. Accordingly, although Security Owners will not possess definitive bonds,
the Rules provide a mechanism by which Security Owners, through their
participants and indirect participants, will receive payments and will be able
to transfer their interest in the Book-Entry Securities.
Because DTC can only act on behalf of participants, who in turn act on
behalf of indirect participants and on behalf of certain banks, the ability of a
Security Owner to pledge Book-Entry Securities to persons or entities that do
not participate in the DTC system, or to otherwise act with respect to
Book-Entry Securities, may be limited due to the absence of physical bonds for
the Book-Entry Securities. In addition, under a book-entry format, Security
Owners may experience delays in their receipt of payments since payment will be
made by the Indenture Trustee to Cede & Co., as nominee for DTC.
S-80
Under the Rules, DTC will take any action permitted to be taken by
Securityholders under the Indenture only at the direction of one or more
participants to whose DTC account the Book-Entry Securities are credited.
Clearstream or Euroclear, as the case may be, will take any action permitted to
be taken by Securityholders under the Indenture on behalf of a Clearstream
participant or Euroclear participant in accordance with its rules. Additionally,
DTC, Clearstream or Euroclear, under the Rules or its respective rules, as the
case may be, will take actions with respect to specified voting rights only at
the direction, and on the behalf, of participants whose holdings of Book-Entry
Securities evidence these specified voting rights. DTC may take conflicting
actions with respect to voting rights, to the extent that participants whose
holdings of Book-Entry Securities evidence voting rights authorize divergent
action.
The Company, the Master Servicer and the Indenture Trustee will have no
liability for any aspect of the records relating to or payments made on account
of beneficial ownership interests in the Book-Entry Securities held by Cede &
Co., as nominee for DTC, or for maintaining, supervising or reviewing any
records relating to beneficial ownership interests.
Definitive Securities
Definitive bonds will be issued to Security Owners or their nominees,
respectively, rather than to DTC or its nominee, only if (1) the Company advises
the Indenture Trustee in writing that DTC is no longer willing or able to
discharge properly its responsibilities as clearing agency with respect to the
Book-Entry Securities and the Company is unable to locate a qualified successor,
(2) the Company, at its option, elects to terminate the book- entry system
through DTC, or (3) after the occurrence of an Event of Default, Security Owners
representing in the aggregate not less than 51% of the aggregate Bond Principal
Balance and Certificate Principal Balance of the Book-Entry Securities advise
the Indenture Trustee and DTC through participants, in writing, that the
continuation of a book-entry system through DTC (or a successor thereto) is no
longer in the Security Owners' best interest.
Upon the occurrence of any event described in the immediately preceding
paragraph, the Indenture Trustee is required to notify all Security Owners,
through participants, of the availability of definitive bonds. Upon surrender by
DTC of the definitive bonds representing the Book-Entry Securities and receipt
of instructions for re-registration, the Indenture Trustee will reissue the
Book-Entry Securities as definitive bonds issued in the respective principal
amounts owned by individual Security Owners, and thereafter the Indenture
Trustee will recognize the holders of definitive bonds as Securityholders under
the Indenture. Definitive bonds will be issued in minimum denominations of
$25,000, except that any beneficial ownership represented by a Book-Entry
Security in an amount less than $25,000 immediately prior to the issuance of a
definitive bond shall be issued in a minimum denomination equal to the amount of
the beneficial ownership.
Interest Payments on the Bonds
Group 1 Available Funds
On each payment date, the Indenture Trustee shall withdraw from the
Payment Account the Group 1 Available Funds and the Class 1-A-2 Insured Amount,
if any, for such payment date and make the following disbursements and transfers
in the order of priority described below, in each case to the extent of the
Group 1 Available Funds and the Class 1-A-2 Insured Amount remaining for such
payment date:
(i) concurrently, to the holders of the Class 1-A-1 Bonds and Class 1-A-2
Bonds, the related Accrued Bond Interest for such class for such payment date;
S-81
(ii) to the holders of the Underlying Class M-1-1 Bonds, the related
Accrued Bond Interest for such class for such payment date;
(iii) to the holders of the Underlying Class M-2-1 Bonds, the related
Accrued Bond Interest for such class for such payment date;
(iv) to the holders of the Underlying Class M-3-1 Bonds, the related
Accrued Bond Interest for such class for such payment date;
(v) to the holders of the Underlying Class M-4-1 Bonds, the related
Accrued Bond Interest for such class for such payment date;
(vi) to the holders of the Underlying Class M-5-1 Bonds, the related
Accrued Bond Interest for such class for such payment date; and
(vii) to the holders of the Underlying Class M-6-1 Bonds, the related
Accrued Bond Interest for such class for such payment date.
If on any payment date, the Group 1 Available Funds is insufficient to pay
Accrued Bond Interest on the Class 1-A-2 Bonds, the shortfall will be covered by
the Bond Insurance Policy; provided, that to the extent such shortfalls are
caused by Prepayment Interest Shortfalls, Relief Act Shortfalls or Basis Risk
Shortfalls with respect to the Group 1 Loans, they will not be covered by the
Bond Insurance Policy. Shortfalls covered by the Bond Insurance Policy could
occur, for example, if delinquencies on the Group 1 Loans were exceptionally
high and were not covered by P&I Advances.
On any payment date, any shortfalls resulting from the application of the
Relief Act and any Prepayment Interest Shortfalls on the Group 1 Loans to the
extent not covered by Compensating Interest paid by the Master Servicer will
constitute Unpaid Interest Shortfalls and will be allocated to the Class 1-A-1
Bonds and Class 1-A- 2 Bonds and the Underlying Class M-1-1, Class M-2-1, Class
M-3-1, Class M-4-1, Class M-5-1 and Class M- 6-1 Bonds on a pro rata basis based
on the respective amounts of interest accrued on such Bonds for such payment
date as provided in the definition of Accrued Bond Interest. Prepayment Interest
Shortfalls resulting from partial prepayments on the Group 1 Loans will not be
offset by the Master Servicer from the Master Servicing Fee, Subservicing Fee or
otherwise. No assurance can be given that Compensating Interest available to
cover Prepayment Interest Shortfalls on the Group 1 Loans will be sufficient
therefor. Unpaid Interest Shortfalls allocated to the Class 1-A-1 Bonds and
Class 1-A-2 Bonds and the Underlying Class M-1-1, Class M-2-1, Class M-3-1,
Class M-4-1, Class M-5-1 and Class M-6-1 Bonds shall only be reimbursed as
described in "--Overcollateralization Provisions" below.
Group 2 Available Funds
On each payment date, the Indenture Trustee shall withdraw from the
Payment Account the Group 2 Available Funds for such payment date and make the
following disbursements and transfers in the order of priority described below,
in each case to the extent of the Group 2 Available Funds remaining for such
payment date:
(i) to the holders of the Class 2-A Bonds, the related Accrued Bond
Interest for such class for such payment date;
(ii) to the holders of the Underlying Class M-1-2 Bonds, the related
Accrued Bond Interest for such class for such payment date;
S-82
(iii) to the holders of the Underlying Class M-2-2 Bonds, the related
Accrued Bond Interest for such class for such payment date;
(iv) to the holders of the Underlying Class M-3-2 Bonds, the related
Accrued Bond Interest for such class for such payment date;
(v) to the holders of the Underlying Class M-4-2 Bonds, the related
Accrued Bond Interest for such class for such payment date;
(vi) to the holders of the Underlying Class M-5-2 Bonds, the related
Accrued Bond Interest for such class for such payment date; and
(vii) to the holders of the Underlying Class M-6-2 Bonds, the related
Accrued Bond Interest for such class for such payment date.
On any payment date, any shortfalls resulting from the application of the
Relief Act and any Prepayment Interest Shortfalls on the Group 2 Loans to the
extent not covered by Compensating Interest paid by the Master Servicer will
constitute Unpaid Interest Shortfalls and will be allocated to the Class 2-A
Bonds and the Underlying Class M-1-2, Class M-2-2, Class M-3-2, Class M-4-2,
Class M-5-2 and Class M-6-2 Bonds on a pro rata basis based on the respective
amounts of interest accrued on such Bonds for such payment date as provided in
the definition of Accrued Bond Interest. Prepayment Interest Shortfalls
resulting from partial prepayments on the Group 2 Loans will not be offset by
the Master Servicer from the Master Servicing Fee, Subservicing Fee or
otherwise. No assurance can be given that Compensating Interest available to
cover Prepayment Interest Shortfalls on the Group 2 Loans will be sufficient
therefor. Unpaid Interest Shortfalls allocated to the Class 2-A Bonds and the
Underlying Class M-1-2, Class M-2-2, Class M-3-2, Class M-4-2, Class M-5-2 and
Class M-6-2 Bonds shall only be reimbursed as described in
"--Overcollateralization Provisions" below.
Calculation of One-Month LIBOR
On each Interest Determination Date, the Indenture Trustee will determine
the London interbank offered rate for one-month United States dollar deposits,
or One-Month LIBOR, for the next Accrual Period for the Bonds, other than the
Class 2-A Bonds, on the basis of the offered rates of the Reference Banks for
one-month United States dollar deposits, as such rate appears on the Telerate
Screen Page 3750, as of 11:00 a.m. (London time) on such Interest Determination
Date.
On each Interest Determination Date, if the rate does not appear or is not
available on Telerate Screen Page 3750, One-Month LIBOR for the related Accrual
Period for these Bonds will be established by the Indenture Trustee as follows:
(a) If on such Interest Determination Date two or more Reference Banks
provide such offered quotations, One-Month LIBOR for the related Accrual Period
shall be the arithmetic mean of such offered quotations (rounded upwards if
necessary to the nearest whole multiple of 0.0625%).
(b) If on such Interest Determination Date fewer than two Reference Banks
provide such offered quotations, One-Month LIBOR for the related Accrual Period
shall be the higher of (x) One-Month LIBOR as determined on the previous
Interest Determination Date and (y) the Reserve Interest Rate.
S-83
The establishment of One-Month LIBOR on each Interest Determination Date
by the Indenture Trustee and the Indenture Trustee's calculation of the rate of
interest applicable to these Bonds for the related Accrual Period shall (in the
absence of manifest error) be final and binding.
Principal Payments on the Bonds
Class 1-A-1 Bonds and Class 1-A-2 Bonds and the Underlying Class M-1-1,
Class M-2-1, Class M-3- 1, Class M-4-1, Class M-5-1 and Class M-6-1 Bonds
On each payment date, the holders of the Class 1-A-1 Bonds and Class 1-A-2
Bonds and the Underlying Class M-1-1, Class M-2-1, Class M-3-1, Class M-4-1,
Class M-5-1 and Class M-6-1 Bonds shall be entitled to receive payments in
respect of principal equal to the related Principal Distribution Amount for that
payment date, allocated on a pro rata basis, based on the Bond Principal
Balances thereof, in reduction of the Bond Principal Balances thereof, until the
Bond Principal Balances thereof have been reduced to zero.
Class 2-A Bonds and the Underlying Class M-1-2, Class M-2-2, Class M-3-2,
Class M-4-2, Class M- 5-2 and Class M-6-2 Bonds
On each payment date, the holders of the Class 2-A Bonds and the
Underlying Class M-1-2, Class M-2- 2, Class M-3-2, Class M-4-2, Class M-5-2 and
Class M-6-2 Bonds shall be entitled to receive payments in respect of principal
equal to the related Principal Distribution Amount for that payment date,
allocated on a pro rata basis, based on the Bond Principal Balances thereof, in
reduction of the Bond Principal Balances thereof, until the Bond Principal
Balances thereof have been reduced to zero.
Overcollateralization Provisions
The weighted average of the Net Mortgage Rates for the mortgage loans in
each Loan Group is generally expected to be higher than the weighted average of
the Bond Interest Rates on the related Bonds. As a result, interest collections
on the mortgage loans in each Loan Group are generally expected to be generated
in excess of the amount of interest payable to the holders of the related Bonds
and the related fees and expenses payable by the trust. This excess interest
will generally constitute the related Net Monthly Excess Cashflow on any payment
date.
Group 1 Loans
With respect to any payment date, any Net Monthly Excess Cashflow in
respect of the Group 1 Loans shall be paid as follows:
(i) to the Bond Insurer, the aggregate of all payments, if any, made by
the Bond Insurer under the Bond Insurance Policy with respect to the Class 1-A-2
Bonds, including interest thereon, to the extent not previously paid or
reimbursed;
(ii) to the holders of the Group 1 Bonds, pro rata, an amount equal to any
Realized Losses on the Group 1 Loans during the related Due Period, payable to
such holders of the Group 1 Bonds as part of the related Principal Distribution
Amount as described under "--Principal Payments on the Bonds" above;
(iii) to the holders of the Group 2 Bonds, pro rata, an amount equal to
any Realized Losses on the Group 2 Loans during the related Due Period, to the
extent unreimbursed by Net Monthly Excess Cashflow for the Group 2 Loans on that
payment date, payable to such holders of the Group 2 Bonds as part of the
related Principal Distribution Amount as described under "--Principal Payments
on the Bonds" above;
S-84
(iv) to the holders of the Class 1-A-1 Bonds and Class 1-A-2 Bonds and the
Underlying Class M-1- 1, Class M-2-1, Class M-3-1, Class M-4-1, Class M-5-1 and
Class M-6-1 Bonds, pro rata, an amount equal to any related
Overcollateralization Increase Amount, payable to such holders as part of the
related Principal Distribution Amount as described under "--Principal Payments
on the Bonds" above;
(v) to the holders of the Group 2 Bonds, pro rata, an amount equal to any
related Overcollateralization Increase Amount resulting from any previously
unreimbursed Realized Losses on the Group 2 Loans, to the extent that such
Realized Losses have not been reimbursed by related and non-related Net Monthly
Excess Cashflow on prior payment dates, payable to such holders of the Group 2
Bonds as part of the related Principal Distribution Amount as described under
"--Principal Payments on the Bonds" above;
(vi) to the holders of the Underlying Class M-1-1, Class M-1-2, Class
M-2-1, Class M-2-2, Class M-3-1, Class M-3-2, Class M-4-1, Class M-4-2, Class
M-5-1, Class M-5-2, Class M-6-1 and Class M-6-2 Bonds, in that order, in an
amount equal to the Allocated Realized Loss Amount for such classes of the
Underlying Class M Bonds, in each case to the extent not covered by non-related
Net Monthly Excess Cashflow for a non-related Underlying Class M Bond;
(vii) to the holders of the Class 1-A-1 Bonds and Class 1-A-2 Bonds, pro
rata, and then to the Underlying Class M-1-1, Class M-2-1, Class M-3-1, Class
M-4-1, Class M-5-1 and Class M-6-1 Bonds, in that order, any Unpaid Interest
Shortfall for such Bonds on such payment date, to the extent not previously
reimbursed;
(viii) to the holders of the Class 1-A-1 Bonds and Class 1-A-2 Bonds, pro
rata, and then to the Underlying Class M-1-1, Class M-2-1, Class M-3-1, Class
M-4-1, Class M-5-1 and Class M-6-1 Bonds, in that order, any related Basis Risk
Shortfall Carry-Forward Amount for such Bonds on such payment date, to the
extent not covered by the Senior Derivative Contracts; and
(ix) to the holders of the Owner Trust Certificates as provided in the
Agreements.
Group 2 Loans
With respect to any payment date, any Net Monthly Excess Cashflow in
respect of the Group 2 Loans shall be paid as follows:
(i) to the holders of the Group 2 Bonds, pro rata, an amount equal to any
Realized Losses on the Group 2 Loans during the related Due Period, payable to
such holders of the Group 2 Bonds as part of the related Principal Distribution
Amount as described under "--Principal Payments on the Bonds" above;
(ii) to the holders of the Group 1 Bonds, pro rata, an amount equal to any
Realized Losses on the Group 1 Loans during the related Due Period, to the
extent unreimbursed by Net Monthly Excess Cashflow for the Group 1 Loans on that
payment date, payable to such holders of the Group 1 Bonds as part of the
related Principal Distribution Amount as described under "--Principal Payments
on the Bonds" above;
(iii) to the Bond Insurer, the aggregate of all payments, if any, made by
the Bond Insurer under the Bond Insurance Policy with respect to the Class 1-A-2
Bonds, including interest thereon, to the extent not previously paid or
reimbursed or covered under clause (i) under "--Group 1 Loans" above;
(iv) to the holders of the Class 2-A Bonds and the Underlying Class M-1-2,
Class M-2-2, Class M- 3-2, Class M-4-2, Class M-5-2 and Class M-6-2 Bonds, pro
rata, in an amount equal to any related
S-85
Overcollateralization Increase Amount, payable to such holders as part of the
related Principal Distribution Amount as described under "--Principal Payments
on the Bonds" above;
(v) to the holders of the Group 1 Bonds, pro rata, an amount equal to any
related Overcollateralization Increase Amount resulting from any previously
unreimbursed Realized Losses on the Group 1 Loans, to the extent that such
Realized Losses have not been reimbursed by related and non-related Net Monthly
Excess Cashflow on prior payment dates, payable to such holders of the Group 1
Bonds as part of the related Principal Distribution Amount as described under
"--Principal Payments on the Bonds" above;
(vi) to the holders of the Underlying Class M-1-2, Class M-1-1, Class
M-2-2, Class M-2-1, Class M-3-2, Class M-3-1, Class M-4-2, Class M-4-1, Class
M-5-2, Class M-5-1, Class M-6-2 and Class M-6-1 Bonds, in that order, in an
amount equal to the Allocated Realized Loss Amount for such classes of the
Underlying Class M Bonds, in each case to the extent not covered by non-related
Net Monthly Excess Cashflow for a non-related Underlying Class M Bond;
(vii) to the holders of the Class 2-A Bonds, and then to the Underlying
Class M-1-2, Class M-2-2, Class M-3-2, Class M-4-2, Class M-5-2 and Class M-6-2
Bonds, in that order, any Unpaid Interest Shortfall for such Bonds on such
payment date, to the extent not previously reimbursed;
(viii) to the holders of the Underlying Class M-1-2, Class M-2-2, Class
M-3-2, Class M-4-2, Class M-5-2 and Class M-6-2 Bonds, in that order, any
related Basis Risk Shortfall Carry-Forward Amount for such Bonds on such payment
date, to the extent not covered by the Subordinate Derivative Contracts; and
(ix) to the holders of the Owner Trust Certificates as provided in the
Agreements.
Description of the Bond Insurance Policy
On the Closing Date, the Bond Insurer will issue the Bond Insurance Policy
in favor of the Indenture Trustee on behalf of the Class 1-A-2 Bondholders. The
Bond Insurance Policy will unconditionally and irrevocably guarantee certain
payments on the Class 1-A-2 Bonds. Provided that timely notice has been received
by the Bond Insurer, the Bond Insurer will be required to forward the Class
1-A-2 Insured Amount, if any, to the Indenture Trustee by the related payment
date. For purposes of the foregoing, amounts in the Payment Account available
for interest payments on any payment date shall be deemed to include all amounts
in the Payment Account for such payment date available for payment on such
payment date. Notwithstanding the foregoing two sentences, the Bond Insurer
shall not be obligated to pay any Preference Amount in respect of principal
(other than principal paid in connection with Realized Losses) except on the
final scheduled payment date or earlier termination of the trust pursuant to the
terms of the Indenture. Prepayment Interest Shortfalls, Relief Act Shortfalls
and any Basis Risk Shortfalls will not be covered by the Bond Insurance Policy.
Pursuant to the terms of the Indenture, draws under the Bond Insurance Policy in
respect of any Insured Undercollateralization Amount with respect to the Class
1-A-2 Bonds will be paid to the Class 1-A-2 Bondholders by the Paying Agent as
principal. In the absence of payments under the Bond Insurance Policy, Class A
Bondholders will directly bear the credit risks associated with their investment
to the extent such risks are not covered by overcollateralization or otherwise.
Derivative Contracts
On the Closing Date, either the Seller will assign to the Company, and the
Company will assign to the Issuer for the benefit of the Bonds, its rights under
the Derivative Contracts, or the Seller will cause the Issuer to enter into the
Derivative Contracts with the Derivative Counterparty. Each Derivative Contract
will contain a Swap Agreement Fixed Rate and provide for the calculation of
One-Month LIBOR. The Derivative
S-86
Contracts consist of various swap agreements, where net payments will be made
(a) to the Issuer, if One-Month LIBOR exceeds the related Swap Agreement Fixed
Rate, and (b) to the Derivative Counterparty, to the extent such Swap Agreement
Fixed Rate exceeds One-Month LIBOR. The Derivative Contracts will be divided
into two groups, the Senior Derivative Contracts and Subordinate Derivative
Contracts. Amounts payable from the Senior Derivative Contracts will be
available solely to make payments to the Class 1-A-1 Bonds and Class 1-A- 2
Bonds and amounts payable from the Subordinate Derivative Contracts will be
available solely to make payments to the Underlying Class M Bonds, in each case
as provided below. On any payment date, any amounts not paid to the related
bonds will be paid to the Owner Trust Certificates and will be not be available
to make payments to the bonds on future payment dates.
Payments will be made with respect to the Derivative Contracts based on a
notional balance in accordance with the schedule set forth in the related
Derivative Contract. The amount of the notional balance on which calculations
are based on any payment date for the Senior Derivative Contracts with respect
to the swap agreements will be the lesser of (a) the balance in the related
schedule and (b) a percentage of the aggregate Bond Principal Balance of the
Class 1-A-1 Bonds and 1-A-2 Bonds immediately prior to the related payment date.
The amount of the notional balance on which calculations are based on any
payment date for the Subordinate Derivative Contracts with respect to the swap
agreements will be the lesser of (a) the balance in the related schedule and (b)
a percentage of the aggregate Bond Principal Balance of the Underlying Class M
Bonds. The percentage referenced above will be determined separately for each
swap agreement. This percentage will be equal to the quotient, expressed as a
percentage, of the initial notional amount of the swap agreement divided by the
aggregate initial notional amount of all of the related swap agreements.
On each payment date, the Indenture Trustee will determine the total
amount payable to the Issuer and the total amount payable to the Derivative
Counterparty under the Derivative Contracts. The Indenture Trustee will
determine whether a net payment is due to the Issuer or from the Derivative
Counterparty and will collect or make such payment, as applicable. Payments due
by the Issuer under the Derivative Contracts will be made prior to payments on
the Bonds.
The Derivative Counterparty, or the guarantor thereof making payments to
the Issuer is, as of the Closing Date, rated "AAA" (or its equivalent) by two of
S&P, Moody's or Fitch Ratings.
The Swap Agreement Fixed Rates and scheduled principal balances of the
swap agreements in the aggregate will pay in accordance with (1) the first six
tables with respect to the Senior Derivative Contracts and (2) the last two
tables with respect to the Subordinate Derivative Contracts; provided, that the
scheduled principal balances may from time to time be less than the amount in
their actual schedules based on the aggregate Bond Principal Balances of the
Bonds as described above:
Scheduled Principal Swap Agreement
Payment Date Balance Fixed Rate
-------------------------------- ------------------- --------------
October 25, 2003 ............... $ 0 0.00000%
November 25, 2003 .............. 0 0.00000
December 25, 2003 .............. 0 0.00000
January 25, 2004 ............... 0 0.00000
February 25, 2004 .............. 83,059,300 1.64555
March 25, 2004 ................. 82,484,100 1.64555
April 25, 2004 ................. 81,838,100 1.64555
May 25, 2004 ................... 81,122,400 1.64555
June 25, 2004 .................. 80,338,600 1.64555
S-87
July 25, 2004 .................. $79,486,900 1.64555%
August 25, 2004 ................ 78,570,000 1.64555
September 25, 2004 ............. 77,588,600 1.64555
October 25, 2004 ............... 76,544,800 1.64555
November 25, 2004 .............. 75,440,900 1.64555
December 25, 2004 .............. 74,278,600 1.64555
January 25, 2005 ............... 73,060,300 1.64555
February 25, 2005 .............. 71,788,800 1.64555
March 25, 2005 ................. 70,466,300 1.64555
April 25, 2005 ................. 69,095,600 1.64555
May 25, 2005 ................... 67,679,700 1.64555
June 25, 2005 .................. 66,221,600 1.64555
July 25, 2005 .................. 64,724,200 1.64555
After the payment date in July 2005, the first swap agreement will
terminate without termination payments by either party.
Scheduled Principal Swap Agreement
Payment Date Balance Fixed Rate
-------------------------------- ------------------- --------------
October 25, 2003 ............... $ 0 0.00000%
November 25, 2003 .............. 0 0.00000
December 25, 2003 .............. 0 0.00000
January 25, 2004 ............... 0 0.00000
February 25, 2004 .............. 88,921,700 1.88008
March 25, 2004 ................. 88,306,200 1.88008
April 25, 2004 ................. 87,614,700 1.88008
May 25, 2004 ................... 86,848,700 1.88008
June 25, 2004 .................. 86,009,400 1.88008
July 25, 2004 .................. 85,097,900 1.88008
August 25, 2004 ................ 84,116,500 1.88008
September 25, 2004 ............. 83,066,100 1.88008
October 25, 2004 ............... 81,948,600 1.88008
November 25, 2004 .............. 80,767,000 1.88008
December 25, 2004 .............. 79,522,500 1.88008
January 25, 2005 ............... 78,217,900 1.88008
February 25, 2005 .............. 76,856,500 1.88008
March 25, 2005 ................. 75,440,500 1.88008
April 25, 2005 ................. 73,973,200 1.88008
May 25, 2005 ................... 72,457,200 1.88008
June 25, 2005 .................. 70,895,900 1.88008
July 25, 2005 .................. 69,292,800 1.88008
S-88
After the payment date in July 2005, the second swap agreement will
terminate without termination payments by either party.
Scheduled Principal Swap Agreement
Payment Date Balance Fixed Rate
-------------------------------- ------------------- --------------
October 25, 2003 ............... $ 0 0.00000%
November 25, 2003 .............. 0 0.00000
December 25, 2003 .............. 0 0.00000
January 25, 2004 ............... 0 0.00000
February 25, 2004 .............. 84,036,100 2.07948
March 25, 2004 ................. 83,454,100 2.07948
April 25, 2004 ................. 82,800,500 2.07948
May 25, 2004 ................... 82,076,500 2.07948
June 25, 2004 .................. 81,283,200 2.07948
July 25, 2004 .................. 80,421,800 2.07948
August 25, 2004 ................ 79,493,800 2.07948
September 25, 2004 ............. 78,501,100 2.07948
October 25, 2004 ............... 77,445,200 2.07948
November 25, 2004 .............. 76,328,000 2.07948
December 25, 2004 .............. 75,152,100 2.07948
January 25, 2005 ............... 73,919,500 2.07948
February 25, 2005 .............. 72,633,100 2.07948
March 25, 2005 ................. 71,295,100 2.07948
April 25, 2005 ................. 69,908,300 2.07948
May 25, 2005 ................... 68,475,700 2.07948
June 25, 2005 .................. 67,000,200 2.07948
July 25, 2005 .................. 65,485,300 2.07948
August 25, 2005 ................ 15,611,900 2.14595
September 25, 2005 ............. 15,242,200 2.14595
October 25, 2005 ............... 14,881,000 2.14595
November 25, 2005 .............. 14,528,500 2.14595
December 25, 2005 .............. 14,184,200 2.14595
January 25, 2006 ............... 13,848,200 2.14595
February 25, 2006 .............. 13,520,100 2.14595
March 25, 2006 ................. 13,199,700 2.14595
April 25, 2006 ................. 12,886,900 2.14595
May 25, 2006 ................... 12,581,700 2.14595
June 25, 2006 .................. 12,283,500 2.14595
July 25, 2006 .................. 11,992,500 2.14595
After the payment date in July 2006, the third swap agreement will
terminate without termination payments by either party.
S-89
Scheduled Principal Swap Agreement
Payment Date Balance Fixed Rate
-------------------------------- ------------------- --------------
October 25, 2003 ............... $ 0 0.00000%
November 25, 2003 .............. 0 0.00000
December 25, 2003 .............. 0 0.00000
January 25, 2004 ............... 0 0.00000
February 25, 2004 .............. 55,935,800 2.39611
March 25, 2004 ................. 70,241,100 2.41725
April 25, 2004 ................. 69,739,700 2.41724
May 25, 2004 ................... 69,178,600 2.41723
June 25, 2004 .................. 68,558,800 2.41723
July 25, 2004 .................. 67,881,200 2.41722
August 25, 2004 ................ 67,146,700 2.41721
September 25, 2004 ............. 66,357,000 2.41720
October 25, 2004 ............... 65,513,200 2.41719
November 25, 2004 .............. 64,616,900 2.41718
December 25, 2004 .............. 63,670,000 2.41718
January 25, 2005 ............... 62,674,400 2.41717
February 25, 2005 .............. 61,631,900 2.41716
March 25, 2005 ................. 60,544,700 2.41715
April 25, 2005 ................. 59,414,800 2.41714
May 25, 2005 ................... 58,244,700 2.41713
June 25, 2005 .................. 57,036,800 2.41712
July 25, 2005 .................. 55,793,800 2.41711
August 25, 2005 ................ 54,518,300 2.41710
September 25, 2005 ............. 12,338,900 2.45494
October 25, 2005 ............... 12,046,500 2.45494
November 25, 2005 .............. 11,761,300 2.45494
December 25, 2005 .............. 11,482,600 2.45494
January 25, 2006 ............... 11,210,600 2.45494
February 25, 2006 .............. 10,945,000 2.45494
March 25, 2006 ................. 10,685,700 2.45494
April 25, 2006 ................. 10,432,500 2.45494
May 25, 2006 ................... 10,185,500 2.45494
June 25, 2006 .................. 9,944,100 2.45494
July 25, 2006 .................. 9,708,600 2.45494
After the payment date in July 2006, the fourth swap agreement will
terminate without termination payments by either party.
S-90
Scheduled Principal Swap Agreement
Payment Date Balance Fixed Rate
-------------------------------- ------------------- --------------
October 25, 2003 ............... $ 0 0.00000%
November 25, 2003 .............. 0 0.00000
December 25, 2003 .............. 0 0.00000
January 25, 2004 ............... 0 0.00000
February 25, 2004 .............. 71,332,800 2.68259
March 25, 2004 ................. 84,519,100 2.68508
April 25, 2004 ................. 89,732,500 2.68704
May 25, 2004 ................... 88,971,100 2.68704
June 25, 2004 .................. 88,134,400 2.68705
July 25, 2004 .................. 87,223,600 2.68705
August 25, 2004 ................ 86,240,500 2.68706
September 25, 2004 ............. 85,186,500 2.68706
October 25, 2004 ............... 84,063,900 2.68707
November 25, 2004 .............. 82,874,400 2.68708
December 25, 2004 .............. 81,620,700 2.68708
January 25, 2005 ............... 80,305,000 2.68709
February 25, 2005 .............. 78,930,200 2.68709
March 25, 2005 ................. 77,498,800 2.68710
April 25, 2005 ................. 76,014,000 2.68710
May 25, 2005 ................... 74,478,700 2.68711
June 25, 2005 .................. 72,896,500 2.68711
July 25, 2005 .................. 71,270,600 2.68712
August 25, 2005 ................ 69,604,300 2.68713
September 25, 2005 ............. 67,960,400 2.68713
October 25, 2005 ............... 61,890,100 2.68512
November 25, 2005 .............. 60,423,900 2.68512
December 25, 2005 .............. 58,992,600 2.68512
January 25, 2006 ............... 57,595,200 2.68512
February 25, 2006 .............. 56,230,700 2.68512
March 25, 2006 ................. 54,898,700 2.68512
April 25, 2006 ................. 53,598,200 2.68512
May 25, 2006 ................... 52,328,500 2.68512
June 25, 2006 .................. 51,088,900 2.68512
July 25, 2006 .................. 49,878,600 2.68512
August 25, 2006 ................ 35,315,900 2.70522
September 25, 2006 ............. 26,673,500 2.70733
October 25, 2006 ............... 26,041,600 2.70733
November 25, 2006 .............. 25,424,800 2.70733
December 25, 2006 .............. 24,822,500 2.70733
S-91
January 25, 2007 ............... $24,234,500 2.70733%
February 25, 2007 .............. 23,660,400 2.70733
March 25, 2007 ................. 23,099,900 2.70733
April 25, 2007 ................. 22,552,700 2.70733
May 25, 2007 ................... 22,018,500 2.70733
June 25, 2007 .................. 21,496,900 2.70733
July 25, 2007 .................. 20,987,700 2.70733
August 25, 2007 ................ 20,490,500 2.70733
September 25, 2007 ............. 20,005,100 2.70733
October 25, 2007 ............... 19,531,100 2.70733
November 25, 2007 .............. 19,068,500 2.70733
December 25, 2007 .............. 18,616,800 2.70733
January 25, 2008 ............... 18,175,800 2.70733
February 25, 2008 .............. 17,745,200 2.70733
March 25, 2008 ................. 17,324,900 2.70733
April 25, 2008 ................. 16,914,400 2.70733
May 25, 2008 ................... 16,513,700 2.70733
June 25, 2008 .................. 16,122,500 2.70733
July 25, 2008 .................. 15,740,600 2.70733
After the payment date in July 2008, the fifth swap agreement will
terminate without termination payments by either party.
Scheduled Principal Swap Agreement
Payment Date Balance Fixed Rate
-------------------------------- ------------------- --------------
October 25, 2003 ............... $ 0 0.00000%
November 25, 2003 .............. 0 0.00000
December 25, 2003 .............. 0 0.00000
January 25, 2004 ............... 0 0.00000
February 25, 2004 .............. 16,671,100 3.50496
March 25, 2004 ................. 26,336,000 3.58330
April 25, 2004 ................. 26,147,500 3.58336
May 25, 2004 ................... 25,936,600 3.58342
June 25, 2004 .................. 25,703,600 3.58348
July 25, 2004 .................. 25,449,100 3.58353
August 25, 2004 ................ 25,173,200 3.58359
September 25, 2004 ............. 24,876,700 3.58365
October 25, 2004 ............... 24,559,800 3.58371
November 25, 2004 .............. 24,223,300 3.58377
December 25, 2004 .............. 23,867,900 3.58384
January 25, 2005 ............... 23,494,100 3.58390
S-92
February 25, 2005 .............. $23,102,700 3.58396%
March 25, 2005 ................. 22,694,600 3.58402
April 25, 2005 ................. 22,270,500 3.58409
May 25, 2005 ................... 21,831,400 3.58415
June 25, 2005 .................. 21,378,100 3.58422
July 25, 2005 .................. 20,911,700 3.58429
August 25, 2005 ................ 20,433,100 3.58436
September 25, 2005 ............. 19,949,000 3.58436
October 25, 2005 ............... 19,476,300 3.58436
November 25, 2005 .............. 19,014,900 3.58436
December 25, 2005 .............. 18,564,500 3.58436
January 25, 2006 ............... 18,124,800 3.58436
February 25, 2006 .............. 17,695,500 3.58436
March 25, 2006 ................. 17,276,300 3.58436
April 25, 2006 ................. 16,867,000 3.58436
May 25, 2006 ................... 16,467,500 3.58436
June 25, 2006 .................. 16,077,400 3.58436
July 25, 2006 .................. 15,696,500 3.58436
August 25, 2006 ................ 15,324,600 3.58436
September 25, 2006 ............. 14,961,600 3.58436
October 25, 2006 ............... 14,607,200 3.58436
November 25, 2006 .............. 14,261,200 3.58436
December 25, 2006 .............. 13,923,500 3.58436
January 25, 2007 ............... 13,593,600 3.58436
February 25, 2007 .............. 13,271,600 3.58436
March 25, 2007 ................. 12,957,100 3.58436
April 25, 2007 ................. 12,650,100 3.58436
May 25, 2007 ................... 12,350,500 3.58436
June 25, 2007 .................. 12,058,000 3.58436
July 25, 2007 .................. 11,772,500 3.58436
August 25, 2007 ................ 11,493,600 3.58436
September 25, 2007 ............. 11,221,400 3.58436
October 25, 2007 ............... 10,955,600 3.58436
November 25, 2007 .............. 10,696,000 3.58436
December 25, 2007 .............. 10,442,700 3.58436
January 25, 2008 ............... 10,195,300 3.58435
February 25, 2008 .............. 9,953,800 3.58435
March 25, 2008 ................. 9,718,000 3.58436
April 25, 2008 ................. 9,487,800 3.58436
May 25, 2008 ................... 9,263,000 3.58435
June 25, 2008 .................. 9,043,500 3.58435
S-93
July 25, 2008 .................. $ 8,829,300 3.58436%
August 25, 2008 ................ 6,424,700 3.66700
After the payment date in August 2008, the sixth swap agreement will
terminate without termination payments by either party.
Scheduled Principal Swap Agreement
Payment Date Balance Fixed Rate
-------------------------------- ------------------- --------------
October 25, 2003 ............... $ 0 0.00000%
November 25, 2003 .............. 0 0.00000
December 25, 2003 .............. 0 0.00000
January 25, 2004 ............... 0 0.00000
February 25, 2004 .............. 41,041,100 1.73173
March 25, 2004 ................. 40,757,000 1.73173
April 25, 2004 ................. 40,437,800 1.73173
May 25, 2004 ................... 40,084,100 1.73173
June 25, 2004 .................. 39,696,800 1.73173
July 25, 2004 .................. 39,276,000 1.73173
August 25, 2004 ................ 38,823,000 1.73173
September 25, 2004 ............. 38,338,200 1.73173
October 25, 2004 ............... 37,822,500 1.73173
November 25, 2004 .............. 37,277,100 1.73173
December 25, 2004 .............. 36,702,700 1.73173
January 25, 2005 ............... 36,100,600 1.73173
February 25, 2005 .............. 35,472,300 1.73173
March 25, 2005 ................. 34,818,800 1.73173
April 25, 2005 ................. 34,141,600 1.73173
May 25, 2005 ................... 33,441,900 1.73173
June 25, 2005 .................. 32,721,300 1.73173
July 25, 2005 .................. 31,981,400 1.73173
After the payment date in July 2005, the seventh swap agreement will
terminate without termination payments by either party.
Scheduled Principal Swap Agreement
Payment Date Balance Fixed Rate
-------------------------------- ------------------- --------------
October 25, 2003 ............... $ 0 0.00000%
November 25, 2003 .............. 0 0.00000
December 25, 2003 .............. 0 0.00000
January 25, 2004 ............... 0 0.00000
February 25, 2004 .............. 24,428,900 3.14440
March 25, 2004 ................. 29,145,600 3.13277
S-94
April 25, 2004 ................. $31,853,400 3.14654%
May 25, 2004 ................... 31,584,700 3.14655
June 25, 2004 .................. 31,289,200 3.14656
July 25, 2004 .................. 30,967,400 3.14658
August 25, 2004 ................ 30,619,900 3.14659
September 25, 2004 ............. 30,247,400 3.14661
October 25, 2004 ............... 29,850,400 3.14662
November 25, 2004 .............. 29,429,700 3.14663
December 25, 2004 .............. 28,986,100 3.14665
January 25, 2005 ............... 28,520,300 3.14666
February 25, 2005 .............. 28,033,600 3.14668
March 25, 2005 ................. 27,526,800 3.14669
April 25, 2005 ................. 27,001,000 3.14671
May 25, 2005 ................... 26,457,200 3.14672
June 25, 2005 .................. 25,896,600 3.14674
July 25, 2005 .................. 25,320,400 3.14675
August 25, 2005 ................ 24,729,800 3.14677
September 25, 2005 ............. 24,146,500 3.14678
October 25, 2005 ............... 23,574,500 3.14678
November 25, 2005 .............. 23,016,100 3.14678
December 25, 2005 .............. 22,470,900 3.14678
January 25, 2006 ............... 21,938,600 3.14678
February 25, 2006 .............. 21,418,800 3.14678
March 25, 2006 ................. 20,911,400 3.14678
April 25, 2006 ................. 20,416,000 3.14678
May 25, 2006 ................... 19,932,400 3.14678
June 25, 2006 .................. 19,460,200 3.14678
July 25, 2006 .................. 18,999,100 3.14678
August 25, 2006 ................ 18,549,100 3.14678
September 25, 2006 ............. 15,321,900 3.15984
October 25, 2006 ............... 13,286,400 3.14440
November 25, 2006 .............. 12,971,700 3.14440
December 25, 2006 .............. 12,664,400 3.14440
January 25, 2007 ............... 12,364,400 3.14440
February 25, 2007 .............. 12,071,500 3.14440
March 25, 2007 ................. 11,785,500 3.14440
April 25, 2007 ................. 11,506,400 3.14440
May 25, 2007 ................... 11,233,900 3.14440
June 25, 2007 .................. 10,967,800 3.14440
July 25, 2007 .................. 10,708,000 3.14440
August 25, 2007 ................ 10,454,300 3.14440
S-95
September 25, 2007 ............. $10,206,700 3.14440%
October 25, 2007 ............... 9,964,800 3.14440
November 25, 2007 .............. 9,728,800 3.14440
December 25, 2007 .............. 9,498,400 3.14440
January 25, 2008 ............... 9,273,400 3.14440
February 25, 2008 .............. 9,053,800 3.14440
March 25, 2008 ................. 8,839,400 3.14440
April 25, 2008 ................. 8,630,000 3.14440
May 25, 2008 ................... 8,425,600 3.14440
June 25, 2008 .................. 8,226,000 3.14440
July 25, 2008 .................. 8,031,100 3.14440
After the payment date in July 2008, the eighth swap agreement will
terminate without termination payments by either party.
With respect to the Senior Derivative Contracts, on each payment date, the
Senior Net Derivative Contract Payment Amount with respect to such payment date
will be allocated to the Bonds and the Owner Trust Certificates in the following
order of priority, in each case to the extent of amounts remaining:
(i) to the holders of the Class 1-A-1 Bonds and Class 1-A-2 Bonds, pro
rata, any related Basis Risk Shortfall Carry-Forward Amount for such payment
date; and
(ii) any remaining amounts to the holders of the Owner Trust Certificates.
With respect to the Subordinate Derivative Contracts, on each payment
date, the Subordinate Net Derivative Contract Payment Amount with respect to
such payment date will be allocated to the Bonds and the Owner Trust
Certificates in the following order of priority, in each case to the extent of
amounts remaining:
(i) to the Underlying Class M-1-1 Bonds and Class M-1-2 Bonds, pro rata,
any related Basis Risk Shortfall Carry-Forward Amount for such payment
date;
(ii) to the Underlying Class M-2-1 Bonds and Class M-2-2 Bonds, pro rata,
any related Basis Risk Shortfall Carry-Forward Amount for such payment
date;
(iii) to the Underlying Class M-3-1 Bonds and Class M-3-2 Bonds, pro rata,
any related Basis Risk Shortfall Carry-Forward Amount for such payment
date;
(iv) to the Underlying Class M-4-1 Bonds and Class M-4-2 Bonds, pro rata,
any related Basis Risk Shortfall Carry-Forward Amount for such payment
date;
(v) to the Underlying Class M-5-1 Bonds and Class M-5-2 Bonds, pro rata,
any related Basis Risk Shortfall Carry-Forward Amount for such payment
date;
(vi) to the Underlying Class M-6-1 Bonds and Class M-6-2 Bonds, pro rata,
any related Basis Risk Shortfall Carry-Forward Amount for such payment
date; and
(vii) any remaining amounts to the holders of the Owner Trust
Certificates.
S-96
Principal and Interest Payments on the Grantor Trust Certificates
On each payment date, each of the Grantor Trust Certificates will be
entitled to all payments received on the related Underlying Class M Bonds as
provided in the preceding sections. The Class M-1, Class M-2, Class M-3, Class
M-4, Class M-5 and Class M-6 Certificates will receive any payments received on
(i) the Underlying Class M-1-1 Bonds and Class M-1-2 Bonds, (ii) the Underlying
Class M-2-1 Bonds and Class M-2- 2 Bonds, (iii) the Underlying Class M-3-1 Bonds
and Class M-3-2 Bonds, (iv) the Underlying Class M-4-1 Bonds and Class M-4-2
Bonds, (v) the Underlying Class M-5-1 Bonds and Class M-5-2 Bonds and (vi) the
Underlying Class M-6-1 Bonds and Class M-6-2 Bonds, respectively.
Subordination
The rights of the holders of the Underlying Class M-1-1, Class M-2-1,
Class M-3-1, Class M-4-1, Class M-5-1 and Class M-6-1 Bonds and the Owner Trust
Certificates to receive distributions will be subordinated, to the extent
described in this prospectus supplement, to the rights of the holders of the
Class 1-A-1 Bonds and Class 1-A-2 Bonds. The protection afforded to the holders
of the Class 1-A-1 Bonds and Class 1-A-2 Bonds by means of the subordination of
the Underlying Class M-1-1, Class M-2-1, Class M-3-1, Class M-4-1, Class M-5-1
and Class M-6-1 Bonds and the Owner Trust Certificates will be accomplished in
part by the preferential right of the holders of the Class 1-A-1 Bonds and Class
1-A-2 Bonds to receive on any payment date, prior to distributions on the
Underlying Class M-1-1, Class M-2-1, Class M-3-1, Class M-4-1, Class M-5-1 and
Class M-6-1 Bonds and Owner Trust Certificates, distributions in respect of
interest.
The rights of the holders of the Underlying Class M-1-2, Class M-2-2,
Class M-3-2, Class M-4-2, Class M-5-2 and Class M-6-2 Bonds and the Owner Trust
Certificates to receive distributions will be subordinated, to the extent
described in this prospectus supplement, to the rights of the holders of the
Class 2-A Bonds. The protection afforded to the holders of the Class 2-A Bonds
by means of the subordination of the Underlying Class M-1-2, Class M-2-2, Class
M-3-2, Class M-4-2, Class M-5-2 and Class M-6-2 Bonds and the Owner Trust
Certificates will be accomplished in part by the preferential right of the
holders of the Class 2-A Bonds to receive on any payment date, prior to
distributions on the Underlying Class M-1-2, Class M-2-2, Class M-3-2, Class
M-4-2, Class M-5-2 and Class M-6-2 Bonds and Owner Trust Certificates,
distributions in respect of interest.
In addition, the rights of the holders of the Bonds to receive payments in
respect of interest and principal will be senior to the rights of the holders of
the Owner Trust Certificates, to the extent described in this prospectus
supplement.
The subordination feature is intended to enhance the likelihood of regular
receipt by the holders of the Bonds of payments in respect of interest and
principal and to afford such holders protection against Realized Losses.
Allocation of Losses
Any Realized Losses on the mortgage loans will be allocated or covered on
any payment date as follows: first, to the related Net Monthly Excess Cashflow,
by an increase in the related Overcollateralization Increase Amount for that
payment date; second, to the non-related Net Monthly Excess Cashflow, to the
extent described in "--Overcollateralization Provisions" above; third, in
reduction of the related Overcollateralized Amount, until reduced to zero;
fourth, in reduction of the unrelated Overcollateralized Amount, until reduced
to zero (meaning, no losses will be allocated to the Bonds until the aggregate
Bond Principal Balance of all of the Bonds is less than the aggregate Stated
Principal Balance of all of the mortgage loans); and fifth, (A) if such Realized
Loss is on a Group 1 Loan, to the Underlying Class M-6-1, Class M-6-2,
S-97
Class M-5-1, Class M-5-2, Class M-4-1, Class M-4-2, Class M-3-1, Class M-3-2,
Class M-2-1, Class M-2-2, Class M-1-1, Class M-1-2 Bonds, in that order, and (B)
if such Realized Loss is on a Group 2 Loan, to the Underlying Class M-6-2, Class
M-6-1, Class M-5-2, Class M-5-1, Class M-4-2, Class M-4-1, Class M-3-2, Class
M-3-1, Class M-2-2, Class M-2-1, Class M-1-2, Class M-1-1 Bonds, in that order,
in each case in reduction of the Bond Principal Balances thereof, until reduced
to zero.
Any Realized Losses on the mortgage loans allocated to an Underlying Class
M Bond as indicated above shall be allocated to its related Grantor Trust
Certificate in reduction of the Certificate Principal Balance thereof, until
reduced to zero.
The Indenture does not permit the allocation of Realized Losses to the
Class A Bonds. Investors in the Class A Bonds should note that although Realized
Losses cannot be allocated to the Class A Bonds, under certain loss scenarios
there will not be enough principal and interest on the mortgage loans to pay the
Class A Bonds all interest and principal amounts to which they are then
entitled.
Once Realized Losses have been allocated to the Underlying Class M Bonds,
such amounts with respect to such Bonds will no longer accrue interest nor will
such amounts in respect of interest be reinstated thereafter. However, Allocated
Realized Loss Amounts may be repaid to the Underlying Class M Bonds from Net
Monthly Excess Cashflow from the mortgage loans, according to the priorities set
forth under "--Overcollateralization Provisions" above.
Any allocation of a Realized Loss to an Underlying Class M Bond will be
made by reducing the Bond Principal Balance thereof by the amount so allocated
as of the payment date in the month following the calendar month in which such
Realized Loss was incurred. Notwithstanding anything to the contrary described
in this prospectus supplement, in no event will the Bond Principal Balance of
the Underlying Class M Bonds be reduced more than once in respect of any
particular amount both (i) allocable to such Bond in respect of Realized Losses
and (ii) payable as principal to the holder of such Bond from Net Monthly Excess
Cashflow.
P&I Advances
Subject to the following limitations, the Master Servicer will be
obligated to advance or cause to be advanced on or before each payment date its
own funds, advances made by a subservicer or funds in the Payment Account that
are not included in the related Available Funds for such payment date, in an
amount equal to the P&I Advances for such payment date. With respect to a
delinquent balloon payment, the Master Servicer is not required to advance such
delinquent balloon payment.
P&I Advances are required to be made only to the extent they are deemed,
in the good faith judgment of the Master Servicer, to be recoverable from
related late collections, Insurance Proceeds or Liquidation Proceeds, including
amounts paid under the Radian Lender-Paid PMI Policy. The purpose of making P&I
Advances is to maintain a regular cash flow to the Bondholders, rather than to
guarantee or insure against losses. The Master Servicer will not be required to
make any P&I Advances with respect to reductions in the amount of the monthly
payments due on the mortgage loans due to bankruptcy proceedings or the
application of the Relief Act.
All P&I Advances, except the termination advances described below, will be
reimbursable to the Master Servicer from late collections, insurance proceeds
and liquidation proceeds from the mortgage loan as to which the unreimbursed P&I
Advance was made. In addition, any P&I Advances previously made in respect of
any mortgage loan that are deemed by the Master Servicer to be nonrecoverable
from related late collections, insurance proceeds or liquidation proceeds may be
reimbursed to the Master Servicer out of any funds in the Payment Account prior
to the payments on the Bonds. In the event the Master Servicer fails in
S-98
its obligation to make any such advance, the Indenture Trustee, as successor
Master Servicer, will be obligated to make any such advance, to the extent
required in the Servicing Agreement.
The Paying Agent
The Paying Agent shall initially be the Indenture Trustee. The Paying
Agent shall have the revocable power to withdraw funds from the Payment Account
for the purpose of making payments to the Bondholders.
Optional Redemption
The holder of the Owner Trust Certificates, or, if there is no single
holder, the majority holder of the Owner Trust Certificates, may purchase the
Bonds from the trust, effecting the early retirement of the Bonds and Grantor
Trust Certificates, on or after the earlier of (i) the payment date on which the
aggregate Stated Principal Balance of the mortgage loans as of the end of the
prior Due Period is less than or equal to 25% of the aggregate Stated Principal
Balance of the mortgage loans as of the Cut-off Date and (ii) the payment date
occurring in October 2013. The purchase price for each class of Bonds will be
equal to 100% of the aggregate outstanding Bond Principal Balance and accrued
and unpaid interest thereon (including any related Unpaid Interest Shortfall,
Basis Risk Shortfall Carry-Forward Amount) at the Bond Interest Rate through the
date on which the Bonds are redeemed in full together with all amounts due and
owing to the Indenture Trustee, the Grantor Trustee and the Bond Insurer. Any
amounts payable to the Class M Bonds in connection with the optional redemption
shall be paid to the related Grantor Trust Certificates and cause the retirement
of the related grantor trust.
DESCRIPTION OF THE SERVICING AGREEMENT
The Master Servicer
Impac Funding Corporation will act as master servicer for the mortgage
loans pursuant to the Servicing Agreement. See "Impac Funding Corporation" in
the prospectus. As of the Cut-off Date, the Master Servicer has entered into a
subservicing arrangement for substantially all of the mortgage loans with
Wendover. However, the Master Servicer intends to transfer the subservicing for
substantially all of such mortgage loans to Countrywide Home Loans Servicing LP,
or an affiliate thereof, and GMAC Mortgage Corporation as described below.
Notwithstanding these arrangements, the Master Servicer will remain primarily
liable for servicing the mortgage loans.
The Subservicers
Substantially all of the Group 1 Loans and Group 2 Loans will initially be
subserviced by Wendover Funding, Inc. However, the Master Servicer has entered
into a contract to transfer the subservicing with respect to substantially all
of such Group 1 Loans to Countrywide Home Loans Servicing LP or an affiliate
thereof, on or about December 1, 2003 and (ii) such Group 2 Loans that are
secured by first liens on the related mortgaged property to GMAC Mortgage
Corporation on or about December 1, 2003.
Wendover is a subservicer of residential, consumer and commercial mortgage
loans in 50 states. Wendover provides origination and servicing for Federal
Housing Administration home equity conversion mortgages, specialized asset
management and default servicing for non-performing product, and special
servicing activities for government entities. Wendover is located in Greensboro,
North Carolina. Wendover is an approved servicer in good standing with Freddie
Mac. Wendover will act as subservicer for all Group 2 Loans secured by second
liens on the related mortgaged property.
S-99
Countrywide Home Loans Servicing LP is an approved mortgage loan servicer
for Fannie Mae, Freddie Mac, Ginnie Mae, HUD and VA and is licensed to service
mortgage loans in each state where a license is required. As of June 30, 2003,
Countrywide Home Loans Servicing LP had a net worth of approximately $7.2
billion. The principal executive officers of Countrywide Home Loans Servicing LP
are located at 7105 Corporate Drive, Plano, Texas 75024. Countrywide Home Loans
Servicing LP is a Texas limited partnership directly owned by Countrywide GP,
Inc. and Countrywide LP, Inc., each a Nevada corporation and a direct wholly
owned subsidiary of Countrywide Home Loans, Inc., a New York corporation.
Countrywide Home Loans, Inc., is a direct wholly owned subsidiary of Countrywide
Financial Corporation, a Delaware corporation (formerly known as Countrywide
Credit Industries, Inc.).
GMAC Mortgage Corporation is to become the subservicer for substantially
all of the Group2 Loans secured by first liens on the related mortgaged
property. GMAC Mortgage Corporation is an indirect wholly- owned subsidiary of
General Motors Acceptance Corporation and is one of the nation's largest
mortgage bankers. GMAC Mortgage Corporation is engaged in the mortgage banking
business, including the origination, purchase, sale and servicing of residential
loans. GMAC Mortgage Corporation maintains its executive and principal offices
at 100 Witmer Road, Horsham, Pennsylvania 19044, and its telephone number is
(215) 682- 1000.
Servicing and Other Compensation and Payment of Expenses
The principal compensation to be paid to the Master Servicer in respect of
its master servicing activities for the Bonds and the Owner Trust Certificates
will be equal to the Master Servicing Fee. The principal compensation to be paid
to any subservicer of the mortgage loans will be equal to the Subservicing Fee.
As additional servicing compensation, the Master Servicer or any subservicer is
entitled to retain all prepayment penalties and charges, any assumption fees and
any late payment charges, to the extent collected from mortgagors, together with
any interest or other income earned on funds held in the Payment Account and any
escrow accounts in respect of the mortgage loans. However, the Master Servicer
is obligated to offset any Prepayment Interest Shortfall in respect of the
mortgage loans on any payment date with Compensating Interest. The Master
Servicer or the related subservicer is obligated to pay certain insurance
premiums and ongoing expenses associated with the mortgage pool in respect of
mortgage loans serviced by it and incurred by the Master Servicer or such
subservicer in connection with its responsibilities under the Servicing
Agreement or the related subservicing agreement. However, the Master Servicer or
such subservicer is entitled to reimbursement therefor as provided in the
Servicing Agreement or the related subservicing agreement.
Optional Purchase of Delinquent Loans
The Master Servicer, on behalf of the Issuer, may either purchase itself
or sell to a third-party any mortgage loan that is 90 days or more delinquent
from the Issuer at a price equal to the Stated Principal Balance thereof plus
one month's interest thereon and any amounts, including advances, owed to the
Master Servicer and the related subservicer. The removal of any such mortgage
loan from the Trust may affect the loss and delinquency tests which determine
the level of the Overcollateralization Target Amount.
THE INDENTURE
The following summary describes certain terms of the Indenture. The
summary does not purport to be complete and is subject to, and qualified in its
entirety by reference to, the provisions of the Trust Agreement and Indenture.
Whenever particular defined terms of the Indenture are referred to, such defined
terms are thereby incorporated in this prospectus supplement by reference. See
"The Agreements" in the prospectus.
S-100
Rights upon Event of Default
In case an Event of Default should occur and be continuing with respect to
the Bonds, then (in every such case) the Indenture Trustee, at the written
direction of Bondholders representing more than 50% of the aggregate Bond
Principal Balance of the Bonds then outstanding, shall declare the principal of
the Bonds, together with accrued and unpaid interest thereon through the date of
acceleration, to be due and payable. Such declarations in respect of the Bonds
may under certain circumstances be rescinded by the Bondholders representing
more than 50% of the aggregate Bond Principal Balance of the Bonds.
If, following an Event of Default, any Bonds have been declared to be due
and payable, the Indenture Trustee may, if directed by the related Bondholders,
refrain from selling such assets and continue to apply all amounts received on
such assets to payments due on the Bonds in accordance with their terms,
notwithstanding the acceleration of the maturity of such Bonds. The Indenture
Trustee, however, must sell or cause to be sold the assets included in the Trust
if collections in respect of such assets are determined to be insufficient to
pay certain expenses payable under the Indenture and to make all scheduled
payments on the Bonds. In the event the assets of the Trust are sold, any
collection on, or the proceeds from the sale of, the mortgage loans will be
applied in accordance with the Indenture.
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,
the Indenture Trustee shall be under no obligation to exercise any of the rights
and powers under the Indenture at the request or direction of any of the
Bondholders, unless such Bondholders shall have offered to the Indenture Trustee
security or indemnity satisfactory to it against the costs, expenses and
liabilities which might be incurred by it in compliance with such request or
direction. Subject to such provisions for indemnification and certain
limitations contained in the Indenture, Bondholders representing more than 50%
of the aggregate Bond Principal Balance of the Bonds shall have the right to
direct the time, method, and place of conducting any proceeding or any remedy
available to the Indenture Trustee or exercising any trust or power conferred on
the Indenture Trustee with respect to such Bonds; and Bondholders representing
more than 50% of the aggregate Bond Principal Balance of the Bonds may, in
certain cases, waive any default with respect thereto, except a default in the
payment of principal or interest or a default in respect of a covenant or
provision of the Indenture that cannot be modified without the waiver or consent
of the holder of each outstanding Bond affected thereby. So long as the Bond
Insurer is not in default, the Bond Insurer has, and may exercise without the
consent of the Class 1-A-2 Bondholders, all of the rights of the Class 1-A-2
Bondholders under the Indenture.
Limitation on Suits
No Bondholder will have any right to institute any proceedings with
respect to the Indenture unless (1) such Bondholder has previously given written
notice to the Indenture Trustee of a continuing Event of Default; (2)
Bondholders representing not less than 25% of the aggregate Bond Principal
Balance of the Bonds have made written request to the Indenture Trustee to
institute proceedings in respect of such Event of Default in its own name as
Indenture Trustee; (3) such Bondholders have offered to the Indenture Trustee
indemnity satisfactory to it against the costs, expenses and liabilities to be
incurred in compliance with such request; (4) for 60 days after its receipt of
such notice, request and offer of indemnity the Indenture Trustee has failed to
institute any such proceedings; and (5) no direction inconsistent with such
written request has been given to the Indenture Trustee during such 60-day
period by the Bondholders representing more than 50% of the aggregate Bond
Principal Balance of the Bonds.
S-101
The Indenture Trustee
The Indenture Trustee may resign at any time, or in the event there is a
conflict of interest with respect to any class of Bonds, as Indenture Trustee
with respect to one or more classes of Bonds, in which event the Issuer will be
obligated to appoint a successor Indenture Trustee for the Bonds or such class
of Bonds within the period specified in the Indenture. The Indenture Trustee
also may be removed at any time by the Bondholders representing more than 50% of
the aggregate Bond Principal Balance of the Bonds if the Indenture Trustee
ceases to be eligible to continue as such under the Indenture or if the
Indenture Trustee becomes incapable of acting, bankrupt, insolvent or if a
receiver or public officer takes charge of the Indenture Trustee or its
property. Any resignation or removal of the Indenture Trustee and appointment of
a successor Indenture Trustee will not become effective until acceptance of the
appointment by the successor Indenture Trustee.
FEDERAL INCOME TAX CONSEQUENCES
For federal income tax purposes, the Bonds will be characterized as
indebtedness to a Bondholder other than the owner of the Owner Trust
Certificates and not as representing an ownership interest in the Trust Fund or
an equity interest in the Issuer or the Company. In addition, for federal income
tax purposes, the Issuer will not be (i) classified as an association taxable as
a corporation for federal income tax purposes, (ii) a taxable mortgage pool as
defined in Section 7701(i) of the Code, or (iii) a "publicly traded partnership"
as defined in Treasury Regulation Section 1.7704-1. The Offered Securities will
not be treated as having been issued with "original issue discount" (as defined
in the prospectus). Each Grantor Trust Fund will be classified as a grantor
trust under subpart E, part I of subchapter J of Chapter 1 of the Code and not
as a partnership or an association taxable as a corporation. See "Federal Income
Tax Consequences" in the prospectus.
The Bonds will not be treated as assets described in Section
7701(a)(19)(C) of the Code or "real estate assets" under Section 856(c)(4)(A) of
the Code. In addition, interest on the Bonds will not be treated as "interest on
obligations secured by mortgages on real property" under Section 856(c)(3)(B) of
the Code. The Bonds will also not be treated as "qualified mortgages" under
Section 860G(a)(3)(C) of the Code.
Prospective investors in the Bonds should see "Federal Income Tax
Consequences" and "State and Other Tax Consequences" in the prospectus for a
discussion of the application of certain federal income and state and local tax
laws to the Issuer and purchasers of the Bonds.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in an underwriting
agreement, dated September 25, 2003, Countrywide Securities Corporation has
agreed to purchase 80% and Merrill Lynch, Pierce, Fenner & Smith Incorporated
has agreed to purchase 20% of each class of Offered Securities, and the Company
has agreed to sell to the Underwriters the Offered Securities. It is expected
that delivery of the Offered Securities will be made only in book-entry form
through the Same Day Funds Settlement System of DTC on or about September 29,
2003, against payment therefor in immediately available funds.
The Offered Securities will be purchased from the Company by the
Underwriters and will be offered by the Underwriters from time to time to the
public in negotiated transactions or otherwise at varying prices to be
determined for each investor at the time of sale. The proceeds to the Company
from the sale of the Offered Securities are expected to be approximately 99.75%
of the aggregate initial Bond Principal Balance and Certificate Principal
Balance of the Offered Securities less expenses expected to equal approximately
S-102
$560,000. The Underwriters may effect such transactions by selling the Offered
Securities to or through dealers, and such dealers may receive compensation in
the form of underwriting discounts, concessions or commissions from the
Underwriters. In connection with the sale of the Offered Securities, the
Underwriters may be deemed to have received compensation from the Company in the
form of underwriting compensation. The Underwriters and any dealers that
participate with the Underwriters in the distribution of the Offered Securities
may be deemed to be underwriters and any profit on the resale of the Offered
Securities positioned by them may be deemed to be underwriting discounts and
commissions under the Securities Act of 1933, as amended.
The underwriting agreement provides that the Company, the Seller and Impac
Funding Corporation will jointly and severally indemnify the Underwriters, and
that under limited circumstances the Underwriters will indemnify the Company,
the Seller and Impac Funding Corporation against certain civil liabilities under
the Securities Act of 1933, as amended, or contribute to payments required to be
made in respect thereof.
Countrywide Securities Corporation is an affiliate of Countrywide Home
Loans Servicing LP.
SECONDARY MARKET
There can be no assurance that a secondary market for the Offered
Securities will develop or, if it does develop, that it will continue. The
primary source of information available to investors concerning the Offered
Securities will be the monthly statements discussed in the prospectus under
"Description of the Securities--Reports to Securityholders," which will include
information as to the outstanding principal balance of the Offered Securities
and the status of the applicable form of credit enhancement. There can be no
assurance that any additional information regarding the Offered Securities will
be available through any other source. In addition, the Company is not aware of
any source through which price information about the Offered Securities will be
generally available on an ongoing basis. The limited nature of information
regarding the Offered Securities may adversely affect the liquidity of the
Offered Securities, even if a secondary market for the Offered Securities
becomes available.
LEGAL OPINIONS
Legal matters relating to the Securities will be passed upon for the
Company by Thacher Proffitt & Wood LLP, New York, New York and for the
Underwriters by Sidley Austin Brown & Wood LLP, New York, New York. Sidley
Austin Brown & Wood LLP represents the Seller on certain matters from time to
time.
EXPERTS
The consolidated financial statements of Ambac Assurance Corporation and
subsidiaries, as of December 31, 2002 and December 31, 2001 and for each of the
years in the three-year period ended December 31, 2002 have been incorporated by
reference in this prospectus supplement and the registration statement in
reliance upon the report of KPMG LLP, independent accountants, incorporated by
reference in this prospectus supplement, and upon the authority of that firm as
experts in accounting and auditing.
S-103
RATINGS
It is a condition to the issuance of the Offered Securities that each
class of Class 1-A-1 Bonds, Class 1-A-2 and Class 2-A Bonds be rated "AAA" by
S&P and "Aaa" by Moody's, that the Class M-1 Certificates be rated at least
"AAA" by S&P and "Aa1" by Moody's, that the Class M-2 Certificates be rated at
least "AA+" by S&P and "Aa1" by Moody's, that the Class M-3 Certificates be
rated at least "AA" by S&P and "Aa2" by Moody's, that the Class M-4 Certificates
be rated at least "AA" by S&P and "A1" by Moody's, that the Class M-5
Certificates be rated at least "AA" by S&P and "A2" by Moody's and Class M-6
Certificates be rated at least "AA" by S&P and "A3" by Moody's.
The ratings of S&P and Moody's assigned to collateralized asset-backed
bonds and grantor trust certificates address the likelihood of the receipt by
Securityholders of all distributions to which the Securityholders are entitled
other than Unpaid Interest Shortfalls or Basis Risk Shortfalls. The rating
process addresses structural and legal aspects associated with the Offered
Securities, including the nature of the underlying mortgage loans. The ratings
assigned to collateralized asset-backed bonds do not represent any assessment of
the likelihood that principal prepayments will be made by the mortgagors or the
degree to which the rate and timing principal prepayments will differ from that
originally anticipated.
In addition, the ratings by S&P and Moody's do not address the likelihood
of the receipt of any amounts in respect of Unpaid Interest Shortfalls or Basis
Risk Shortfalls.
The Company has not requested that any rating agency rate any class of the
Offered Securities other than as stated above. However, there can be no
assurance as to whether any other rating agency will rate any class of the
Offered Securities, or, if it does, what rating would be assigned by any other
rating agency. A rating on any class of the Offered Securities by another rating
agency, if assigned at all, may be lower than the ratings assigned to the
Offered Securities as stated above. The ratings do not address the possibility
that Securityholders might suffer a lower than anticipated yield due to
non-credit events.
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning rating
organization. Each security rating should be evaluated independently of any
other security rating. In the event that the ratings initially assigned to the
Offered Securities are subsequently lowered for any reason, no person or entity
is obligated to provide any additional credit support or credit enhancement with
respect to the Offered Securities.
LEGAL INVESTMENT
The Offered Securities will not constitute "mortgage related securities"
for purposes of SMMEA.
The Company makes no representations as to the proper characterization of
any class of Offered Securities for legal investment or other purposes, or as to
the ability of particular investors to purchase any class of Offered Securities
under applicable legal investment restrictions. These uncertainties may
adversely affect the liquidity of any class of Offered Securities. Accordingly,
all institutions whose investment activities are subject to legal investment
laws and regulations, regulatory capital requirements or review by regulatory
authorities should consult with their legal advisors in determining whether and
to what extent any class of Offered Securities constitutes a legal investment or
is subject to investment, capital or other restrictions.
See "Legal Investment Matters" in the prospectus.
S-104
ERISA CONSIDERATIONS
ERISA and Section 4975 of the Code impose certain requirements on Plans
(as defined in the prospectus) and on persons who are fiduciaries with respect
to such Plans. Any Plan fiduciary which proposes to cause a Plan to acquire any
of the Offered Securities would be required to determine whether such an
investment is permitted under the governing Plan instruments and is prudent and
appropriate for the Plan in view of its overall investment policy and the
composition and diversification of its portfolio. The DOL (as defined in the
prospectus) has promulgated the DOL Regulations defining the term "Plan Assets"
for purposes of applying the general fiduciary responsibility provisions of
ERISA and the prohibited transaction provisions of ERISA and Section 4975 of the
Code. Under the DOL Regulations, generally, when a Plan acquires an "equity
interest" in another entity (such as the Trust), the underlying assets of that
entity may be considered to be Plan Assets. The DOL Regulations provide that the
term "equity interest" means any interest in an entity other than an instrument
which is treated as indebtedness under applicable local law and which has no
"substantial equity features."
As of the date hereof, the ratings of the Class 1-A-1, Class1-A-2 and
Class 2-A Bonds and the traditional debt features of these Bonds should cause
these Bonds to be treated as debt with no "substantial equity features" under
the DOL Regulations. There can be no assurance given, however, that the Bonds
are or will be treated as debt and not "equity interests" under the DOL
Regulations. Moreover, the debt treatment of the Bonds for ERISA purposes could
change subsequent to their issuance; that is, they could be treated as equity
interests, if, for example, the ratings of the Bonds change. Because of the
factual nature of certain of the above- described provisions of ERISA, the Code
and the DOL Regulations, Plans or persons investing Plan Assets should carefully
consider whether such an investment might constitute or give rise to a
prohibited transaction under ERISA or the Code. Any Plan fiduciary which
proposes to cause a Plan to acquire any of the Bonds should consult with its
counsel with respect to the potential consequences under ERISA and the Code of
the Plan's acquisition and ownership of such Offered Securities.
In addition, ERISA and the Code prohibit certain transactions involving
the assets of a Plan and Parties in Interest (as defined in the prospectus) who
have certain specified relationships to the Plan. Accordingly, even if the Bonds
are treated as indebtedness under the DOL Regulations, prior to making an
investment in the Bonds, investing Plans should determine whether the Issuer,
the Seller, the Company, any Underwriter, any service provider, the Owner
Trustee, the Indenture Trustee, the Grantor Trustee, any owner of 50% or more of
the Owner Trust Certificates, which could be transferred subsequent to the
purchase of the Bonds by a Plan, or any of their affiliates is a Party in
Interest with respect to such Plan and, if so, whether such transaction is
subject to one or more statutory, regulatory or administrative exemptions.
Additionally, an investment of the assets of a Plan in certain securities may
cause the assets of the issuer of those securities to be deemed "Plan Assets" of
such Plan, and any person with certain specified relationships to such issuer to
be deemed a Party in Interest with respect to the investing Plan.
By acquiring a Class 1-A-1, Class 1-A-2 or Class 2-A Bond, each purchaser
will be deemed to represent that either (1) it is not acquiring such Bond with
the assets of a Plan; or (2) (A) the acquisition, holding and transfer of the
Offered Security will not give rise to a nonexempt prohibited transaction under
Section 406 of ERISA or Section 4975 of the Code and (B) such Bonds have an
investment grade rating at the time of acquisition and such purchaser agrees to
treat them as indebtedness for federal income tax purposes.
It is not anticipated that the exemption granted to the underwriters in
Prohibited Transaction Exemption 2002-41 will apply to the Class M-1, Class M-2,
Class M-3, Class M-4, Class M-5 and Class M-6 Certificates. If the holder of
such a Certificate is a Plan or purchasing with Plan Assets, the underlying
Bonds held by the grantor trust issuing the certificate may be treated as assets
of such Plan. If, however, the
S-105
underlying Bond is treated as indebtedness without substantial equity features
for purposes of the DOL Regulations, the mortgage loans underlying the Bonds
will not be treated as Plan Assets of the Plan. While it is anticipated that, as
of the date hereof, the traditional debt features of the underlying Bonds should
cause such Bonds to be treated as debt with no "substantial equity features"
under the DOL Regulations, there can be no assurance that any class of
underlying Bonds will be treated as indebtedness without substantial equity
features for purposes of the DOL Regulations. Consequently, in the event that
such Bonds are not treated as debt with no "substantial equity features" under
the DOL Regulations, the subsequent transfer of such Certificates or any
interest therein to a Plan trustee or other person acting on behalf of a Plan,
or using Plan Assets to effect such transfer, will be restricted. Without regard
to whether the underlying Bonds are treated as indebtedness with no substantial
equity features, if the Issuer, the Seller, the Company, any Underwriter, the
Owner Trustee, the Indenture Trustee, any owner of 50% or more of the Owner
Trust Certificates, the trustee of or any service provider to the grantor trust
issuing such Certificate or any of their affiliates is a Party in Interest with
respect to such Plan, a prohibited transaction could occur if an exemption is
not available. By acquiring a Class M-1, Class M-2, Class M-3, Class M-4, Class
M-5 and Class M-6 Certificate, each purchaser will be deemed to represent that
either (1) it is not acquiring the Certificate with Plan Assets; or (2) (A) the
acquisition and holding of the Certificate will not give rise to a nonexempt
prohibited transaction under Section 406 of ERISA or Section 4975 of the Code
and (B) the Certificate has an investment-grade rating at the time of
acquisition.
Alternatively, regardless of the rating of the Offered Securities, a
person investing on behalf of or with assets of a Plan may provide the Indenture
Trustee and the Owner Trustee or the Grantor Trustee with an opinion of counsel,
which opinion of counsel will not be at the expense of the Issuer, the Seller,
the Company, any Underwriter, the Owner Trustee, the Indenture Trustee, the
Grantor Trustee, the Master Servicer or any successor servicer which opines that
the acquisition, holding and transfer of such Offered Security or interest
therein is permissible under applicable law, will not constitute or result in a
non exempt prohibited transaction under ERISA or Section 4975 of the Code and
will not subject the Issuer, the Seller, the Company, any Underwriter, the Owner
Trustee, the Indenture Trustee, the Grantor Trustee, the Master Servicer or any
successor servicer to any obligation in addition to those undertaken in the
Indenture.
S-106
GLOSSARY
180-day Delinquent High CLTV Loan -- A High CLTV Loan which has been delinquent
for 180 days or more.
Accrual Period - With respect to any payment date and each class of Group 1
Bonds and Group 2 Bonds, other than the Class 2-A Bonds, the period from the
preceding payment date (or in the case of the first payment date, from the
Closing Date) through the day preceding such payment date. With respect to any
payment date and the Class 2-A Bonds, the preceding calendar month.
Accrued Bond Interest - With respect to any payment date and each class of
Bonds, interest accrued during the related Accrual Period at the then-applicable
Bond Interest Rate on the related Bond Principal Balance thereof immediately
prior to such payment date, less such Bonds' Unpaid Interest Shortfall for such
payment date, plus any Accrued Bond Interest remaining unpaid from any prior
payment date with interest thereon at the related Bond Interest Rate. Accrued
Bond Interest for the Bonds, other than the Class 2-A Bonds, shall be calculated
on the basis of the actual number of days in the Accrual Period and a 360 day
year. Accrued Bond Interest for the Class 2-A Bonds shall be calculated on the
basis of a 360-day year consisting of 12 30-day months.
Agreements - The Servicing Agreement, the Indenture, the Trust Agreement and the
Mortgage Loan Sale and Contribution Agreement.
Allocated Realized Loss Amount - With respect to the Underlying Class M Bonds
and any payment date, an amount equal to the sum of any Realized Loss allocated
to such Bonds on that payment date and any Allocated Realized Loss Amount for
that class remaining unpaid from the previous payment date. With respect to each
Grantor Trust Certificate, the Allocated Realized Loss Amount for its
corresponding Underlying Class M Bonds.
Allowable Claim - For any mortgage loan covered by a Primary Insurance Policy,
the current principal balance of such mortgage loan plus accrued interest and
allowable expenses at the time of the claim.
Appraised Value - The appraised value of a mortgaged property based upon the
lesser of (i) the appraisal made at the time of the origination of the related
mortgage loan, or (ii) the sale price of such mortgaged property at such time of
origination. With respect to a mortgage loan, the proceeds of which were used to
refinance an existing mortgage loan, the appraised value of the mortgaged
property based upon the appraisal obtained at the time of refinancing.
Available Funds - The Group 1 Available Funds or Group 2 Available Funds, as
applicable.
Available Funds Rate - On any payment date and for the Class 1-A-1 Bonds and
Class 1-A-2 Bonds and the Underlying Class M-1-1, Class M-2-1, Class M-3-1,
Class M-4-1, Class M-5-1 and Class M-6-1 Bonds, the per annum rate equal to the
product of:
(i) (A) the product of:
(1) Group 1 Adjusted Net WAC Rate and
(2) a fraction equal to
S-107
(x) the aggregate Stated Principal Balance of the Group
1 Loans as of the end of the prior Due Period (plus, on any
Subordinated Transfer Payment Date where the Group 1 Loans are
the Undercollateralized Loan Group, the Subordinated Transfer
Realized Loss Amount) divided by
(y) the aggregate Bond Principal Balance of the Class
1-A-1 Bonds and Class 1-A-2 Bonds and the Underlying Class
M-1-1, Class M-2-1, Class M-3-1, Class M-4- 1, Class M-5-1 and
Class M-6-1 Bonds immediately prior to such payment date,
minus
(B) the Policy Premium Rate in respect of the Class 1-A-2 Bonds
times a fraction equal to
(1) the aggregate Bond Principal Balance of the Class 1-A-2
Bonds immediately prior to such payment date divided by
(2) the aggregate Bond Principal Balance of the Class 1-A-1
Bonds and Class 1-A-2 Bonds and the Underlying Class M-1-1,
Class M-2-1, Class M-3-1, Class M-4-1, Class M-5-1 and Class
M-6-1 Bonds immediately prior to such payment date, and
(ii) a fraction equal to (x) 30 divided by (y) the number of days in the
related Accrual Period.
On any payment date and for the Class 2-A Bonds and the Underlying Class
M-1-2, Class M-2-2, Class M-3-2, Class M-4-2, Class M-5-2 and Class M-6-2 Bonds,
the per annum rate equal to the product of:
(i) the product of:
(1) Group 2 Adjusted Net WAC Rate and
(2) a fraction equal to
(x) the aggregate Stated Principal Balance of the Group
2 Loans as of the end of the prior Due Period (plus, on any
Subordinated Transfer Payment Date where the Group 2 Loans are
the Undercollateralized Loan Group, the Subordinated Transfer
Realized Loss Amount) divided by
(y) the aggregate Bond Principal Balance of the Class
2-A Bonds and the Underlying Class M-1-2, Class M-2-2, Class
M-3-2, Class M-4-2, Class M-5-2 and Class M-6-2 Bonds
immediately prior to such payment date, and
(ii) a fraction equal to (x) 30 divided by (y) the number of days in the
related Accrual Period (which shall be 30 days in the case of the Class 2-A
Bonds).
Basic Principal Distribution Amount - With respect to any payment date and each
Loan Group, the lesser of (a) the excess of (i) the related Available Funds and,
with respect to the Group 1 Loans, the Class 1-A-2 Insured Amount, if any, for
such payment date over (ii) the aggregate amount of Accrued Bond Interest for
the related Bonds for such payment date and (b) the excess of (i) the related
Principal Remittance Amount for such payment date over (ii) the related
Overcollateralization Release Amount, if any, for such payment date.
S-108
Basis Risk Shortfall - With respect to any class of Bonds, on each payment date
where clause (iii) of the definition of "Bond Interest Rate" is less than
clauses (i) or (ii) of the definition of "Bond Interest Rate", the excess, if
any, of (x) the aggregate Accrued Bond Interest thereon for such payment date
calculated pursuant to the lesser of clause (i) or (ii) of the definition of
Bond Interest Rate over (y) interest accrued on the related mortgage loans at
the related Available Funds Rate.
Basis Risk Shortfall Carry-Forward Amount - With respect to each class of Bonds
and any payment date, as determined separately for each such class of Bonds, an
amount equal to the aggregate amount of Basis Risk Shortfall for such Bonds on
such payment date, plus any unpaid Basis Risk Shortfall for such class of Bonds
from prior payment dates, plus interest thereon at the Bond Interest Rate for
such payment date, to the extent previously unreimbursed by related Net Monthly
Excess Cashflow or the related Derivative Contracts.
Bond - A Class 1-A-1, Class 1-A-2 or Class 2-A Bond, or an Underlying Class
M-1-1, Class M-1-2, Class M-2-1, Class M-2-2, Class M-3-1, Class M-3-2, Class
M-4-1, Class M-4-2, Class M-5-1, Class M-5-2, Class M-6-1 or Class M-6-2 Bond.
Bond Insurance Policy - The bond guaranty insurance policy issued by the Bond
Insurer for the benefit of the Class 1-A-2 Bondholders.
Bond Insurer - Ambac Assurance Corporation, a Wisconsin domiciled stock
insurance corporation, or any successor thereto as provided in the Indenture.
Bond Interest Rate - With respect to each payment date and each class of Bonds,
other than the Class 2-A Bonds, a floating rate equal to the least of (i)
One-Month LIBOR plus the related Bond Margin, (ii) the Maximum Bond Rate and
(iii) the related Available Funds Rate with respect to such payment date. With
respect to the Class 2-A Bonds, on any payment date prior to the Step-Up Date,
4.109% per annum, and on any payment date on and after the Step-Up Date, 4.609%
per annum.
Bond Margin - With respect to the Class 1-A-1 Bonds, on any payment date prior
to the Step-Up Date, 0.350% per annum, and on any payment date on and after the
Step-Up Date, 0.700% per annum. With respect to the Class 1-A-2 Bonds, on any
payment date prior to the Step-Up Date, 0.270% per annum, and on any payment
date on and after the Step-Up Date, 0.540% per annum. With respect to the Class
M-1-1 Bonds and Class M-1-2 Bonds, on any payment date prior to the Step-Up
Date, 0.470% per annum, and on any payment date on and after the Step-Up Date,
0.940% per annum. With respect to the Class M-2-1 Bonds and Class M-2- 2 Bonds,
on any payment date prior to the Step-Up Date, 0.570% per annum, and on any
payment date on and after the Step-Up Date, 0.855% per annum. With respect to
the Class M-3-1 Bonds and Class M-3-2 Bonds, on any payment date prior to the
Step-Up Date, 0.670% per annum, and on any payment date on and after the Step-Up
Date, 1.005% per annum. With respect to the Class M-4-1 Bonds and Class M-4-2
Bonds, on any payment date prior to the Step-Up Date, 1.250% per annum, and on
any payment date on and after the Step-Up Date, 1.875% per annum. With respect
to the Class M-5-1 Bonds and Class M-5-2 Bonds, on any payment date prior to the
Step-Up Date, 1.550% per annum, and on any payment date on and after the Step-Up
Date, 2.325% per annum. With respect to the Class M-6-1 Bonds and Class M-6-2
Bonds, on any payment date prior to the Step-Up Date, 1.700% per annum, and on
any payment date on and after the Step-Up Date, 2.550% per annum.
Bond Principal Balance - With respect to any Bond as of any date of
determination, the initial Bond Principal Balance as stated on the face thereof,
minus all amounts distributed in respect of principal with respect to such Bond
and, in the case of any Underlying Class M Bond, the aggregate amount of any
reductions in the Bond Principal Balance thereof deemed to have occurred in
connection with allocations of Realized Losses on all prior payment dates as
described in this prospectus supplement.
S-109
Bondholder - A holder of a Bond.
Book-Entry Bonds - Each class of the Bonds for so long as they are issued,
maintained and transferred at DTC.
Certificate Interest Rate - With respect to the Class M-1 Certificates, the
weighted average of the Bond Interest Rates of the Underlying Class M-1-1 Bonds
and the Underlying Class M-1-2 Bonds, weighted on the basis of the Bond
Principal Balances thereof as of the end of the prior Due Period. With respect
to the Class M-2 Certificates, the weighted average of the Bond Interest Rates
of the Underlying Class M-2-1 Bonds and the Underlying Class M-2-2 Bonds,
weighted on the basis of the Bond Principal Balances thereof as of the end of
the prior Due Period. With respect to the Class M-3 Certificates, the weighted
average of the Bond Interest Rates of the Underlying Class M-3-1 Bonds and the
Underlying Class M-3-2 Bonds, weighted on the basis of the Bond Principal
Balances thereof as of the end of the prior Due Period. With respect to the
Class M-4 Certificates, the weighted average of the Bond Interest Rates of the
Underlying Class M-4-1 Bonds and the Underlying Class M-4-2 Bonds, weighted on
the basis of the Bond Principal Balances thereof as of the end of the prior Due
Period. With respect to the Class M-5 Certificates, the weighted average of the
Bond Interest Rates of the Underlying Class M-5-1 Bonds and the Underlying Class
M-5-2 Bonds, weighted on the basis of the Bond Principal Balances thereof as of
the end of the prior Due Period. With respect to the Class M-6 Certificates, the
weighted average of the Bond Interest Rates of the Underlying Class M-6-1 Bonds
and the Underlying Class M-6-2 Bonds, weighted on the basis of the Bond
Principal Balances thereof as of the end of the prior Due Period.
Certificate Principal Balance - With respect to Class M-1 Certificates as of any
date of determination, the sum of the Bond Principal Balances of the Class M-1-1
Bonds and Class M-1-2 Bonds. With respect to Class M-2 Certificates as of any
date of determination, the sum of the Bond Principal Balances of the Class M-2-1
Bonds and Class M-2-2 Bonds. With respect to Class M-3 Certificates as of any
date of determination, the sum of the Bond Principal Balances of the Class M-3-1
Bonds and Class M-3-2 Bonds. With respect to Class M-4 Certificates as of any
date of determination, the sum of the Bond Principal Balances of the Class M-4-1
Bonds and Class M-4-2 Bonds. With respect to Class M-5 Certificates as of any
date of determination, the sum of the Bond Principal Balances of the Class M-5-1
Bonds and Class M-5-2 Bonds. With respect to Class M-6 Certificates as of any
date of determination, the sum of the Bond Principal Balances of the Class M-6-1
Bonds and Class M-6-2 Bonds.
Certificate Registrar - Deutsche Bank National Trust Company, and its successors
and assigns.
Class 1-A-2 Insured Amount - Draws on the Bond Insurance Policy to cover related
Deficiency Amounts and Preference Amounts on the Class 1-A-2 Bonds.
Closing Date - September 29, 2003.
Code - The Internal Revenue Code of 1986, as amended, and the rules and
regulations promulgated thereunder.
Company - IMH Assets Corp., or its successor in interest.
Compensating Interest - With respect to any payment date as determined
separately for each Loan Group, the amount of any Prepayment Interest Shortfalls
resulting from prepayments in full during the preceding calendar month on the
related mortgage loans, but only to the extent such Prepayment Interest
Shortfalls do not exceed an amount equal to the lesser of (a) one-twelfth of
0.125% of the aggregate Stated Principal
S-110
Balance of the related mortgage loans immediately preceding such payment date
and (b) the sum of the Master Servicing Fee and Subservicing Fee for such
payment date for the related mortgage loans.
CPR - A constant rate of prepayment on the mortgage loans.
Credit Score - A measurement of the relative degree of risk a borrower
represents to a lender obtained from credit reports utilizing, among other
things, payment history, delinquencies on accounts, levels of outstanding
indebtedness, length of credit history, types of credit, and bankruptcy
experience.
Cut-off Date - With respect to the mortgage loans and the sample mortgage loans,
other than the High CLTV Loans, September 1, 2003, and for the High CLTV Loans
the close of business on August 29, 2003.
Cut-off Date Balance -- The aggregate Stated Principal Balance of the mortgage
loans as of the Cut-off Date.
Deficiency Amount - With respect to each payment date prior to the final
scheduled payment date and the Class 1-A-2 Bonds, an amount equal to the sum of
(i)(x) the excess, if any, of (a) the aggregate amount of Accrued Bond Interest
on the Class 1-A-1 Bonds and Class 1-A-2 Bonds for that payment date over (b)
the related Available Funds for that payment date, times a fraction equal to (1)
the amount of Accrued Bond Interest on the Class 1-A-2 Bonds over (2) the
aggregate amount of Accrued Bond Interest on the Class 1-A-1 Bonds and Class
1-A-2 Bonds and (ii)(x) the excess, if any of (a) the aggregate Bond Principal
Balance of the Class 1-A-1 Bonds and Class 1-A-2 Bonds over (b) the aggregate
Stated Principal Balance of the Group 1 Loans, in each case immediately
following such payment date, times (y) a fraction equal to (1) the Bond
Principal Balance of the Class 1-A-2 Bonds over (2) the aggregate Bond Principal
Balance of the Class 1-A-1 Bonds and Class 1-A-2 Bonds, in each case immediately
following distributions on that payment date. With respect to the final
scheduled payment date and the Class 1-A-2 Bonds, an amount equal to (i) the sum
of (x) the excess, if any, of (a) the aggregate amount of Accrued Bond Interest
on the Class 1-A-1 Bonds and Class 1-A-2 Bonds for that payment date over (b)
the related Available Funds for that payment date times a fraction equal to (1)
the amount of Accrued Bond Interest on the Class 1-A-2 Bonds over (2) the
aggregate amount of Accrued Bond Interest on the Class 1-A-1 Bonds and Class
1-A-2 Bonds and (ii) the excess, if any, of the Bond Principal Balance of all
outstanding Class 1-A-2 Bonds due on such final scheduled payment date to the
extent not paid from the related Available Funds on that payment date. For the
Class 1-A-2 Bonds and any date on which the acceleration of the Bonds has been
directed or consented to by the Bondholders pursuant to the Indenture, the
amount required to pay the Bond Principal Balance of the Class 1-A-2 Bonds in
full, together with accrued and unpaid interest thereon through the date of
payment of the Class 1-A-2 Bonds.
Derivative Contracts - The Senior Derivative Contracts or Subordinate Derivative
Contracts, as applicable.
Derivative Counterparty - The counterparty to the Derivative Contracts. The
identity of the Derivative Counterparty will be included in a Form 8-K to be
filed with the Commission within 15 days of the Closing Date.
Determination Date - With respect to any payment date is on the 15th day of the
related month or, if such day is not a business day, on the immediately
preceding business day.
Due Date - With respect to each mortgage loan, the day of the month on which
each scheduled monthly payment is due.
Due Period - With respect to any payment date and the mortgage loans (other than
the High CLTV Loans), the period commencing on the second day of the month
immediately preceding the month of such payment
S-111
date (or, with respect to the first Due Period, the day following the Cut-off
Date) and ending on the first day of the month of such payment date. With
respect to any payment date and the High CLTV Loans, the calendar month
preceding the month of such payment date.
ERISA - The Employee Retirement Income Security Act of 1974, as amended.
Event of Default - Any one of the following: (a) the failure by the Issuer to
pay (i) Accrued Bond Interest on any Class of Bonds or any Principal
Distribution Amount with respect to a payment date on such payment date, or (ii)
any Unpaid Interest Shortfall on any Class of Bonds with respect to a payment
date, but in the case of clause (ii) only to the extent funds are available to
make such payment as described under "-- Overcollateralization Provisions" in
this prospectus supplement; (b) a default by the Issuer in the observance of
certain negative covenants in the Indenture; (c) a default by the Issuer in the
observance of any other covenant of the Indenture, and the continuation of any
such default for a period of thirty days after notice to the Issuer by the
Indenture Trustee, by the Holders of at least 25% of the aggregate Bond
Principal Balance of the Bonds, as applicable; (d) any representation or
warranty made by the Issuer in the Indenture or in any Bond or other writing
delivered pursuant thereto having been incorrect in a material respect as of the
time made, and the circumstance in respect of which such representation or
warranty is incorrect not having been cured within thirty days after notice
thereof is given to the Issuer by the Indenture Trustee, by the Holders of at
least 25% of the aggregate Bond Principal Balance of the Bonds, as applicable;
(e) certain events of bankruptcy, insolvency, receivership or reorganization of
the Issuer; or (f) the failure by the Issuer on the final scheduled payment date
to reduce the Bond Principal Balances of the Bonds to zero.
Grantor Trust Agreement - The Grantor Trust Agreement dated as of September 29,
2003, between the Company and the Grantor Trustee, as Grantor Trustee.
Grantor Trust Certificate - Any Class M-1, Class M-2, Class M-3, Class M-4,
Class M-5 or Class M-6 Certificate.
Grantor Trustee - Deutsche Bank National Trust Company, and its successors and
assigns or any successor grantor trustee appointed pursuant to the terms of the
Grantor Trust Agreement.
Group 1 Adjusted Net WAC Rate - On any payment date which is not a Subordinated
Transfer Payment Date, or which is a Subordinated Transfer Payment Date but the
Group 1 Loans are an Overcollateralized Loan Group, the Group 1 Net WAC Rate. On
any Subordinated Transfer Payment Date, if the Group 1 Loans are an
Undercollateralized Loan Group, the weighted average of the Group 1 Net WAC Rate
and the Group 2 Net WAC Rate, weighted on the basis of the aggregate Stated
Principal Balance of the Group 1 Loans as of the end of the prior Due Period,
and the Subordinated Transfer Realized Loss Amount, respectively.
Group 1 Available Funds - For any payment date, an amount equal to the amount
received by the Indenture Trustee and available in the Payment Account on that
payment date in respect of the Group 1 Loans. The Group 1 Available Funds will
generally be equal to (a) the sum of (1) the aggregate amount of scheduled
payments on the Group 1 Loans received or advanced that were due during the
related Due Period, (2) any unscheduled payments and receipts on the Group 1
Loans, including mortgagor prepayments on such mortgage loans, the proceeds of
any repurchase of the Group 1 Loans by the Master Servicer or Seller, Insurance
Proceeds (including amounts paid under the Radian Lender-Paid PMI Policy) and
Liquidation Proceeds, received during the related Prepayment Period, in each
case net of amounts reimbursable therefrom to the Indenture Trustee, the Master
Servicer and any subservicer, and (3) any Compensating Interest paid by the
Master Servicer in respect of the Group 1 Loans and reduced by (b) the sum of
(1) Master Servicing Fees, the Subservicing Fees, the Indenture Trustee's Fee,
the Owner Trustee's Fee, the related Net Derivative Fee, if any, any amounts in
respect of the premiums payable to Radian under the Radian Lender-Paid PMI
Policy
S-112
in respect of the Group 1 Loans, and the premium on the Bond Insurance Policy in
respect of the Class 1-A-2 Bonds and (2) certain amounts owed to the Master
Servicer, the Depositor, the Indenture Trustee and the Owner Trustee in respect
of the Group 1 Loans, as provided in the Agreements; provided, however, that on
any Subordinated Transfer Payment Date, the Group 1 Available Funds shall be
increased (if it is the Undercollateralized Loan Group) or reduced (if it is the
Overcollateralized Loan Group), by the Subordinated Payment Transfer Fraction of
the Available Funds for the Overcollateralized Loan Group.
Group 1 Bond - A Class 1-A-1 Bond or Class 1-A-2 Bond or Underlying Class M-1-1,
Class M-2-1, Class M-3-1, Class M-4-1, Class M-5-1 and Class M-6-1 Bond.
Group 1 Cut-off Date Balance - The aggregate Stated Principal Balance of the
Group 1 Loans as of the Cut- off Date.
Group 1 Net WAC Rate - The weighted average of the Net Mortgage Rates on the
Group 1 Loans included in the trust as of the end of the prior Due Period,
weighted on the basis of the Stated Principal Balances thereof as of the end of
the prior Due Period.
Group 1 Overcollateralization Target Amount - With respect to any payment date,
(i) on or before the payment date occurring in March 2004, $0, or (ii) with
respect to any payment date thereafter, 0.50% of the Group 1 Cut-off Date
Balance; provided, that if the aggregate Bond Principal Balance of the Group 2
Bonds has been reduced to zero, the Group 1 Overcollateralization Target Amount
will be 0.50% of the sum of the Group 1 Cut-off Date Balance and Group 2 Cut-off
Date Balance.
Group 2 Adjusted Net WAC Rate - On any payment date which is not a Subordinated
Transfer Payment Date, or which is a Subordinated Transfer Payment Date but the
Group 2 Loans are an Overcollateralized Loan Group, the Group 2 Net WAC Rate. On
any Subordinated Transfer Payment Date, if the Group 2 Loans are an
Undercollateralized Loan Group, the weighted average of the Group 2 Net WAC Rate
and the Group 1 Net WAC Rate, weighted on the basis of the aggregate Stated
Principal Balance of the Group 2 Loans as of the end of the prior Due Period,
and the Subordinated Transfer Realized Loss Amount, respectively.
Group 2 Available Funds - For any payment date, an amount equal to the amount
received by the Indenture Trustee and available in the Payment Account on that
payment date in respect of the Group 2 Loans. The Group 2 Available Funds will
generally be equal to (a) the sum of (1) the aggregate amount of scheduled
payments on the Group 2 Loans received or advanced that were due during the
related Due Period, (2) any unscheduled payments and receipts on the Group 2
Loans, including mortgagor prepayments on such mortgage loans, the proceeds of
any repurchase of the Group 2 Loans by the Master Servicer or Seller, Insurance
Proceeds and Liquidation Proceeds, received during the related Prepayment
Period, in each case net of amounts reimbursable therefrom to the Indenture
Trustee, the Master Servicer and any subservicer, and (3) any Compensating
Interest paid by the Master Servicer in respect of the Group 2 Loans, and
reduced by (b) the sum of (1) Master Servicing Fees, the Subservicing Fees, the
Indenture Trustee's Fee, the Owner Trustee's Fee, and the related Net Derivative
Fee, if any, and (2) certain amounts owed to the Master Servicer, the Depositor,
the Indenture Trustee and the Owner Trustee in respect of the Group 2 Loans, as
provided in the Agreements; provided, however, that on any Subordinated Transfer
Payment Date, the Group 2 Available Funds shall be increased (if it is the
Undercollateralized Loan Group) or reduced (if it is the Overcollateralized Loan
Group), by the Subordinated Payment Transfer Fraction of the Available Funds for
the Overcollateralized Loan Group.
Group 2 Bond - A Class 2-A Bond or Underlying Class M-1-2, Class M-2-2, Class
M-3-2, Class M-4-2, Class M-5-2 and Class M-6-2 Bond.
S-113
Group 2 Cut-off Date Balance - The aggregate Stated Principal Balance of the
Group 2 Loans as of the Cut- off Date.
Group 2 Net WAC Rate - The weighted average of the Net Mortgage Rates on the
Group 2 Loans included in the trust as of the end of the prior Due Period,
weighted on the basis of the Stated Principal Balances thereof as of the end of
the prior Due Period.
Group 2 Overcollateralization Target Amount - With respect to any payment date,
(i) on or before the payment date occurring in March 2004, $0, or (ii) with
respect to any payment date thereafter, 0.50% of the Group 2 Cut-off Date
Balance; provided, that if the aggregate Bond Principal Balance of the Group 1
Bonds has been reduced to zero, the Group 2 Overcollateralization Target Amount
will be 0.50% of the sum of the Group 1 Cut-off Date Balance and Group 2 Cut-off
Date Balance.
High CLTV Loans -- Group 2 Loans that are secured by second liens and were
originated with a limited expectation of recovering any amounts from the
foreclosure of the related mortgaged property and are underwritten with an
emphasis on the creditworthiness of the related borrower.
Homeownership Act - Home Ownership and Equity Protection Act of 1994, as
amended.
Indenture - The Indenture dated as of September 29, 2003, between the Issuer and
the Indenture Trustee, as Indenture Trustee.
Indenture Trustee - Deutsche Bank National Trust Company, and its successors and
assigns or any successor indenture trustee appointed pursuant to the terms of
the Indenture.
Indenture Trustee's Fee - With respect to any payment date, one month's interest
accrued at the Indenture Trustee's Fee Rate on the Stated Principal Balance of
each mortgage loan.
Indenture Trustee's Fee Rate - On each mortgage loan, a rate equal to 0.0037%
per annum.
Insured Undercollateralization Amount - With respect to any payment date and the
Group 1 Loans, (x) the amount by which the aggregate Bond Principal Balance of
the Class 1-A-1 Bonds and Class 2-A-1 Bonds exceeds the aggregate Stated
Principal Balance of the Group 1 Loans and, if it is an Undercollateralized Loan
Group, any Subordinated Transfer Realized Loss Amount multiplied by (y) a
fraction equal to (1) the Bond Principal Balance of the Class 1-A-2 Bonds over
(2) the aggregate Bond Principal Balance of the Class 1-A-1 Bonds and Class
1-A-2 Bonds, in each case immediately following distributions on that payment
date.
Interest Determination Date - With respect to the first Accrual Period, the
second LIBOR Business Day preceding the Closing Date, and with respect to each
Accrual Period thereafter, the second LIBOR Business Day preceding the related
payment date on which such Accrual Period commences.
IRS - The Internal Revenue Service.
Issuer - Impac CMB Trust Series 2003-10, a Delaware statutory trust, or its
successor in interest.
LIBOR Business Day - A day on which banks are open for dealing in foreign
currency and exchange in London and New York City.
Master Servicer - Impac Funding Corporation, a California corporation, and its
successors and assigns.
S-114
Master Servicing Fee - With respect to each mortgage loan and any payment date,
the fee payable monthly to the Master Servicer in respect of master servicing
compensation that accrues at an annual rate equal to the Master Servicing Fee
Rate multiplied by the Stated Principal Balance of such mortgage loan as of the
related Due Date in the related Due Period.
Master Servicing Fee Rate - With respect to any mortgage loan, 0.030% per annum.
Maximum Bond Rate - With respect to any Class of Bonds, other than the Class 2-A
Bonds, 11.50% per annum.
Moody's - Moody's Investors Service, Inc.
Mortgage Loan Sale and Contribution Agreement - The Mortgage Loan Sale and
Contribution Agreement, dated as of the Closing Date, between the Seller and the
Company, whereby the mortgage loans are being sold to the Company.
Net Derivative Fee - With respect to any payment date and the mortgage loans,
the amount equal to the excess, if any, of (a) the aggregate amount payable on
that payment date to the Derivative Counterparty in respect of the related
Derivative Contracts, over (b) the aggregate amount payable on that payment date
to the Issuer from the Derivative Counterparty pursuant to the related
Derivative Contracts, in each case as described in "Description of the
Securities - The Derivative Contracts" in this prospectus supplement.
Net Derivative Fee Rate - With respect to any payment date and the mortgage
loans, the fraction, expressed as a rate per annum, equal to (x) the Net
Derivative Fee on such payment date related to such group over (y) the aggregate
Stated Principal Balance of the related mortgage loans in the related group.
Net Monthly Excess Cashflow - For any payment date and each Loan Group, the sum
of (a) any related Overcollateralization Release Amount and (b) the excess of
(x) the related Available Funds and, with respect to the Group 1 Loans, the
Class 1-A-2 Insured Amount, if any, for such payment date over (y) the sum for
such payment date of (A) the aggregate amount of Accrued Bond Interest for the
related Bonds and (B) the related Principal Remittance Amount.
Net Mortgage Rate - On any mortgage loan and any payment date, the then
applicable mortgage rate thereon for the scheduled monthly payment thereon
during the related Due Period, minus the sum of (1) the Master Servicing Fee
Rate, (2) the Subservicing Fee Rate, (3) the Indenture Trustee's Fee Rate, (4)
the Owner Trustee's Fee Rate, (5) the Net Derivative Fee Rate (if any) and (6)
the related Radian PMI Rate, if such mortgage loan is a Radian PMI Insured Loan.
Non-High CLTV Loans -- The adjustable-rate mortgage loans and the fixed-rate
mortgage loans that are not High CLTV Loans.
Non-Seasoned Mortgage Loans -- Mortgage loans other than the Seasoned Mortgage
Loans.
Offered Security - Any of the Class 1-A-1, Class 1-A-2 and Class 2-A Bonds or
the Class M-1, Class M-2, Class M-3, Class M-4, Class M-5 or Class M-6
Certificates.
OID Regulations - Treasury regulations under Sections 1271 to 1275 of the Code
generally addressing the treatment of debt instruments issued with original
issue discount.
S-115
Overcollateralization Increase Amount - With respect to any payment date, and
each Loan Group, the lesser of (i) the related Net Monthly Excess Cashflow for
such payment date but, solely with respect to the Group 1 Loans, after payments
to the Bond Insurer in respect of clause (i) of "Description of the
Securities--Overcollateralization Provisions" and (ii) the excess, if any, of
(a) the related Overcollateralization Target Amount over (b) the related
Overcollateralized Amount on such payment date (after taking into account
payments to the related Bonds of the related Basic Principal Distribution Amount
on such payment date).
Overcollateralization Release Amount - With respect to any payment date and each
Loan Group, the lesser of (x) the related Principal Remittance Amount for such
payment date and (y) the excess, if any, of (i) the related Overcollateralized
Amount for such payment date (assuming that 100% of the related Principal
Remittance Amount is applied as a principal payment on such payment date) over
(ii) the related Overcollateralization Target Amount for such payment date.
Overcollateralization Target Amount - The Group 1 Overcollateralization Target
Amount or Group 2 Overcollateralization Target Amount, as applicable.
Overcollateralized Amount - For any payment date, other than a Subordinated
Transfer Payment Date, and each Loan Group, the amount, if any, by which (i) the
aggregate principal balance of the related mortgage loans (after giving effect
to scheduled payments of principal due during the related Due Period, to the
extent received or advanced, and unscheduled collections of principal received
during the related Prepayment Period, but prior to reduction for Realized Losses
on the related mortgage loans incurred during the related Prepayment Period),
exceeds (ii) the aggregate Bond Principal Balance related to such Loan Group as
of such payment date (after giving effect to distributions to be made on such
payment date).
For any Subordinated Transfer Payment Date and the Undercollateralized
Loan Group, the amount, if any, by which (i) the aggregate principal balance of
the related mortgage loans (after giving effect to scheduled payments of
principal due during the related Due Period, to the extent received or advanced,
and unscheduled collections of principal received during the related Prepayment
Period, but prior to reduction for Realized Losses on the related mortgage loans
incurred during the related Prepayment Period), exceeds (ii) the sum of (x) the
aggregate Bond Principal Balance related to such Loan Group as of such payment
date (after giving effect to distributions to be made on such payment date) and
(y) the Subordinated Transfer Realized Loss Amount.
For any Subordinated Transfer Payment Date and the Overcollateralized Loan
Group, the amount, if any, by which (i) the aggregate principal balance of the
related mortgage loans (after giving effect to scheduled payments of principal
due during the related Due Period, to the extent received or advanced, and
unscheduled collections of principal received during the related Prepayment
Period, but prior to reduction for Realized Losses on the related mortgage loans
incurred during the related Prepayment Period), exceeds (ii) (x) the aggregate
Bond Principal Balance related to such Loan Group as of such payment date (after
giving effect to distributions to be made on such payment date) minus (y) the
Subordinated Transfer Realized Loss Amount.
Overcollateralized Loan Group - For any Subordinated Transfer Payment Date, the
loan group which is not the Undercollateralized Loan Group.
Owner Trust Certificates - The IMH Assets Corp., Trust Certificates, Series
2003-10, issued pursuant to the Trust Agreement and representing the beneficial
ownership interest in the trust. The Owner Trust Certificates are not offered
hereby.
S-116
Owner Trustee - Wilmington Trust Company and its successors and assigns or any
successor owner trustee appointed pursuant to the terms of the Trust Agreement.
Owner Trustee's Fee - With respect to any payment date the product of (i) the
Owner Trustee's Fee Rate divided by 12 and (ii) the aggregate Stated Principal
Balance of the mortgage loans as of the first day of the related Due Period.
Owner Trustee's Fee Rate - A rate equal to 0.0017% per annum.
P&I Advance - The aggregate of all payments of interest, in the case of the
Non-High CLTV Loans, and principal, net of the Master Servicing Fee and
Subservicing Fee, that were due during the related Due Period on the mortgage
loans and that were delinquent on the related Determination Date, to the extent
they are deemed, in the good faith judgment of the Master Servicer, to be
recoverable from related late collections, Insurance Proceeds or Liquidation
Proceeds, including amounts paid under the Radian Lender-Paid PMI Policy.
Plan - Any employee benefit plan subject to Title I of ERISA and any plan or
other arrangement subject to Section 4975 of the Code.
Plan Assets - The assets of a Plan as determined under Department of Labor
regulation section 2510.3-101 or other applicable law.
Policy Premium Rate - The rate per annum set forth in the Agreement.
Preference Amount - With respect to the Class 1-A-2 Bonds, any amount previously
distributed to a Class 1- A-2 Bondholder that is recoverable and sought to be
recovered as a voidable preference by a trustee in bankruptcy pursuant to the
United States Bankruptcy Code, as amended from time to time, in accordance with
a final nonappealable order of a court having competent jurisdiction.
Prepayment Assumption - A Prepayment Assumption of 100% assumes, (i) with
respect to the Group 1 Loans, 30% CPR and (ii) with respect to the Group 2
Loans, a Prepayment Assumption of 100% assumes that the outstanding balance of a
pool of mortgage loans prepays at a rate of 2% CPR in the first month, such rate
increasing by an additional approximately 1.63636% (exactly 18/11) CPR each
month thereafter through the twelfth month, and such rate remaining constant at
20% CPR thereafter.
Prepayment Interest Shortfall - For any payment date, the aggregate shortfall,
if any, in collections of interest (less the related Subservicing Fees)
resulting from Mortgagor prepayments in full and in part on the mortgage loans
during the related Prepayment Period. Such shortfalls will result because
interest on prepayments in full is paid only to the date of prepayment, and
because no interest is paid on prepayments in part, as such prepayments in part
are applied to reduce the outstanding principal balance of the mortgage loans as
of the Due Date in the month of prepayment.
Prepayment Period - With respect to any payment date is the calendar month
immediately preceding the month in which such payment date occurs.
Principal Distribution Amount - For any payment date and each Loan Group, the
sum of (a) the related Basic Principal Distribution Amount, (b) the amount of
related and non-related Net Monthly Excess Cashflow used to cover Realized
Losses as provided in the applicable clauses of "Description of the
Securities--Overcollateralization Provisions" in this prospectus supplement and
(c) the related Overcollateralization Increase Amount.
S-117
Principal Remittance Amount - For any payment date and each Loan Group, the sum
of
(1) the principal portion of all scheduled monthly payments on the
related mortgage loans due on the related Due Date, to the extent received
or advanced;
(2) the principal portion of all proceeds of the repurchase of a
related mortgage loan (or, in the case of a substitution, certain amounts
representing a principal adjustment) as required by the Servicing
Agreement during the preceding calendar month;
(3) the principal portion of all other unscheduled collections
received during the preceding calendar month in respect of the related
mortgage loans, including full and partial prepayments, the proceeds of
any repurchase of such mortgage loans by the Master Servicer or Seller,
Liquidation Proceeds and Insurance Proceeds (including amounts, if any,
paid under the Radian Lender-Paid PMI Policy), in each case to the extent
applied as recoveries of principal; and
(4) with respect to the Group 1 Loans, any portion of any Class
1-A-2 Insured Amount for such payment date representing an Insured
Undercollateralization Amount allocable to the Class 1- A-2 Bonds.
provided, however, that on any Subordinated Transfer Payment Date, the Principal
Remittance Amount for the Undercollateralized Loan Group shall be increased, and
the Principal Remittance Amount for the Overcollateralized Loan Group shall be
reduced, by the Subordinated Payment Transfer Fraction of the amounts determined
pursuant to clauses (1) through (3) above for the Overcollateralized Loan Group.
Radian - Radian Guaranty, Inc., or its successors or assigns.
Radian Lender-Paid PMI Policy - The lender-paid primary mortgage insurance
policy issued by Radian in accordance with a March 29, 2002 letter between the
Seller and Radian.
Radian PMI Insured Loans -- The mortgage loans covered by the Radian Lender-Paid
PMI Policy.
Radian PMI Rate - With respect to each Radian PMI Insured Loan, the per annum
rate payable to Radian under the Radian Lender-Paid PMI Policy.
Rating Agencies - S&P and Moody's.
Record Date - For each payment date and the Bonds or the Grantor Trust
Certificates, the close of business on the business day immediately preceding
such payment date.
Reference Banks - Leading banks selected by the Indenture Trustee and engaged in
transactions in Eurodollar deposits in the international Eurocurrency market (i)
with an established place of business in London, (ii) whose quotations appear on
the Telerate Screen Page 3750 on the Interest Determination Date in question,
(iii) which have been designated as such by the Indenture Trustee and (iv) not
controlling, controlled by, or under common control with, the Company or the
Seller.
Relief Act Shortfall - For any payment date and any mortgage loan, any
shortfalls relating to the Relief Act or similar legislation or regulations.
Reserve Interest Rate - With respect to any Interest Determination Date, the
rate per annum that the Indenture Trustee determines to be either (i) the
arithmetic mean (rounded upwards if necessary to the nearest
S-118
whole multiple of 0.0625%) of the one-month United States dollar lending rates
which New York City banks selected by the Indenture Trustee are quoting on the
relevant Interest Determination Date to the principal London offices of leading
banks in the London interbank market or (ii) in the event that the Indenture
Trustee can determine no such arithmetic mean, the lowest one-month United
States dollar lending rate which New York City banks selected by the Indenture
Trustee are quoting on such Interest Determination Date to leading European
banks.
Rules - The rules, regulations and procedures creating and affecting DTC and its
operations.
S&P - Standard & Poor's, a division of The McGraw-Hill Companies, Inc.
Seasoned Mortgage Loans -- The mortgage loans that were acquired by the Company
in connection with the termination of prior securitizations of mortgage loans
originated or acquired by the Seller.
Security - Any of the Bonds, the Grantor Trust Certificates, or the Owner Trust
Certificate.
Securityholder - A holder of a Security.
Seller - Impac Mortgage Holdings, Inc., in its capacity as seller under the
Mortgage Loan Sale and Contribution Agreement, and its successors and assigns.
Senior Derivative Contracts - The six derivative contracts between the Seller
and the Derivative Counterparty for the benefit of the Class 1-A-1 Bonds, Class
1-A-2 Bonds and the Owner Trust Certificates.
Senior Net Derivative Contract Payment Amount - With respect to any payment
date, the amount equal to the excess, if any, of (a) the aggregate amount
payable on that payment date to the Issuer from the Derivative Counterparty
pursuant to the Senior Derivative Contracts, over (b) the aggregate amount
payable on that payment date to the Derivative Counterparty under the Senior
Derivative Contracts, in each case as described in "Description of the
Securities--The Derivative Contracts" in this prospectus supplement.
Servicing Agreement - The Servicing Agreement, dated as of September 29, 2003,
among the Master Servicer, the Issuer and the Indenture Trustee.
Stated Principal Balance - With respect to any mortgage loan as of any date of
determination, (i) the principal balance thereof as of the Cut-off Date, as
applicable, after application of all scheduled principal payments due on or
before the Cut-off Date, as applicable, whether or not received, minus (ii) the
sum of (a) the principal portion of the scheduled monthly payments due with
respect to such mortgage loan during each Due Period ending prior to the most
recent payment date which were received or with respect to which a P&I Advance
was made, (b) all principal prepayments with respect to such mortgage loan and
all Insurance Proceeds and Liquidation Proceeds to the extent applied by the
Master Servicer as recoveries of principal in accordance with the Servicing
Agreement which were distributed to the holders of the Bonds and Owner Trust
Certificates on any previous payment date and (c) the principal portion of any
Realized Loss with respect thereto allocated to the trust on any previous
payment date; provided that a 180-day Delinquent High CLTV Loan will have a
Stated Principal Balance of zero.
Step-Up Date - The first payment date following the earlier of (i) the first
payment date for which the aggregate Stated Principal Balance of the mortgage
loans as of the end of the related Due Period has been reduced to 25% or less of
the Cut-off Date Balance and (ii) the payment date occurring in October 2013.
S-119
Subordinate Derivative Contracts - The two derivative contracts between the
Seller and the Derivative Counterparty for the benefit of the Underlying Class
M-1-1, Class M-1-2, Class M-2-1, Class M-2-2, Class M-3-1, Class M-3-2, Class
M-4-1, Class M-4-2, Class M-5-1, Class M-5-2, Class M-6-1 or Class M-6-2 Bonds
and the Owner Trust Certificates.
Subordinate Net Derivative Contract Payment Amount - With respect to any payment
date, the amount equal to the excess, if any, of (a) the aggregate amount
payable on that payment date to the Issuer from the Derivative Counterparty
pursuant to the Subordinate Derivative Contracts, over (b) the aggregate amount
payable on that payment date to the Derivative Counterparty under the
Subordinate Derivative Contracts, in each case as described in "Description of
the Securities--The Derivative Contracts" in this prospectus supplement.
Subordinated Payment Transfer Fraction - With respect to any Subordinated
Transfer Payment Date, a fraction equal to (x) any Subordinated Transfer
Realized Loss Amount for such payment date, divided by (y) the aggregate Stated
Principal Balance of the mortgage loans in the Overcollateralized Loan Group as
of the beginning of the related Due Period.
Subordinated Transfer Amount - With respect to any Subordinated Transfer Payment
Date, the principal portion of any amount paid from the Overcollateralized Loan
Group to the Undercollateralized Loan Group.
Subordinated Transfer Payment Date - Any payment date on which a Subordinated
Transfer Realized Loss Amount exists for either loan group.
Subordinated Transfer Realized Loss Amount - For any payment date, the amount of
any Realized Loss on a mortgage loan in a Loan Group which has been allocated on
a preceding payment date either (a) to the non- related Overcollateralization
Amount or (b) to the non-related Underlying Class M Bonds, to the extent such
Realized Loss has not been reimbursed by related or non-related Net Monthly
Excess Cashflow or by a Subordinated Transfer Amount or by an offsetting
reduction in the overcollateralization or in the Class M Bonds of the related
Undercollateralized Loan Group.
Subservicing Fee - With respect to each mortgage loan and any payment date, the
fee payable monthly to the related subservicer in respect of servicing
compensation that accrues at an annual rate equal to the Subservicing Fee Rate
multiplied by the Stated Principal Balance of such mortgage loan as of the
related Due Date in the related Due Period.
Subservicing Fee Rate - On each Group 1 Loan, a rate equal to 0.375% per annum.
On each Group 2 Loan, a rate equal to (i) 0.25% per annum with respect to Group
2 Loans secured by first liens on the related mortgaged property or (ii) 0.75%
per annum with respect to Group 2 Loans secured by second liens on the related
mortgaged property.
Swap Agreement Fixed Rate - With respect to each Derivative Contract, the fixed
rate set forth in the related Derivative Contract used to determine payments to
the Issuer or to the Derivative Counterparty.
Telerate Screen Page 3750 - The display designated as page 3750 on the Telerate
Service (or such other page as may replace page 3750 on that service for the
purpose of displaying London interbank offered rates of major banks).
Trust Agreement - The Amended and Restated Trust Agreement dated as of September
29, 2003, among the Owner Trustee, the Certificate Registrar and the Company.
S-120
Undercollateralized Loan Group - With respect to any payment date, a loan group
which benefits from the payment of a Subordinated Transfer Realized Loss Amount.
Underlying Class M Bond - Any Class M-1-1, Class M-1-2, Class M-2-1, Class
M-2-2, Class M-3-1, Class M-3-2, Class M-4-1, Class M-4-2, Class M-5-1, Class
M-5-2, Class M-6-1 or Class M-6-2 Bond.
Underwriters - Countrywide Securities Corporation and Merrill Lynch, Pierce,
Fenner & Smith Incorporated.
Unpaid Interest Shortfall - For each class of Bonds and any payment date, such
Bonds' pro rata share, based on the amount of Accrued Bond Interest otherwise
payable on such Bond on such payment date, of (a) any Prepayment Interest
Shortfalls on the related mortgage loans, to the extent not covered by related
Compensating Interest, and (b) any Relief Act Shortfalls on the related mortgage
loans, plus interest on the amount of previously allocated Unpaid Interest
Shortfall on such class of Bonds which remains unreimbursed, at the Bond
Interest Rate for such class for the related Accrual Period.
Wendover - Wendover Funding, Inc.
S-121
[THIS PAGE INTENTIONALLY LEFT BLANK]
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered Impac CMB
Trust, Impac CMB Grantor Trust 1, Impac CMB Grantor Trust 2, Impac CMB Grantor
Trust 3, Impac CMB Grantor Trust 4, Impac CMB Grantor Trust 5 and Impac CMB
Grantor Trust 6, Series 2003-10 Collateralized Asset-Backed Bonds and Grantor
Trust Certificates, Class 1-A-1, Class 1-A-2 and Class 2-A Bonds and the Class
M-1, Class M-2, Class M-3, Class M-4, Class M-5 and Class M-6 Certificates
(collectively, the "Global Securities") will be available only in book-entry
form. Investors in the Global Securities may hold interests in such Global
Securities through any of DTC, Clearstream or Euroclear. The Global Securities
will be tradable as home market instruments in both the European and U.S.
domestic markets. Initial settlement and all secondary trades will settle in
same day funds. Capitalized terms used but not defined in this Annex I have the
meanings assigned to them in this prospectus supplement and the prospectus.
Secondary market trading between investors holding interests in Global
Securities through Clearstream and Euroclear will be conducted in accordance
with their normal rules and operating procedures and in accordance with
conventional eurobond practice (i.e., seven calendar day settlement). Secondary
market trading between investors holding interests in Global Securities through
DTC will be conducted according to the rules and procedures applicable to U.S.
corporate debt obligations.
Secondary cross-market trading between investors holding interests in
Global Securities through Clearstream or Euroclear and investors holding
interests in Global Securities through DTC participants will be effected on a
delivery-against-payment basis through the respective depositories of
Clearstream and Euroclear (in such capacity) and as DTC participants.
Non-U.S. holders (as described below) of Global Securities will be subject
to U.S. withholding taxes unless such holders meet certain requirements and
deliver appropriate U.S. tax documents to the securities clearing organizations
or their participants.
Initial Settlement
All Global Securities will be held in book-entry form by DTC in the name
of Cede & Co. as nominee of DTC. Investors' interests in the Global Securities
will be represented through financial institutions acting on their behalf as
direct and indirect participants in DTC. Clearstream and Euroclear will hold
positions on behalf of their participants through their respective depositories,
which in turn will hold such positions in accounts as DTC participants.
Investors electing to hold interests in Global Securities through DTC
participants will be subject to the settlement practices applicable to similar
issues of pass-through certificates. Investors' securities custody accounts will
be credited with their holdings against payment in same-day funds on the
settlement date.
Investors electing to hold interests in Global Securities through
Clearstream or Euroclear accounts will follow the settlement procedures
applicable to conventional eurobonds, except that there will be no temporary
global security and no "lock-up" or restricted period. Global Securities will be
credited to the securities custody accounts on the settlement date against
payment in same-day funds.
I-1
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
Transfers Between DTC Participants. Secondary market trading between DTC
participants will be settled using the DTC procedures applicable to similar
issues of pass-through certificates in same-day funds.
Transfers 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.
Transfers Between DTC Seller and Clearstream or Euroclear Purchaser. When
Global Securities are to be transferred from the account of a DTC participant to
the account of a Clearstream participant or a Euroclear participant, the
purchaser will send instructions to Clearstream or Euroclear through a
Clearstream participant or Euroclear participant at least one business day prior
to settlement. Clearstream or Euroclear will instruct its respective depository
to receive the Global Securities against payment. Payment will include interest
accrued on the Global Securities from and including the last payment date to but
excluding the settlement date. Payment will then be made by the respective
depository to the DTC participant's account against delivery of the Global
Securities. After such settlement has been completed, the Global Securities will
be credited to the respective clearing system, and by the clearing system, in
accordance with its usual procedures, to the Clearstream participant's or
Euroclear participant's account. The Global Securities credit will appear on the
next business day (European time) and the cash debit will be back-valued to, and
the interest on the Global Securities will accrue from, the value date (which
would be the preceding day when settlement occurred in New York). If settlement
is not completed through DTC on the intended value date (i.e., the trade fails),
the Clearstream or Euroclear cash debit will be valued instead as of the actual
settlement date.
Clearstream participants and Euroclear participants will need to make
available to the respective clearing system the funds necessary to process
same-day funds settlement. The most direct means of doing so is to pre-position
funds for settlement, either from cash on hand or existing lines of credit, as
they would for any settlement occurring with Clearstream or Euroclear. Under
this approach, they may take on credit exposure to Clearstream or Euroclear
until the Global Securities are credited to their accounts one day later.
As an alternative, if Clearstream or Euroclear has extended a line of
credit to them, Clearstream participants or Euroclear participants can elect not
to pre-position funds and allow that credit line to be drawn upon the finance
settlement. Under this procedure, Clearstream participants or Euroclear
participants purchasing Global Securities would incur overdraft charges for one
day, to the extent they cleared the overdraft when the Global Securities were
credited to their accounts. However, interest on the Global Securities would
accrue from the value date. Therefore, the investment income on the interest in
the Global Securities earned during that one- day period may substantially
reduce or offset the amount of such overdraft charges, although this result will
depend on each Clearstream participant's or Euroclear participant's cost of
funds.
Since the settlement through DTC will take place during New York business
hours, DTC participants can employ their usual procedures for sending Global
Securities to the respective depository 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 participant, a
cross-market transaction will settle no differently than a trade between two DTC
participants.
I-2
Transfers Between Clearstream or Euroclear Seller and DTC Purchaser. Due
to time zone differences in their favor, Clearstream participants and Euroclear
participants may employ their customary procedures for transactions in which
Global Securities are to be transferred by the respective clearing system,
through the respective depository, to a DTC participant. The seller will send
instructions to Clearstream or the Euroclear Operator through a Clearstream
participant or Euroclear participant at least one business day prior to
settlement. Clearstream or Euroclear will instruct its respective depository, to
deliver the Global Securities to the DTC participant's account against payment.
Payment will include interest accrued on the Global Securities from and
including the last payment date to but excluding the settlement date. The
payment will then be reflected in the account of the Clearstream participant or
Euroclear participant the following business 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 through DTC 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 charges
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 purchase Global
Securities from DTC participants for delivery to Clearstream participants or
Euroclear participants should note that these trades will automatically fail on
the sale side unless affirmative action were taken. At least three techniques
should be available to eliminate this potential problem:
(a) borrowing Global Securities through Clearstream or Euroclear for
one day (until the purchase side of the day trade is reflected in the
relevant Clearstream or Euroclear accounts) in accordance with the
clearing system's customary procedures;
(b) borrowing Global Securities in the United States from a DTC
participant no later than one day prior to settlement, which would give
the Global Securities sufficient time to be reflected in the relevant
Clearstream or Euroclear accounts in order to settle the sale side of the
trade; or
(c) staggering the value dates for the buy and sell sides of the
trade so that the value date for the purchase from the DTC participant is
at least one day prior to the value date for the sale to the Clearstream
participant or Euroclear participant.
Certain U.S. Federal Income Tax Documentation Requirements
A beneficial owner of Global Securities holding securities through
Clearstream or Euroclear (or through DTC if the holder has an address outside
the U.S.) will be subject to the 30% U.S. withholding tax that generally applies
to payments of interest (including original issue discount) on registered debt
issued by U.S. Persons (as defined below), unless (i) each clearing system, bank
or other financial institution that holds customers' securities in the ordinary
course of its trade or business in the chain of intermediaries between such
beneficial owner and the U.S. entity required to withhold tax, complies with
applicable certification requirements and (ii) such beneficial owner takes one
of the following steps to obtain an exemption or reduced tax rate:
Exemption for Non-U.S. Persons (Form W-8BEN). Beneficial Holders of Global
Securities that are Non-U.S. Persons (as defined below) can obtain a complete
exemption from the withholding tax by filing a signed Form W-8BEN (Certificate
of Foreign Status of Beneficial Owner for United States Tax Withholding).
I-3
If the information shown on Form W-8BEN changes, a new Form W-8BEN must be filed
within 30 days of such change.
Exemption for Non-U.S. Persons with Effectively Connected Income (Form
W-8ECI). A Non-U.S. Person (as defined below), including a non-U.S. corporation
or bank with a U.S. branch, for which the interest income is effectively
connected with its conduct of a trade or business in the United States, can
obtain an exemption from the withholding tax by filing Form W-8ECI (Exemption
from Withholding of Tax on Income Effectively Connected with the Conduct of a
Trade or Business in the United States) or a substitute form.
Exemption or Reduced Rate for Non-U.S. Persons Resident in Treaty
Countries (Form W-8BEN). Non- U.S. Persons residing in a country that has a tax
treaty with the United States can obtain an exemption or reduced tax rate
(depending on the treaty terms) by filing Form W-8BEN (Certificate of Foreign
Status of Beneficial Owner for United States Tax Withholding). Form W-8BEN may
be filed by a beneficial owner or its agent.
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a complete
exemption from the withholding tax by filing Form W-9 (Payer's Request for
Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The beneficial owner of a
Global Security or, in the case of a Form W-8BEN or a Form W-8ECI filer, his
agent, files by submitting the appropriate form to the person through whom it
holds the security (the clearing agency, in the case of persons holding directly
on the books of the clearing agency). Form W-8BEN and Form W-8ECI are effective
until the third succeeding calendar year from the date the form is signed.
The term "U.S. Person" means (i) a citizen or resident of the United
States, (ii) a corporation, a partnership or other entity treated as a
corporation or a partnership for United States federal income tax purposes,
organized in or under the laws of the United States or any state thereof,
including for this purpose the District of Columbia, (iii) an estate, the income
of which is includible in gross income for United States tax purposes,
regardless of its source, (iv) a trust if a court within the United States is
able to exercise primary supervision of the administration of the trust and one
or more United States fiduciaries have the authority to control all substantial
decisions of the trust; or (v) to the extent provided in Treasury regulations,
certain trusts in existence on August 20, 1996 that are treated as United States
persons prior to such date and elect to continue to be treated as United States
persons. The term "Non-U.S. Person" means any person who is not a U.S. Person.
This summary does not deal with all aspects of U.S. Federal income tax
withholding that may be relevant to foreign holders of the Global Securities.
Investors are advised to consult their own tax advisors for specific tax advice
concerning their holding and disposing of the Global Securities.
I-4
IMH Assets Corp.
Company
COLLATERALIZED ASSET-BACKED BONDS
- --------------------------------------------------------------------------------
You should consider carefully the risk factors in the prospectus.
- --------------------------------------------------------------------------------
The Offered Bonds
The company proposes to establish one or more trusts to issue and sell from time
to time one or more classes of offered bonds, which shall be collateralized
asset-backed bonds.
The Trust Fund
Each series of bonds will be secured by a trust fund consisting primarily of a
segregated pool of mortgage loans, including:
mortgage loans secured by first and junior liens on the related mortgage
property;
o home equity revolving lines of credit;
o mortgage loans where the borrower has little or no equity in
the related mortgaged property;
o mortgage loans secured by one-to-four-family residential
properties;
o mortgage loans secured by multifamily properties;
o mortgage loans secured by commercial properties and mixed
residential and commercial properties, provided that the
concentration of these properties is less than 10% of the
pool; and
o manufactured housing conditional sales contracts and
installment loan agreements or interests therein;
in each case acquired by the company from one or more affiliated or unaffiliated
institutions.
Credit Enhancement
If so specified in the related prospectus supplement, the trust for a series of
bonds may include any one or any combination of a financial guaranty insurance
policy, mortgage pool insurance policy, letter of credit, special hazard
insurance policy or reserve fund, and currency or interest rate exchange
agreements. In addition to or in lieu of the foregoing, credit enhancement may
be provided by means of subordination of one or more classes of bonds, by
cross-support or by overcollateralization.
The offered bonds may be offered to the public through different methods as
described in "Methods of Distribution" in this prospectus.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the bonds offered hereby or determined
that this prospectus or the prospectus supplement is truthful or complete. Any
representation to the contrary is a criminal offense.
The date of this prospectus is September 25, 2003.
TABLE OF CONTENTS
Caption Page
- ------- ----
INTRODUCTION...................................................................3
General...................................................................3
THE MORTGAGE POOLS.............................................................4
General...................................................................4
The Mortgage Loans........................................................5
Underwriting Standards....................................................9
Qualifications of Originators and Sellers................................11
Representations by Sellers...............................................12
SERVICING OF MORTGAGE LOANS...................................................14
General..................................................................14
The Master Servicer......................................................15
Collection and Other Servicing Procedures; Mortgage Loan
Modifications............................................................15
Subservicers.............................................................17
Special Servicers........................................................17
Realization upon or Sale of Defaulted Mortgage Loans.....................17
Servicing and Other Compensation and Payment of
Expenses; Retained Interest..............................................20
Evidence as to Compliance................................................20
DESCRIPTION OF THE BONDS......................................................21
General..................................................................21
Form of Bonds............................................................23
Global Bonds.............................................................23
Assignment of Trust Fund Assets..........................................26
Payment Account..........................................................29
Distributions............................................................32
Distributions of Interest and Principal on the Bonds.....................32
Pre-Funding Account......................................................33
Distributions on the Bonds in Respect of Prepayment
Premiums.................................................................34
Allocation of Losses and Shortfalls......................................34
Advances.................................................................34
Reports to Bondholders...................................................35
DESCRIPTION OF CREDIT ENHANCEMENT.............................................36
General..................................................................36
Subordinate Bonds........................................................37
Cross-support............................................................37
Overcollateralization....................................................37
Financial Guaranty Insurance Policy......................................37
Mortgage Pool Insurance Policies.........................................38
Letter of Credit.........................................................39
Special Hazard Insurance Policies........................................40
Reserve Funds............................................................40
Cash Flow Agreements.....................................................41
Maintenance of Credit Enhancement........................................41
Reduction or Substitution of Credit Enhancement..........................43
OTHER FINANCIAL OBLIGATIONS RELATED TO THE
BONDS....................................................................43
Swaps and Yield Supplement Agreements....................................43
Purchase Obligations.....................................................44
PRIMARY MORTGAGE INSURANCE, HAZARD INSURANCE;
CLAIMS THEREUNDER........................................................44
General..................................................................44
Primary Mortgage Insurance Policies......................................44
Hazard Insurance Policies................................................46
FHA Insurance............................................................47
VA Mortgage Guaranty.....................................................47
THE COMPANY...................................................................48
IMPAC FUNDING CORPORATION.....................................................48
IMPAC MORTGAGE HOLDINGS, INC..................................................48
THE AGREEMENTS................................................................49
General..................................................................49
Certain Matters Regarding the Master Servicer and the
Company..................................................................49
Events of Default and Rights upon Event Default..........................50
Amendment................................................................52
Termination; Retirement of Bonds.........................................52
The Trustee..............................................................53
Duties of the Trustee....................................................53
Some Matters Regarding the Trustee.......................................53
RESIGNATION AND REMOVAL OF THE TRUSTEE........................................54
YIELD CONSIDERATIONS..........................................................54
MATURITY AND PREPAYMENT CONSIDERATIONS........................................56
LEGAL ASPECTS OF MORTGAGE LOANS...............................................58
Mortgages................................................................58
Cooperative Mortgage Loans...............................................58
Tax Aspects of Cooperative Ownership.....................................59
Leases and Rents.........................................................60
Contracts................................................................60
Foreclosure on Mortgages and Some Contracts..............................61
Foreclosure on Shares of Cooperatives....................................63
Repossession with Respect to Contracts...................................64
Rights of Redemption.....................................................65
Anti-deficiency Legislation and Other Limitations on
Lenders..................................................................66
Environmental Legislation................................................68
Consumer Protection Laws with Respect to Contracts.......................69
Enforceability of Some Provisions........................................69
Subordinate Financing....................................................71
Installment Contracts....................................................71
Applicability of Usury Laws..............................................71
Alternative Mortgage Instruments.........................................72
Formaldehyde Litigation with Respect to Contracts........................72
Soldiers' and Sailors' Civil Relief Act of 1940..........................73
Forfeitures in Drug and Rico Proceedings.................................73
Junior Mortgages.........................................................74
Negative Amortization Loans..............................................74
FEDERAL INCOME TAX CONSEQUENCES...............................................75
General..................................................................75
Grantor Trust Funds......................................................81
STATE AND OTHER TAX CONSEQUENCES..............................................90
ERISA CONSIDERATIONS..........................................................90
Representation from Plans Investing in Bonds with
"Substantial Equity Features" or Non-exempt Bonds........................94
Tax Exempt Investors.....................................................94
Consultation with Counsel................................................95
LEGAL INVESTMENT MATTERS......................................................95
USE OF PROCEEDS...............................................................96
METHODS OF DISTRIBUTION.......................................................96
LEGAL MATTERS.................................................................97
FINANCIAL INFORMATION.........................................................97
RATINGS.......................................................................98
AVAILABLE INFORMATION.........................................................98
REPORTS TO BONDHOLDERS........................................................98
INCORPORATION OF INFORMATION BY REFERENCE.....................................98
GLOSSARY......................................................................99
2
INTRODUCTION
All capitalized terms in this prospectus are defined in the glossary at the end.
General
The collateralized asset-backed bonds offered by this prospectus and the
prospectus supplement will be offered from time to time in series. The bonds of
each series will consist of the offered bonds of the series, together with any
other collateralized asset-backed bonds of the series. In addition, bonds of
each series may be included in a grantor trust and collateralized asset-backed
grantor trust certificates may be issued in connection with the same series.
Each series of bonds will represent indebtedness of a trust fund to be
established by the company. Each trust fund will consist primarily of a mortgage
pool of mortgage loans or interests therein, which may include mortgage
securities, acquired by the company from one or more affiliated or unaffiliated
sellers. See "The Company" and "The Mortgage Pools." The mortgage loans may
include sub-prime mortgage loans. The trust fund assets may only include, if
applicable, the mortgage loans, reinvestment income, reserve funds, cash
accounts and various forms of credit enhancement as described in this prospectus
and will be held in trust for the benefit of the related bondholders pursuant to
an indenture, in each case as more fully described in this prospectus and in the
related prospectus supplement. Information regarding the offered bonds of a
series, and the general characteristics of the mortgage loans and other trust
fund assets in the related trust fund, will be set forth in the related
prospectus supplement.
Each series of bonds will include one or more classes. Each class of bonds
of any series will represent the right, which right may be senior or subordinate
to the rights of one or more of the other classes of the bonds, to receive a
specified portion of payments of principal or interest or both on the mortgage
loans and the other trust fund assets in the related trust fund in the manner
described in this prospectus under "Description of the Bonds" and in the related
prospectus supplement. A series may include one or more classes of bonds
entitled to principal distributions, with disproportionate, nominal or no
interest distributions, or to interest distributions, with disproportionate,
nominal or no principal distributions. A series may include two or more classes
of bonds which differ as to the timing, sequential order, priority of payment,
pass-through rate or amount of distributions of principal or interest or both.
The company's only obligations with respect to a series of bonds will be
pursuant to representations and warranties made by the company, except as
provided in the related prospectus supplement. The master servicer for any
series of bonds will be named in the related prospectus supplement. The
principal obligations of the master servicer will be pursuant to its contractual
servicing obligations, which include its limited obligation to make advances in
the event of delinquencies in payments on the related mortgage loans. See
"Description of the Bonds."
If so specified in the related prospectus supplement, the trust fund for a
series of bonds may include any one or any combination of a financial guaranty
insurance policy, mortgage pool insurance policy, letter of credit, special
hazard insurance policy, reserve fund or currency or interest rate exchange
agreements. In addition to or in lieu of the foregoing, credit enhancement may
be provided by means of subordination of one or more classes of bonds or by
overcollateralization. See "Description of Credit Enhancement."
The rate of payment of principal of each class of bonds entitled to a
portion of principal payments on the mortgage loans in the related mortgage pool
and the trust fund assets will depend on the priority of payment of the class
and the rate and timing of principal payments on the mortgage loans and other
trust fund assets, including by reason of prepayments, defaults, liquidations
and repurchases of mortgage loans. A rate of principal payment slower or faster
than that anticipated may affect the yield on a class of bonds in the manner
described in this prospectus and in the related prospectus supplement. See
"Yield Considerations."
3
The offered bonds may be offered through one or more different methods,
including offerings through underwriters, as more fully described under "Methods
of Distribution" and in the related prospectus supplement.
There will be no secondary market for the offered bonds of any series
prior to the offering thereof. There can be no assurance that a secondary market
for any of the offered bonds will develop or, if it does develop, that it will
continue. The offered bonds will not be listed on any securities exchange.
Collateralized asset-backed grantor trust certificates may be issued in
connection with any series, as a result of depositing one or more bonds into a
grantor trust and issuing one or more grantor trust certificates. Any such
grantor trust certificate and any related grantor trust agreement will be
described in the related prospectus supplement. Any statements in this
prospectus referencing the bonds will generally include any grantor trust
certificate issued, provided that the tax treatment of such certificate will
differ as described in "Federal Income Tax Consequences."
THE MORTGAGE POOLS
General
Each mortgage pool will consist primarily of mortgage loans, minus any
interest retained by the company or any affiliate of the company. The mortgage
loans may consist of single family loans, multifamily loans, commercial loans,
mixed-use loans and Contracts, each as described below.
The single family loans will be evidenced by mortgage notes and secured by
mortgages that, in each case, create a first or junior lien on the related
mortgagor's fee or leasehold interest in the related mortgaged property. The
related mortgaged property for a single family loan may be owner- occupied or
may be a vacation, second or non-owner-occupied home.
If specified in the related prospectus supplement relating to a series of
bonds, the single family loans may include cooperative apartment loans evidenced
by a mortgage note secured by security interests in the related mortgaged
property including shares issued by cooperatives and in the related proprietary
leases or occupancy agreements granting exclusive rights to occupy specific
dwelling units in the related buildings.
The multifamily loans will be evidenced by mortgage notes and secured by
mortgages that create a first or junior lien on residential properties
consisting of five or more dwelling units in high- rise, mid- rise or garden
apartment structures or projects.
The commercial loans will be evidenced by mortgage notes and secured
mortgages that create a first or junior lien on commercial properties including
office building, retail building and a variety of other commercial properties as
may be described in the related prospectus supplement.
The mixed-use loans will be evidenced by mortgage loans and secured by
mortgages that create a first or junior lien on properties consisting of mixed
residential and commercial structures.
The aggregate concentration by original principal balance of commercial
and mixed-use loans in any mortgage pool will be less than 10% of the original
principal balance of the mortgage pool.
Mortgaged properties may be located in any one of the 50 states, the
District of Columbia or the Commonwealth of Puerto Rico.
The mortgage loans will not be guaranteed or insured by the company or any
of its affiliates. However, if so specified in the related prospectus
supplement, the mortgage loans may be insured by the FHA or the VA. See "Primary
Mortgage Insurance, Hazard Insurance; Claims Thereunder--FHA Insurance" and
"--VA Mortgage Guaranty" in this prospectus.
A mortgage pool may include mortgage loans that are delinquent as of the
date the related series of bonds is issued. In that case, the related prospectus
supplement will set forth, as to each
4
mortgage loan, available information as to the period of delinquency and any
other information relevant for a prospective purchaser to make an investment
decision. No mortgage loan in a mortgage pool shall be 90 days or more
delinquent. Mortgage loans which are more than 30 and less than 90 days
delinquent included in any mortgage pool will have delinquency data relating to
them included in the related prospectus supplement. No mortgage pool will
include a concentration of mortgage loans which is more than 30 and less than 90
days delinquent of 20% or more.
The mortgage loans may include "sub-prime" mortgage loans. "Sub-prime"
mortgage loans will be underwritten in accordance with underwriting standards
which are less stringent than guidelines for "A" quality borrowers. Mortgagors
may have a record of outstanding judgments, prior bankruptcies and other credit
items that do not satisfy the guidelines for "A" quality borrowers. They may
have had past debts written off by past lenders.
A mortgage pool may include mortgage loans that do not meet the purchase
requirements of Fannie Mae and Freddie Mac. These mortgage loans are known as
nonconforming loans. The mortgage loans may be nonconforming because they exceed
the maximum principal balance of mortgage loans purchased by Fannie Mae and
Freddie Mac, known as jumbo loans, because they are sub-prime mortgage loans, or
because of some other failure to meet the purchase criteria of Fannie Mae and
Freddie Mac. The related prospectus supplement will detail to what extent the
mortgage loans are nonconforming mortgage loans.
Each mortgage loan will be selected by the company for inclusion in a
mortgage pool from among those purchased by the company, either directly or
through its affiliates, from Unaffiliated Sellers or Affiliated Sellers. If a
mortgage pool is composed of mortgage loans acquired by the company directly
from Unaffiliated Sellers, the related prospectus supplement will specify the
extent of mortgage loans so acquired. The characteristics of the mortgage loans
are as described in the related prospectus supplement. Other mortgage loans
available for purchase by the company may have characteristics which would make
them eligible for inclusion in a mortgage pool but were not selected for
inclusion in the mortgage pool.
The mortgage loans may be delivered to the trust fund pursuant to a
Designated Seller Transaction, concurrently with the issuance of the related
series of bonds. These bonds may be sold in whole or in part to the Seller in
exchange for the related mortgage loans, or may be offered under any of the
other methods described in this prospectus under "Methods of Distribution." The
related prospectus supplement for a mortgage pool composed of mortgage loans
acquired by the company pursuant to a Designated Seller Transaction will
generally include information, provided by the related Seller, about the Seller,
the mortgage loans and the underwriting standards applicable to the mortgage
loans.
If specified in the related prospectus supplement, the trust fund for a
series of bonds may include mortgage securities, as described in this
prospectus. The mortgage securities may have been issued previously by the
company or an affiliate thereof, a financial institution or other entity engaged
generally in the business of mortgage lending or a limited purpose corporation
organized for the purpose of, among other things, acquiring and depositing
mortgage loans into trusts, and selling beneficial interests in trusts. The
mortgage securities will be generally similar to bonds offered under this
prospectus. However, any mortgage securities included in a trust fund will (1)
either have been (a) previously registered under the Securities Act, or (b)
eligible for sale under Rule 144(k) under the Exchange Act; and (2) be acquired
in bona fide secondary market transactions. If the mortgage securities are the
securities of the company or an affiliate thereof, they will be registered under
the Securities Act, even if they satisfy the requirements of the preceding
sentence. As to any series of mortgage securities, the related prospectus
supplement will include a description of (1) the mortgage securities and any
related credit enhancement, and (2) the mortgage loans underlying the mortgage
securities.
The Mortgage Loans
Each of the mortgage loans will be a type of mortgage loan described or
referred to below, with any variations described in the related prospectus
supplement:
5
o Fixed-rate, fully-amortizing mortgage loans (which may include
mortgage loans converted from adjustable-rate mortgage loans
or otherwise modified) providing for level monthly payments of
principal and interest and terms at origination or
modification of not more than approximately 15 years;
o Fixed-rate, fully-amortizing mortgage loans (which may include
mortgage loans converted from adjustable-rate mortgage loans
or otherwise modified) providing for level monthly payments of
principal and interest and terms at origination or
modification of more than 15 years, but not more than
approximately 30 years;
o Fully-amortizing ARM Loans having an original or modified term
to maturity of not more than approximately 30 years with a
related mortgage rate which generally adjusts initially either
three months, six months or one, two, three, five, seven or
ten years or other intervals subsequent to the initial payment
date, and thereafter at either three- month, six-month,
one-year or other intervals (with corresponding adjustments in
the amount of monthly payments) over the term of the mortgage
loan to equal the sum of the related Note Margin and the
Index. The related prospectus supplement will set forth the
relevant Index and the highest, lowest and weighted average
Note Margin with respect to the ARM Loans in the related
mortgage pool. The related prospectus supplement will also
indicate any periodic or lifetime limitations on changes in
any per annum mortgage rate at the time of any adjustment. If
specified in the related prospectus supplement, an ARM Loan
may include a provision that allows the mortgagor to convert
the adjustable mortgage rate to a fixed rate at some point
during the term of the ARM Loan generally not later than six
to ten years subsequent to the initial payment date;
o Negatively-amortizing ARM Loans having original or modified
terms to maturity of not more than approximately 30 years with
mortgage rates which generally adjust initially on the payment
date referred to in the related prospectus supplement, and on
each of specified periodic payment dates thereafter, to equal
the sum of the Note Margin and the Index. The scheduled
monthly payment will be adjusted as and when described in the
related prospectus supplement to an amount that would fully
amortize the mortgage loan over its remaining term on a level
debt service basis; provided that increases in the scheduled
monthly payment may be subject to limitations as specified in
the related prospectus supplement. Any Deferred Interest will
be added to the principal balance of the mortgage loan;
o Fixed-rate, graduated payment mortgage loans having original
or modified terms to maturity of not more than approximately
15 years with monthly payments during the first year
calculated on the basis of an assumed interest rate which is a
specified percentage below the mortgage rate on the mortgage
loan. Monthly payments on these mortgage loans increase at the
beginning of the second year by a specified percentage of the
monthly payment during the preceding year and each year
thereafter to the extent necessary to amortize the mortgage
loan over the remainder of its approximately 15-year term.
Deferred Interest, if any, will be added to the principal
balance of these mortgage loans;
o Fixed-rate, graduated payment mortgage loans having original
or modified terms to maturity of not more than approximately
30 years with monthly payments during the first year
calculated on the basis of an assumed interest rate which is a
specified percentage below the mortgage rate. The monthly
payments on these mortgage loans increase at the beginning of
the second year by a specified percentage of the monthly
payment during the preceding year and each year thereafter to
the extent necessary to fully amortize the
6
mortgage loan within its approximately 25- or 30-year term.
Deferred Interest, if any, will be added to the principal
balance of these mortgage loans;
o Balloon loans having payment terms similar to those described
in one of the preceding paragraphs, calculated on the basis of
an assumed amortization term, but providing for a balloon
payment of all outstanding principal and interest to be made
at the end of a specified term that is shorter than the
assumed amortization term.
o Mortgage loans that provide for a line of credit pursuant to
which amounts may be advanced to the borrower from time to
time; or
o Another type of mortgage loan described in the related
prospectus supplement.
The mortgage pool may contain single family loans and multifamily loans
secured by junior liens, and the related senior liens may not be included in the
mortgage pool. The primary risk to holders of mortgage loans secured by junior
liens is the possibility that adequate funds will not be received in connection
with a foreclosure of the related senior liens to satisfy fully both the senior
liens and the mortgage loan. In the event that a holder of a senior lien
forecloses on a mortgaged property, the proceeds of the foreclosure or similar
sale will be applied first to the payment of court costs and fees in connection
with the foreclosure, second to real estate taxes, third in satisfaction of all
principal, interest, prepayment or acceleration penalties, if any, and any other
sums due and owing to the holder of the senior liens. The claims of the holders
of the senior liens will be satisfied in full out of proceeds of the liquidation
of the related mortgaged property, if the proceeds are sufficient, before the
trust fund as holder of the junior lien receives any payments in respect of the
mortgage loan. If the master servicer were to foreclose on a mortgage loan
secured by a junior lien, it would do so subject to any related senior liens. In
order for the debt related to the mortgage loan to be paid in full at the sale,
a bidder at the foreclosure sale of the mortgage loan would have to bid an
amount sufficient to pay off all sums due under the mortgage loan and the senior
liens or purchase the mortgaged property subject to the senior liens. In the
event that the proceeds from a foreclosure or similar sale of the related
mortgaged property are insufficient to satisfy all senior liens and the mortgage
loan in the aggregate, the trust fund, as the holder of the junior lien, and,
accordingly, holders of one or more classes of the bonds of the related series
bear (1) the risk of delay in distributions while a deficiency judgment against
the borrower is sought and (2) the risk of loss if the deficiency judgment is
not realized upon. Moreover, deficiency judgments may not be available in some
jurisdictions or the mortgage loan may be nonrecourse. In addition, a junior
mortgagee may not foreclose on the property securing a junior mortgage unless it
forecloses subject to the senior mortgages.
A mortgage loan may contain a prohibition on prepayment or lock-out period
or require payment of a prepayment penalty. A multifamily, commercial or
mixed-use loan may also contain a provision that entitles the lender to a share
of profits realized from the operation or disposition of the related mortgaged
property. If the holders of any class or classes of offered bonds of a series
will be entitled to all or a portion of this type of equity participation, the
related prospectus supplement will describe the equity participation and the
method or methods by which distributions in respect thereof will be made to such
holders.
The mortgage loans may be "equity refinance" mortgage loans, as to which a
portion of the proceeds are used to refinance an existing mortgage loan, and the
remaining proceeds may be retained by the mortgagor or used for purposes
unrelated to the mortgaged property. Alternatively, the mortgage loans may be
"rate and term refinance" mortgage loans, as to which substantially all of the
proceeds (net of related costs incurred by the mortgagor) are used to refinance
an existing mortgage loan or loans (which may include a junior lien) primarily
in order to change the interest rate or other terms thereof. The mortgage loans
may be mortgage loans which have been consolidated and/or have had various terms
changed, mortgage loans which have been converted from adjustable rate mortgage
loans to fixed rate mortgage loans, or construction loans which have been
converted to permanent mortgage loans. In addition, a mortgaged property may be
subject to secondary financing at the time
7
of origination of the mortgage loan or thereafter. In addition, some or all of
the single family loans secured by junior liens may be High LTV Loans.
A mortgage pool may contain convertible ARM Loans which allow the
mortgagors to convert the adjustable rates on these mortgage loans to a fixed
rate at some point during the life of these mortgage loans, generally not later
than six to ten years subsequent to the date of origination, depending upon the
length of the initial adjustment period. If specified in the related prospectus
supplement, upon any conversion, the company, the related master servicer, the
applicable Seller or a third party will purchase the converted mortgage loan as
and to the extent set forth in the related prospectus supplement. Alternatively,
if specified in the related prospectus supplement, the company or the related
master servicer (or another specified party) may agree to act as remarketing
agent with respect to the converted mortgage loans and, in this capacity, to use
its best efforts to arrange for the sale of converted mortgage loans under
specified conditions. Upon the failure of any party so obligated to purchase any
converted mortgage loan, the inability of any remarketing agent to arrange for
the sale of the converted mortgage loan and the unwillingness of the remarketing
agent to exercise any election to purchase the converted mortgage loan for its
own account, the related mortgage pool will thereafter include both fixed rate
and adjustable rate mortgage loans.
If provided for in the related prospectus supplement, the mortgage loans
may include buydown mortgage loans. Under the terms of a buydown mortgage loan,
the monthly payments made by the mortgagor during the early years of the
mortgage loan will be less than the scheduled monthly payments on the mortgage
loan. The resulting difference will made up from:
o funds contributed by the seller of the mortgaged property or
another source and placed in a custodial account,
o If funds contributed by the seller are contributed on a
present value basis, investment earnings on these funds or
o additional funds to be contributed over time by the
mortgagor's employer or another source.
See "Description of the Bonds--Payment Account."
Generally, the mortgagor under each buydown mortgage loan will be
qualified at the applicable lower monthly payment. Accordingly, the repayment of
a buydown mortgage loan is dependent on the ability of the mortgagor to make
larger level monthly payments after the Buydown Funds have been depleted and,
for some buydown mortgage loans, during the Buydown Period.
The prospectus supplement for each series of bonds will contain
information, to the extent known or reasonably ascertainable, as to the loss and
delinquency experience of the Seller and/or the master servicer with respect to
mortgage loans similar to those included in the trust fund. Information
generally will be provided when the Seller and/or master servicer have a
seasoned portfolio of mortgage loans.
The prospectus supplement for each series of bonds will contain
information as to the type of mortgage loans that will be included in the
related mortgage pool. Each prospectus supplement applicable to a series of
bonds will include information, generally as of the cut-off date and to the
extent then available to the company, on an approximate basis, as to the
following:
o the aggregate principal balance of the mortgage loans,
o the type of property securing the mortgage loans,
o the original or modified terms to maturity of the mortgage
loans,
o the range of principal balances of the mortgage loans at
origination or modification,
8
o the earliest origination or modification date and latest
maturity date of the mortgage loans,
o the loan-to-value ratios of the mortgage loans,
o the mortgage rate or range of mortgage rates borne by the
mortgage loans,
o if any of the mortgage loans are ARM Loans, the applicable
Index, the range of Note Margins and the weighted average Note
Margin,
o the geographical distribution of the mortgage loans,
o the number of buydown mortgage loans, if applicable, and
o the percent of ARM Loans which are convertible to fixed-rate
mortgage loans, if applicable.
A Current Report on Form 8-K will be available upon request to holders of the
related series of bonds and will be filed, together with the related servicing
agreement, owner trust agreement and indenture, with the Commission within
fifteen days after the initial issuance of the bonds. In the event that mortgage
loans are added to or deleted from the trust fund after the date of the related
prospectus supplement, the addition or deletion will be noted in the Current
Report on Form 8-K. In no event, however, will more than 5% (by principal
balance at the cut-off date) of the mortgage loans or mortgage securities
deviate from the characteristics of the mortgage loans or mortgage securities
set forth in the related prospectus supplement.
The company will cause the mortgage loans constituting each mortgage pool,
or mortgage securities evidencing interests therein, to be assigned, without
recourse, to the trustee named in the related prospectus supplement, for the
benefit of the holders of all of the bonds of a series. Except to the extent
that servicing of any mortgage loan is to be transferred to a special servicer,
the master servicer named in the related prospectus supplement will service the
mortgage loans, directly or through subservicers, pursuant to a servicing
agreement, and will receive a fee for these services. See "Servicing of Mortgage
Loans," "Description of the Bonds" and "The Agreements." With respect to those
mortgage loans serviced by the master servicer through a subservicer, the master
servicer will remain liable for its servicing obligations under the related
servicing agreement as if the master servicer alone were servicing the mortgage
loans. The master servicer's obligations with respect to the mortgage loans will
consist principally of its contractual servicing obligations under the related
servicing agreement (including its obligation to enforce the purchase and other
obligations of subservicers and Sellers, as more fully described in this
prospectus under "--Representations by Sellers" in this prospectus, "Servicing
of Mortgage Loans--Subservicers," and "Description of the Bonds--Assignment of
Trust Fund Assets," and, if and to the extent set forth in the related
prospectus supplement, its obligation to make cash advances in the event of
delinquencies in payments on or with respect to the mortgage loans as described
in this prospectus under "Description of the Bonds--Advances") or pursuant to
the terms of any mortgage securities.
Underwriting Standards
Mortgage loans to be included in a mortgage pool will have been purchased
by the company, either directly or indirectly from Sellers. The mortgage loans,
as well as mortgage loans underlying mortgage securities, will have been
originated in accordance with underwriting standards acceptable to the company
and generally described below. Any mortgage loan not directly underwritten by
the company or its affiliates will be reunderwritten by the company or its
affiliates, except in the case of a Designated Seller's Transaction, in which
case each mortgage loan will be underwritten by the Seller or an affiliate
thereof. The reunderwriting standards of the company or its affiliates for these
mortgage loans generally will be in accordance with the same standards as those
for mortgage loans directly underwritten, with any variations described in the
related prospectus supplement.
9
The underwriting standards to be used in originating the mortgage loans
are primarily intended to assess the creditworthiness of the mortgagor, the
value of the mortgaged property and the adequacy of the property as collateral
for the mortgage loan.
The primary considerations in underwriting a mortgage loan are the
mortgagor's employment stability and whether the mortgagor has sufficient
monthly income available (1) to meet the mortgagor's monthly obligations on the
proposed mortgage loan (generally determined on the basis of the monthly
payments due in the year of origination) and other expenses related to the home
(including property taxes and hazard insurance) and (2) to meet monthly housing
expenses and other financial obligations and monthly living expenses. However,
the loan-to-value ratio of the mortgage loan is another critical factor. In
addition, a mortgagor's credit history and repayment ability, as well as the
type and use of the mortgaged property, are also considerations.
High LTV Loans are underwritten with an emphasis on the creditworthiness
of the related mortgagor. High LTV Loans are underwritten with a limited
expectation of recovering any amounts from the foreclosure of the related
mortgaged property.
In the case of the multifamily loans, commercial loans or mixed-use loans,
lenders typically look to the debt service coverage ratio of a loan as an
important measure of the risk of default on that loan. Unless otherwise defined
in the related prospectus supplement, the debt service coverage ratio of a
multifamily loan or commercial loan at any given time is the ratio of (1) the
net operating income of the related mortgaged property for a twelve-month period
which is to (2) the annualized scheduled payments on the mortgage loan and on
any other loan that is secured by a lien on the mortgaged property prior to the
lien of the related mortgage. The total operating revenues derived from a
multifamily, commercial or mixed-use property, as applicable, during that
period, minus the total operating expenses incurred in respect of that property
during that period other than (a) non-cash items such as depreciation and
amortization, (b) capital expenditures and (c) debt service on loans (including
the related mortgage loan) secured by liens on that property. The net operating
income of a multifamily, commercial or mixed-use property, as applicable, will
fluctuate over time and may or may not be sufficient to cover debt service on
the related mortgage loan at any given time. As the primary source of the
operating revenues of a multifamily, commercial or mixed-use property, as
applicable, rental income (and maintenance payments from tenant-stockholders of
a cooperatively owned multifamily property) may be affected by the condition of
the applicable real estate market and/or area economy. Increases in operating
expenses due to the general economic climate or economic conditions in a
locality or industry segment, such as increases in interest rates, real estate
tax rates, energy costs, labor costs and other operating expenses, and/or
changes in governmental rules, regulations and fiscal policies, may also affect
the risk of default on a multifamily, commercial or mixed-use loan. Lenders also
look to the loan-to-value ratio of a multifamily, commercial or mixed-use loan
as a measure of risk of loss if a property must be liquidated following a
default.
Each prospective mortgagor will generally complete a mortgage loan
application that includes information on the applicant's liabilities, income,
credit history, employment history and personal information. One or more credit
reports on each applicant from national credit reporting companies generally
will be required. The report typically contains information relating to credit
history with local and national merchants and lenders, installment debt payments
and any record of defaults, bankruptcies, repossessions, or judgments. In the
case of a multifamily loan, commercial loan or mixed-use loan, the mortgagor
will also be required to provide certain information regarding the related
mortgaged property, including a current rent roll and operating income
statements (which may be pro forma and unaudited). In addition, the originator
will generally also consider the location of the mortgaged property, the
availability of competitive lease space and rental income of comparable
properties in the relevant market area, the overall economy and demographic
features of the geographic area and the mortgagor's prior experience in owning
and operating properties similar to the multifamily properties or commercial
properties, as the case may be.
Mortgaged properties generally will be appraised by licensed appraisers.
The appraiser will generally address neighborhood conditions, site and zoning
status and condition and valuation of improvements. In the case of mortgaged
properties secured by single family loans, the appraisal report will generally
include a reproduction cost analysis (when appropriate) based on the current
cost of constructing a similar home and a market value analysis based on recent
sales of comparable
10
homes in the area. With respect to multifamily properties, commercial properties
and mixed-use properties, the appraisal must specify whether an income analysis,
a market analysis or a cost analysis was used. An appraisal employing the income
approach to value analyzes a property's projected net cash flow, capitalization
and other operational information in determining the property's value. The
market approach to value analyzes the prices paid for the purchase of similar
properties in the property's area, with adjustments made for variations between
those other properties and the property being appraised. The cost approach to
value requires the appraiser to make an estimate of land value and then
determine the current cost of reproducing the improvements less any accrued
depreciation. In any case, the value of the property being financed, as
indicated by the appraisal, must support, and support in the future, the
outstanding loan balance. All appraisals are required to be on forms acceptable
to Fannie Mae or Freddie Mac.
Notwithstanding the foregoing, loan-to-value ratios will not necessarily
constitute an accurate measure of the risk of liquidation loss in a pool of
mortgage loans. For example, the value of a mortgaged property as of the date of
initial issuance of the related series of bonds may be less than the Value
determined at loan origination, and will likely continue to fluctuate from time
to time based upon changes in economic conditions and the real estate market.
Mortgage loans which are subject to negative amortization will have
loan-to-value ratios which will increase after origination as a result of
negative amortization. Also, even when current, an appraisal is not necessarily
a reliable estimate of value for a multifamily property or commercial property.
As stated above, appraised values of multifamily, commercial and mixed-use
properties are generally based on the market analysis, the cost analysis, the
income analysis, or upon a selection from or interpolation of the values derived
from those approaches. Each of these appraisal methods can present analytical
difficulties. It is often difficult to find truly comparable properties that
have recently been sold; the replacement cost of a property may have little to
do with its current market value; and income capitalization is inherently based
on inexact projections of income and expenses and the selection of an
appropriate capitalization rate. Where more than one of these appraisal methods
are used and provide significantly different results, an accurate determination
of value and, correspondingly, a reliable analysis of default and loss risks, is
even more difficult.
If so specified in the related prospectus supplement, the underwriting of
a multifamily loan, commercial loan or mixed-use loan may also include
environmental testing. Under the laws of some states, contamination of real
property may give rise to a lien on the property to assure the costs of cleanup.
In several states, this type of lien has priority over an existing mortgage lien
on that property. In addition, under the laws of some states and under the
federal Comprehensive Environmental Response, Compensation and Liability Act of
1980, a lender may be liable, as an "owner" or "operator", for costs of
addressing releases or threatened releases of hazardous substances at a
property, if agents or employees of the lender have become sufficiently involved
in the operations of the borrower, regardless of whether or not the
environmental damage or threat was caused by the borrower or a prior owner. A
lender also risks such liability on foreclosure of the mortgage as described
under "Legal Aspects of Mortgage Loans--Environmental Legislation" in this
prospectus.
With respect to any FHA loan or VA loans the mortgage loan Seller will be
required to represent that it has complied with the applicable underwriting
policies of the FHA or VA, respectively. See "Primary Mortgage Insurance, Hazard
Insurance; Claims Thereunder--FHA Insurance" and "-- VA Mortgage Guaranty" in
this prospectus.
Qualifications of Originators and Sellers
Each mortgage loan generally will be originated, directly or through
mortgage brokers and correspondents, by a savings and loan association, savings
bank, commercial bank, credit union, insurance company, or similar institution
which is supervised and examined by a federal or state authority, or by a
mortgagee approved by the Secretary of Housing and Urban Development pursuant to
sections 203 and 211 of the Housing Act.
11
Representations by Sellers
Each Seller will have made representations and warranties in respect of
the mortgage loans and/or mortgage securities sold by the Seller and evidenced
by a series of bonds. In the case of mortgage loans, representations and
warranties will generally include, among other things, that as to each mortgage
loan:
o any required hazard and primary mortgage insurance policies
were effective at the origination of the mortgage loan, and
each the policy remained in effect on the date of purchase of
the mortgage loan from the Seller by or on behalf of the
company;
o with respect to each mortgage loan other than a Contract or a
cooperative mortgage loan, either (A) a title insurance policy
insuring (subject only to permissible title insurance
exceptions) the lien status of the mortgage was effective at
the origination of the mortgage loan and the policy remained
in effect on the date of purchase of the mortgage loan from
the Seller by or on behalf of the company or (B) if the
mortgaged property securing the mortgage loan is located in an
area where these policies are generally not available, there
is in the related mortgage file an attorney's certificate of
title indicating (subject to permissible exceptions set forth
therein) the lien status of the mortgage;
o the Seller has good title to the mortgage loan and the
mortgage loan was subject to no offsets, defenses or
counterclaims except as may be provided under the Relief Act
and except to the extent that any buydown agreement exists for
a buydown mortgage loan;
o there are no mechanics' liens or claims for work, labor or
material affecting the related mortgaged property which are,
or may be a lien prior to, or equal with, the lien of the
related mortgage (subject only to permissible title insurance
exceptions);
o the related mortgaged property is free from damage and in good
repair;
o there are no delinquent tax or assessment liens against the
related mortgaged property;
o the mortgage loan is not more than 90 days delinquent as to
any scheduled payment of principal and/or interest;
o if a Primary Insurance Policy is required with respect to the
mortgage loan, the mortgage loan is the subject of the policy;
and
o the mortgage loan was made in compliance with, and is
enforceable under, all applicable local, state and federal
laws in all material respects.
If the mortgage loans include cooperative mortgage loans, representations and
warranties with respect to title insurance or hazard insurance may not be given.
Generally, the cooperative itself is responsible for the maintenance of hazard
insurance for property owned by the cooperative, and the borrowers
(tenant-stockholders) of the cooperative do not maintain hazard insurance on
their individual dwelling units. In the case of mortgage securities,
representations and warranties will generally include, among other things, that
as to each mortgage security: (1) the mortgage security is validly issued and
outstanding and entitled to the benefits of the agreement pursuant to which it
was issued; and (2) the Seller has good title to the mortgage security. In the
event of a breach of a Seller's representation or warranty that materially
adversely affects the interests of the bondholders in a mortgage loan or
mortgage security, the related Seller will be obligated to cure the breach or
repurchase or, if permitted, replace the mortgage loan or mortgage security as
described below. However, there can be no assurance that a Seller will honor its
obligation to repurchase or, if
12
permitted, replace any mortgage loan or mortgage security as to which a breach
of a representation or warranty arises.
All of the representations and warranties of a Seller in respect of a
mortgage loan or mortgage security will have been made as of the date on which
the mortgage loan or mortgage security was purchased from the Seller by or on
behalf of the company. As a result, the date as of which the representations and
warranties were made may be a date prior to the date of initial issuance of the
related series of bonds or, in the case of a Designated Seller Transaction, will
be the date of closing of the related sale by the applicable Seller. A
substantial period of time may have elapsed between the date as of which the
representations and warranties were made and the later date of initial issuance
of the related series of bonds. Accordingly, the Seller's purchase obligation
(or, if specified in the related prospectus supplement, limited replacement
option) described below will not arise if, during the period commencing on the
date of sale of a mortgage loan or mortgage security by the Seller, an event
occurs that would have given rise to a purchase obligation had the event
occurred prior to sale of the affected mortgage loan or mortgage security, as
the case may be. The only representations and warranties to be made for the
benefit of holders of bonds in respect of any related mortgage loan or mortgage
security relating to the period commencing on the date of sale of the mortgage
loan or mortgage security by the Seller to or on behalf of the company will be
the limited representations of the company and the master servicer described
under "Description of the Bonds--Assignment of Trust Fund Assets" below.
The company will assign to the trustee for the benefit of the holders of
the related series of bonds all of its right, title and interest in each
purchase agreement by which it purchased a mortgage loan or mortgage security
from a Seller insofar as the purchase agreement relates to the representations
and warranties made by the Seller in respect of the mortgage loan or mortgage
security and any remedies provided for with respect to any breach of
representations and warranties with respect to the mortgage loan or mortgage
security. If a Seller cannot cure a breach of any representation or warranty
made by it in respect of a mortgage loan or mortgage security which materially
and adversely affects the interests of the bondholders therein within a
specified period after having discovered or received notice of a breach, then,
the Seller will be obligated to purchase the mortgage loan or mortgage security
at a purchase price set forth in the related agreement which purchase price
generally will be equal to the principal balance thereof as of the date of
purchase plus accrued and unpaid interest through or about the date of purchase
at the related mortgage rate or pass- through rate, as applicable (net of any
portion of this interest payable to the Seller in respect of master servicing
compensation, special servicing compensation or subservicing compensation, as
applicable, and any interest retained by the company).
As to any mortgage loan required to be purchased by a Seller as provided
above, rather than repurchase the mortgage loan, the Seller, if so specified in
the related prospectus supplement, will be entitled, at its sole option, to
remove the Deleted Mortgage Loan from the trust fund and substitute in its place
a Qualified Substitute Mortgage Loan. Any Qualified Substitute Mortgage Loan
generally will, on the date of substitution:
o have an outstanding principal balance, after deduction of the
principal portion of the monthly payment due in the month of
substitution, not in excess of the outstanding principal
balance of the Deleted Mortgage Loan (the amount of any
shortfall to be deposited in the Payment Account by the
related Seller or the master servicer in the month of
substitution for distribution to the bondholders),
o have a mortgage rate and a Net Mortgage Rate not less than
(and not more than one percentage point greater than) the
mortgage rate and Net Mortgage Rate, respectively, of the
Deleted Mortgage Loan as of the date of substitution,
o have a loan-to-value ratio at the time of substitution no
higher than that of the Deleted Mortgage Loan at the time of
substitution,
13
o have a remaining term to maturity not greater than (and not
more than one year less than) that of the Deleted Mortgage
Loan and
o comply with all of the representations and warranties made by
the Seller as of the date of substitution.
The related mortgage loan purchase agreement may include additional requirements
relating to ARM Loans or other specific types of mortgage loans, or additional
provisions relating to meeting the foregoing requirements on an aggregate basis
where a number of substitutions occur contemporaneously. No Seller will have any
option to substitute for a mortgage security that it is obligated to repurchase
in connection with a breach of a representation and warranty.
The master servicer will be required under the applicable servicing
agreement to use reasonable efforts to enforce this purchase or substitution
obligation for the benefit of the trustee and the bondholders, following those
practices it would employ in its good faith business judgment and which are
normal and usual in its general mortgage servicing activities; provided,
however, that this purchase or substitution obligation will not become an
obligation of the master servicer in the event the applicable Seller fails to
honor the obligation. In instances where a Seller is unable, or disputes its
obligation, to purchase affected mortgage loans and/or mortgage securities, the
master servicer, employing the standards set forth in the preceding sentence,
may negotiate and enter into one or more settlement agreements with the related
Seller that could provide for the purchase of only a portion of the affected
mortgage loans and/or mortgage securities. Any settlement could lead to losses
on the mortgage loans and/or mortgage securities which would be borne by the
related bonds. In accordance with the above described practices, the master
servicer will not be required to enforce any purchase obligation of a Seller
arising from any misrepresentation by the Seller, if the master servicer
determines in the reasonable exercise of its business judgment that the matters
related to the misrepresentation did not directly cause or are not likely to
directly cause a loss on the related mortgage loan or mortgage security. If the
Seller fails to repurchase and no breach of any other party's representations
has occurred, the Seller's purchase obligation will not become an obligation of
the company or any other party. In the case of a Designated Seller Transaction
where the Seller fails to repurchase a mortgage loan or mortgage security and
neither the company nor any other entity has assumed the representations and
warranties, the repurchase obligation of the Seller will not become an
obligation of the company or any other party. The foregoing obligations will
constitute the sole remedies available to bondholders or the trustee for a
breach of any representation by a Seller or for any other event giving rise to
the obligations as described above.
Neither the company nor the master servicer will be obligated to purchase
a mortgage loan or mortgage security if a Seller defaults on its obligation to
do so, and no assurance can be given that the Sellers will carry out their
purchase obligations. A default by a Seller is not a default by the company or
by the master servicer. However, to the extent that a breach of the
representations and warranties of a Seller also constitutes a breach of a
representation made by the company or the master servicer, as described below
under "Description of the Bonds--Assignment of Trust Fund Assets," the company
or the master servicer may have a purchase or substitution obligation. Any
mortgage loan or mortgage security not so purchased or substituted for shall
remain in the related trust fund and any losses related thereto shall be
allocated to the related credit enhancement, to the extent available, and
otherwise to one or more classes of the related series of bonds.
If a person other than a Seller makes the representations and warranties
referred to in the first paragraph of this "--Representations by Sellers"
section, or a person other than a Seller is responsible for repurchasing or
replacing any mortgage loan or mortgage security for a breach of those
representations and warranties, the identity of that person will be specified in
the related prospectus supplement.
SERVICING OF MORTGAGE LOANS
General
The mortgage loans and mortgage securities included in each mortgage pool
will be serviced and administered pursuant to a servicing agreement. A form of
servicing agreement has been filed
14
as an exhibit to the registration statement of which this prospectus is a part.
However, the provisions of each servicing agreement will vary depending upon the
nature of the related mortgage pool. The following summaries describe the
material servicing-related provisions that may appear in a servicing agreement
for a mortgage pool that includes mortgage loans. The related prospectus
supplement will describe any servicing-related provision of its related
servicing agreement that materially differs from the description thereof
contained in this prospectus. If the related mortgage pool includes mortgage
securities, the related prospectus supplement will summarize the material
provisions of the related servicing agreement and identify the responsibilities
of the parties to that servicing agreement.
With respect to any series of bonds as to which the related mortgage pool
includes mortgage securities, the servicing and administration of the mortgage
loans underlying any mortgage securities will be pursuant to the terms of those
mortgage securities. Mortgage loans underlying mortgage securities in a mortgage
pool will be serviced and administered generally in the same manner as mortgage
loans included in a mortgage pool, however, there can be no assurance that this
will be the case, particularly if the mortgage securities are issued by an
entity other than the company or any of its affiliates. The related prospectus
supplement will describe any material differences between the servicing
described below and the servicing of the mortgage loans underlying mortgage
securities in any mortgage pool.
The Master Servicer
The master servicer, if any, for a series of bonds will be named in the
related prospectus supplement and may be Impac Funding Corporation or another
affiliate of the company. The master servicer is required to maintain a fidelity
bond and errors and omissions policy with respect to its officers and employees
and other persons acting on behalf of the master servicer in connection with its
activities under a servicing agreement.
Collection and Other Servicing Procedures; Mortgage Loan Modifications
The master servicer for any mortgage pool, directly or through
subservicers, will be obligated under the servicing agreement to service and
administer the mortgage loans in the mortgage pool for the benefit of the
related bondholders, in accordance with applicable law, the terms of the
servicing agreement, the mortgage loans and any instrument of credit enhancement
included in the related trust fund, and, to the extent consistent with the
foregoing, the customs and standards of prudent institutional mortgage lenders
servicing comparable mortgage loans for their own account in the jurisdictions
where the related mortgaged properties are located. Subject to the foregoing,
the master servicer will have full power and authority to do any and all things
in connection with servicing and administration that it may deem necessary and
desirable.
As part of its servicing duties, the master servicer will be required to
make reasonable efforts to collect all payments called for under the terms and
provisions of the mortgage loans that it services. The master servicer will be
obligated to follow the same collection procedures as it would follow for
comparable mortgage loans held for its own account, so long as these procedures
are consistent with the servicing standard of and the terms of the related
servicing agreement and the servicing standard generally described in the
preceding paragraph, and do not impair recovery under any instrument of credit
enhancement included in the related trust fund. Consistent with the foregoing,
the master servicer will be permitted, in its discretion, to waive any
prepayment premium, late payment charge or other charge in connection with any
mortgage loan.
Under a servicing agreement, a master servicer will be granted discretion
to extend relief to mortgagors whose payments become delinquent. In the case of
single family loans and Contracts, a master servicer may, for example, grant a
period of temporary indulgence to a mortgagor or may enter into a liquidating
plan providing for repayment of delinquent amounts within a specified period
from the date of execution of the plan. However, the master servicer must first
determine that any waiver or extension will not impair the coverage of any
related insurance policy or materially adversely affect the security for the
mortgage loan. In addition, unless otherwise specified in the related prospectus
supplement, if a material default occurs or a payment default is reasonably
foreseeable with respect to a multifamily loan, commercial loan or mixed-use
loan, the master servicer will be permitted, subject to any specific limitations
set forth in the related servicing agreement and
15
described in the related prospectus supplement, to modify, waive or amend any
term of such mortgage loan, including deferring payments, extending the stated
maturity date or otherwise adjusting the payment schedule, provided that the
modification, waiver or amendment (1) is reasonably likely to produce a greater
recovery with respect to that mortgage loan on a present value basis than would
liquidation and (2) will not adversely affect the coverage under any applicable
instrument of credit enhancement.
In the case of multifamily loans, commercial loans and mixed-use loans, a
mortgagor's failure to make required mortgage loan payments may mean that
operating income is insufficient to service the mortgage debt, or may reflect
the diversion of that income from the servicing of the mortgage debt. In
addition, a mortgagor under a multifamily, commercial or mixed-use loan that is
unable to make mortgage loan payments may also be unable to make timely payment
of taxes and otherwise to maintain and insure the related mortgaged property.
Generally, the related master servicer will be required to monitor any
multifamily loan or commercial 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 mortgaged property and take any other actions as are consistent with
the servicing standard described above and in the servicing agreement. A
significant period of time may elapse before the master servicer is able to
assess the success of any such corrective action or the need for additional
initiatives. The time within which the master servicer can make the initial
determination of appropriate action, evaluate the success of corrective action,
develop additional initiatives, institute foreclosure proceedings and actually
foreclose (or accept a deed to a mortgaged property in lieu of foreclosure) on
behalf of the bondholders of the related series may vary considerably depending
on the particular multifamily, commercial or mixed-use loan, the mortgaged
property, the mortgagor, the presence of an acceptable party to assume that loan
and the laws of the jurisdiction in which the mortgaged property is located. If
a mortgagor files a bankruptcy petition, the master servicer may not be
permitted to accelerate the maturity of the related multifamily, commercial or
mixed-use loan or to foreclose on the mortgaged property for a considerable
period of time. See "Legal Aspects of Mortgage Loans."
Some or all of the mortgage loans in a mortgage pool may contain a
due-on-sale clause that entitles the lender to accelerate payment of the
mortgage loan upon any sale or other transfer of the related mortgaged property
made without the lender's consent. Certain of the multifamily loans in a
mortgage pool may also contain a due-on-encumbrance clause that entitles the
lender to accelerate the maturity of the mortgage loan upon the creation of any
other lien or encumbrance upon the mortgaged property. In any case in which a
mortgaged property is being conveyed by the mortgagor, the master servicer will
in general be obligated, to the extent it has knowledge of the conveyance, to
exercise its rights to accelerate the maturity of the related mortgage loan
under any due-on-sale clause applicable thereto, but only if the exercise of
these rights is permitted by applicable law and only to the extent it would not
adversely affect or jeopardize coverage under any Primary Insurance Policy or
applicable credit enhancement arrangements. If applicable law prevents the
master servicer from enforcing a due-on-sale or due-on-encumbrance clause or if
the master servicer determines that it is reasonably likely that the related
mortgagor would institute a legal action to avoid enforcement of a due-on-sale
or due-on-encumbrance clause, the master servicer may enter into an assumption
and modification agreement with the person to whom the property has been or is
about to be conveyed, pursuant to which this person becomes liable under the
mortgage loan subject to specified conditions. The original mortgagor may be
released from liability on a single family loan if the master servicer shall
have determined in good faith that the release will not adversely affect the
collectability of the mortgage loan. The master servicer will determine whether
to exercise any right the trustee may have under any due-on-sale or
due-on-encumbrance provision in a multifamily loan, commercial loan or mixed-use
loan in a manner consistent with the servicing standard. The master servicer
generally will be entitled to retain as additional servicing compensation any
fee collected in connection with the permitted transfer of a mortgaged property.
See "Legal Aspects of Mortgage Loans--Enforceability of Some Provisions." FHA
loans do not contain due-on-sale or due-on-encumbrance clauses and may be
assumed by the purchaser of the mortgaged property.
Mortgagors may, from time to time, request partial releases of the
mortgaged properties, easements, consents to alteration or demolition and other
similar matters. The master servicer may approve a request if it has determined,
exercising its good faith business judgment in the same
16
manner as it would if it were the owner of the related mortgage loan, that
approval will not adversely affect the security for, or the timely and full
collectability of, the related mortgage loan. Any fee collected by the master
servicer for processing these requests will be retained by the master servicer
as additional servicing compensation.
In the case of mortgage loans secured by junior liens on the related
mortgaged properties, the master servicer will be required to file (or cause to
be filed) of record a request for notice of any action by a superior lienholder
under the senior lien for the protection of the related trustee's interest,
where permitted by local law and whenever applicable state law does not require
that a junior lienholder be named as a party defendant in foreclosure
proceedings in order to foreclose the junior lienholder's equity of redemption.
The master servicer also will be required to notify any superior lienholder in
writing of the existence of the mortgage loan and request notification of any
action (as described below) to be taken against the mortgagor or the mortgaged
property by the superior lienholder. If the master servicer is notified that any
superior lienholder has accelerated or intends to accelerate the obligations
secured by the related senior lien, or has declared or intends to declare a
default under the mortgage or the promissory note secured thereby, or has filed
or intends to file an election to have the related mortgaged property sold or
foreclosed, then, the master servicer will be required to take, on behalf of the
related trust fund, whatever actions are necessary to protect the interests of
the related bondholders, and/or to preserve the security of the related mortgage
loan. The master servicer will be required to advance the necessary funds to
cure the default or reinstate the superior lien, if the advance is in the best
interests of the related bondholders and the master servicer determines the
advances are recoverable out of payments on or proceeds of the related mortgage
loan.
The master servicer for any mortgage pool will also be required to perform
other customary functions of a servicer of comparable loans, including
maintaining escrow or impound accounts for payment of taxes, insurance premiums
and similar items, or otherwise monitoring the timely payment of those items;
adjusting mortgage rates on ARM Loans; maintaining Buydown Accounts; supervising
foreclosures and similar proceedings; managing REO properties; and maintaining
servicing records relating to the mortgage loans in the mortgage pool. The
master servicer will be responsible for filing and settling claims in respect of
particular mortgage loans under any applicable instrument of credit enhancement.
See "Description of Credit Enhancement."
Subservicers
A master servicer may delegate its servicing obligations in respect of the
mortgage loans serviced by it to one or more third-party subservicers, but the
master servicer will remain liable for its obligations under the related
servicing agreement. The master servicer will be solely liable for all fees owed
by it to any subservicer, regardless of whether the master servicer's
compensation pursuant to the related servicing agreement is sufficient to pay
the subservicer's fees. Each subservicer will be entitled to reimbursement for
some of the expenditures which it makes, generally to the same extent as would
the master servicer for making the same expenditures. See "--Servicing and Other
Compensation and Payment of Expenses; Retained Interest" below and "Description
of the Bonds--The Payment Account."
Special Servicers
If and to the extent specified in the related prospectus supplement, a
special servicer may be a party to the related servicing agreement or may be
appointed by the master servicer or another specified party to perform specified
duties in respect of servicing the related mortgage loans that would otherwise
be performed by the master servicer (for example, the workout and/or foreclosure
of defaulted mortgage loans). The rights and obligations of any special servicer
will be specified in the related prospectus supplement, and the master servicer
will be liable for the performance of a special servicer only if, and to the
extent, set forth in that prospectus supplement.
Realization upon or Sale of Defaulted Mortgage Loans
Except as described below, the master servicer will be required, in a
manner consistent with the servicing standard, to foreclose upon or otherwise
comparably convert the ownership of properties securing any mortgage loans in
the related mortgage pool that come into and continue in
17
default and as to which no satisfactory arrangements can be made for collection
of delinquent payments. Generally, the foreclosure process will commence no
later than 90 days after delinquency of the related mortgage loan. The master
servicer will be authorized to institute foreclosure proceedings, exercise any
power of sale contained in the related mortgage, obtain a deed in lieu of
foreclosure, or otherwise acquire title to the related mortgaged property, by
operation of law or otherwise, if the action is consistent with the servicing
standard. The master servicer's actions in this regard must be conducted,
however, in a manner that will permit recovery under any instrument of credit
enhancement included in the related trust fund. In addition, the master servicer
will not be required to expend its own funds in connection with any foreclosure
or to restore any damaged property unless it shall determine that (1) the
foreclosure and/or restoration will increase the proceeds of liquidation of the
mortgage loan to the related bondholders after reimbursement to itself for these
expenses and (2) these expenses will be recoverable to it from related Insurance
Proceeds, Liquidation Proceeds or amounts drawn out of any fund or under any
instrument constituting credit enhancement (respecting which it shall have
priority for purposes of withdrawal from the Payment Account in accordance with
the servicing agreement).
However, unless otherwise specified in the related prospectus supplement,
the master servicer may not acquire title to any multifamily property or
commercial property securing a mortgage loan or take any other action that would
cause the related trustee, for the benefit of bondholders of the related series,
or any other specified person to be considered to hold title to, to be a
"mortgagee-in- possession" of, or to be an "owner" or an "operator" of such
mortgaged property within the meaning of federal environmental laws, unless the
master servicer has previously determined, based on a report prepared by a
person who regularly conducts environmental audits (which report will be an
expense of the trust fund), that either:
(1) the mortgaged property is in compliance with applicable
environmental laws and regulations or, if not, that taking actions as are
necessary to bring the mortgaged property into compliance with these laws
is reasonably likely to produce a greater recovery on a present value
basis than not taking those actions; and
(2) there are no circumstances or conditions present at the
mortgaged property that have resulted in any contamination for which
investigation, testing, monitoring, containment, clean-up or remediation
could be required under any applicable environmental laws and regulations
or, if those circumstances or conditions are present for which any such
action could be required, taking those actions with respect to the
mortgaged property is reasonably likely to produce a greater recovery on a
present value basis than not taking those actions. See "Legal Aspects of
Mortgage Loans--Environmental Legislation."
The master servicer will not be obligated to foreclose upon or otherwise
convert the ownership of any mortgaged property securing a single family loan if
it has received notice or has actual knowledge that the property may be
contaminated with or affected by hazardous wastes or hazardous substances;
however, environmental testing will not be required. The master servicer will
not be liable to the bondholders of the related series if, based on its belief
that no such contamination or effect exists, the master servicer forecloses on a
mortgaged property and takes title to the mortgaged property, and thereafter the
mortgaged property is determined to be so contaminated or affected.
With respect to a mortgage loan in default, the master servicer may pursue
foreclosure (or similar remedies) concurrently with pursuing any remedy for a
breach of a representation and warranty. However, the master servicer is not
required to continue to pursue both remedies if it determines that one remedy is
more likely than the other to result in a greater recovery. Upon the first to
occur of final liquidation (by foreclosure or otherwise) or a repurchase or
substitution pursuant to a breach of a representation and warranty, the mortgage
loan will be removed from the related trust fund if it has not been removed
previously. The master servicer may elect to treat a defaulted mortgage loan as
having been finally liquidated if a substantial portion or all of the amounts
expected to be received from that mortgage loan have been received. Any
additional liquidation expenses relating to the mortgage loan thereafter
incurred will be reimbursable to the master servicer (or any subservicer) from
any amounts otherwise distributable to holders of securities of the related
series, or may be offset by any subsequent recovery related to the mortgage
loan. Alternatively, for purposes
18
of determining the amount of related Liquidation Proceeds to be distributed to
securityholders, the amount of any Realized Loss or the amount required to be
drawn under any applicable form of credit support, the master servicer may take
into account minimal amounts of additional receipts expected to be received, as
well as estimated additional liquidation expenses expected to be incurred in
connection with the defaulted mortgage loan.
As provided above, the master servicer may pass through less than the full
amount it expects to receive from the related mortgage loan; however, the master
servicer may only do this if the master servicer reasonably believes it will
maximize the proceeds to the securityholders in the aggregate. To the extent the
master servicer receives additional recoveries following liquidation, the amount
of the Realized Loss will be restated, and the additional recoveries will be
passed through the trust as Liquidation Proceeds. In the event the amount of the
Realized Loss is restated, the amount of overcollateralization or the principal
balance of the most subordinate class of securities in the trust may be
increased. However, the holders of any bonds whose principal balance is
increased will not be reimbursed interest for the period during which the
principal balance of their bonds was lower.
With respect to a series of bonds, if so provided in the related
prospectus supplement, the applicable form of credit enhancement may provide, to
the extent of coverage, that a defaulted mortgage loan will be removed from the
trust fund prior to the final liquidation thereof. In addition, a servicing
agreement may grant to the master servicer, a special servicer, a provider of
credit enhancement and/or the holder or holders of specified classes of bonds of
the related series a right of first refusal to purchase from the trust fund, at
a predetermined purchase price, any mortgage loan as to which a specified number
of scheduled payments are delinquent. If the purchase price is insufficient to
fully fund the entitlements of bondholders to principal and interest, it will be
specified in the related prospectus supplement. Furthermore, a servicing
agreement may authorize the master servicer to sell any defaulted mortgage loan
if and when the master servicer determines, consistent with the servicing
standard, that the sale would produce a greater recovery to bondholders on a
present value basis than would liquidation of the related mortgaged property.
In the event that title to any mortgaged property is acquired by
foreclosure or by deed in lieu of foreclosure, the deed or certificate of sale
will be issued to the trustee or to its nominee on behalf of bondholders of the
related series. Notwithstanding any acquisition of title and cancellation of the
related mortgage loan, the REO Mortgage Loan will be considered for most
purposes to be an outstanding mortgage loan held in the trust fund until the
mortgaged property is sold and all recoverable Liquidation Proceeds and
Insurance Proceeds have been received with respect to the defaulted mortgage
loan. For purposes of calculations of amounts distributable to bondholders in
respect of an REO Mortgage Loan, the amortization schedule in effect at the time
of any acquisition of title (before any adjustment thereto by reason of any
bankruptcy or any similar proceeding or any moratorium or similar waiver or
grace period) will be deemed to have continued in effect (and, in the case of an
ARM Loan, the amortization schedule will be deemed to have adjusted in
accordance with any interest rate changes occurring on any adjustment date
therefor) so long as the REO Mortgage Loan is considered to remain in the trust
fund.
If Liquidation Proceeds collected with respect to a defaulted mortgage
loan are less than the outstanding principal balance of the defaulted mortgage
loan plus accrued interest plus the aggregate amount of reimbursable expenses
incurred by the master servicer with respect to the mortgage loan, and the
shortfall is not covered under any applicable instrument or fund constituting
credit enhancement, the trust fund will realize a loss in the amount of the
difference. The master servicer will be entitled to reimburse itself from the
Liquidation Proceeds recovered on any defaulted mortgage loan, prior to the
distribution of Liquidation Proceeds to bondholders, amounts that represent
unpaid servicing compensation in respect of the mortgage loan, unreimbursed
servicing expenses incurred with respect to the mortgage loan and any
unreimbursed advances of delinquent payments made with respect to the mortgage
loan. If so provided in the related prospectus supplement, the applicable form
of credit enhancement may provide for reinstatement subject to specified
conditions in the event that, following the final liquidation of a mortgage loan
and a draw under the credit enhancement, subsequent recoveries are received. In
addition, if a gain results from the final liquidation of a defaulted mortgage
loan or an REO Mortgage Loan which is not required by law to be remitted to the
related mortgagor, the master servicer will be entitled to retain the gain as
additional servicing compensation unless the related prospectus supplement
provides otherwise.
19
For a description of the master servicer's (or other specified person's)
obligations to maintain and make claims under applicable forms of credit
enhancement and insurance relating to the mortgage loans, see "Description of
Credit Enhancement" and "Primary Mortgage Insurance, Hazard Insurance; Claims
Thereunder."
Servicing and Other Compensation and Payment of Expenses; Retained Interest
The principal servicing compensation to be paid to the master servicer in
respect of its master servicing activities for a series of bonds will be equal
to the percentage or range of percentages per annum described in the related
prospectus supplement of the outstanding principal balance of each mortgage
loan, and this compensation will be retained by it on a monthly or other
periodic basis from collections of interest on each mortgage loan in the related
trust fund at the time the collections are deposited into the applicable Payment
Account. This portion of the servicing fee will be calculated with respect to
each mortgage loan by multiplying the fee by the principal balance of the
mortgage loan. In addition, the master servicer may retain all prepayment
premiums, assumption fees and late payment charges, to the extent collected from
mortgagors, and any benefit which may accrue as a result of the investment of
funds in the applicable Payment Account. Any additional servicing compensation
will be described in the related prospectus supplement. Any subservicer will
receive a portion of the master servicer's compensation as its subservicing
compensation.
In addition to amounts payable to any subservicer, the master servicer
will pay or cause to be paid some of the ongoing expenses associated with each
trust fund and incurred by it in connection with its responsibilities under the
servicing agreement, including, if so specified in the related prospectus
supplement, payment of any fee or other amount payable in respect of any
alternative credit enhancement arrangements, payment of the fees and
disbursements of the trustee, any custodian appointed by the trustee and the
bond registrar, and payment of expenses incurred in enforcing the obligations of
subservicers and Sellers. The master servicer will be entitled to reimbursement
of expenses incurred in enforcing the obligations of subservicers and Sellers
under limited circumstances. In addition, the master servicer will be entitled
to reimbursements for some of its expenses incurred in connection with
liquidated mortgage loans and in connection with the restoration of mortgaged
properties, this right of reimbursement being prior to the rights of bondholders
to receive any related Liquidation Proceeds or Insurance Proceeds. If and to the
extent so provided in the related prospectus supplement, the master servicer
will be entitled to receive interest on amounts advanced to cover reimbursable
expenses for the period that the advances are outstanding at the rate specified
in the prospectus supplement, and the master servicer will be entitled to
payment of the interest periodically from general collections on the mortgage
loans in the related trust fund prior to any payment to bondholders or as
otherwise provided in the related servicing agreement and described in the
prospectus supplement.
The prospectus supplement for a series of bonds will specify whether there
will be any interest in the mortgage loans retained by the company. Any retained
interest will be a specified portion of the interest payable on each mortgage
loan in a mortgage pool and will not be part of the related trust fund. Any
retained interest will be established on a loan-by-loan basis and the amount
thereof with respect to each mortgage loan in a mortgage pool will be specified
on an exhibit to the related servicing agreement. Any partial recovery of
interest in respect of a mortgage loan will be allocated between the owners of
any retained interest and the holders of classes of bonds entitled to payments
of interest as provided in the related prospectus supplement and the applicable
servicing agreement.
If and to the extent provided in the related prospectus supplement, the
master servicer may be required to apply a portion of the servicing compensation
otherwise payable to it in respect of any period to any Prepayment Interest
Shortfalls resulting from mortgagor prepayments during that period. See "Yield
Considerations."
Evidence as to Compliance
Each servicing agreement will provide that on or before a specified date
in each year, beginning the first such date that is at least a specified number
of months after the cut-off date, a firm of independent public accountants will
furnish a statement to the company and the trustee to the
20
effect that, on the basis of an examination by the firm conducted substantially
in compliance with the Uniform Single Attestation Program for Mortgage Bankers
or the Audit Program for mortgages serviced for Freddie Mac, the servicing of
mortgage loans under agreements (including the related servicing agreement)
substantially similar to each other was conducted in compliance with the
agreements except for significant exceptions or errors in records that, in the
opinion of the firm, the Uniform Single Attestation Program for Mortgage Bankers
or the Audit Program for mortgages serviced for Freddie Mac requires it to
report. In rendering its statement the firm may rely, as to the matters relating
to the direct servicing of mortgage loans by subservicers, upon comparable
statements for examinations conducted substantially in compliance with the
Uniform Single Attestation Program for Mortgage Bankers or the Audit Program for
mortgages serviced for Freddie Mac (rendered within one year of the statement)
of firms of independent public accountants with respect to those subservicers
which also have been the subject of this type of examination.
Each servicing agreement will also provide for delivery to the trustee, on
or before a specified date in each year, of an annual statement signed by one or
more officers of the master servicer to the effect that, to the best knowledge
of each officer, the master servicer has fulfilled in all material respects its
obligations under the servicing agreement throughout the preceding year or, if
there has been a material default in the fulfillment of any obligation, the
statement shall specify each known default and the nature and status thereof.
This statement may be provided as a single form making the required statements
as to more than one servicing agreement.
Copies of the annual accountants' statement and the annual statement of
officers of a master servicer may be obtained by bondholders without charge upon
written request to the master servicer or trustee.
DESCRIPTION OF THE BONDS
General
The bonds will be issued in series. Each series of bonds (or, in some
instances, two or more series of bonds) will be issued pursuant to an indenture
between the related Issuer and the trustee, similar to the form filed as an
exhibit to the registration statement of which this prospectus is a part. The
trust fund will be created pursuant to an owner trust agreement between the
company and the owner trustee. Each indenture, along with the related servicing
agreement and owner trust agreement, will be filed with the Commission as an
exhibit to a Current Report on Form 8-K. Qualified counsel will render an
opinion to the effect that the trust fund's assets will not be considered assets
of the Seller or the company in the event of the bankruptcy Seller or the
company. The following summaries (together with additional summaries under "The
Agreements" below) describe the material provisions relating to the bonds common
to each Agreement.
Each series of bonds covered by a particular indenture will evidence
indebtedness of a separate trust fund created pursuant to the related owner
trust agreement. A trust fund will consist of, to the extent provided in the
owner trust agreement:
o the mortgage loans (and the related mortgage documents) or
interests therein (including any mortgage securities)
underlying a particular series of bonds as from time to time
are subject to the servicing agreement, exclusive of, if
specified in the related prospectus supplement, any interest
retained by the company or any of its affiliates with respect
to each mortgage loan;
o all payments and collections in respect of the mortgage loans
or mortgage securities due after the related cut-off date, as
from time to time are identified as deposited in respect
thereof in the related Payment Account as described below;
o any property acquired in respect of mortgage loans in the
trust fund, whether through foreclosure of a mortgage loan or
by deed in lieu of foreclosure;
21
o hazard insurance policies, Primary Insurance Policies and FHA
insurance policies, if any, maintained in respect of mortgage
loans in the trust fund and the proceeds of these policies;
o the rights of the company under any mortgage loan purchase
agreement, including in respect of any representations and
warranties therein; and
o any combination, as and to the extent specified in the related
prospectus supplement, of a financial guaranty insurance
policy, mortgage pool insurance policy, letter of credit,
special hazard insurance policy, or currency or interest rate
exchange agreements as described under "Description of Credit
Enhancement."
If provided in the related prospectus supplement, the original principal
amount of a series of bonds may exceed the principal balance of the mortgage
loans or mortgage securities initially being delivered to the trustee. Cash in
an amount equal to this difference will be deposited into a pre- funding account
maintained with the trustee. During the period set forth in the related
prospectus supplement, amounts on deposit in the pre-funding account may be used
to purchase additional mortgage loans or mortgage securities for the related
trust fund. Any amounts remaining in the pre- funding account at the end of the
period will be distributed as a principal prepayment to the holders of the
related series of bonds at the time and in the manner set forth in the related
prospectus supplement.
Each series of bonds may consist of any one or a combination of the
following:
o a single class of bonds;
o two or more classes of bonds, one or more classes of which
will be senior in right of payment to one or more of the other
classes, and as to which some classes of senior (or
subordinate) bonds may be senior to other classes of senior
(or subordinate) bonds, as described in the respective
prospectus supplement;
o two or more classes of bonds, one or more classes of which
will be Strip Bonds;
o two or more classes of bonds which differ as to the timing,
sequential order, rate, pass-through rate or amount of
distributions of principal or interest or both, or as to which
distributions of principal or interest or both on a class may
be made upon the occurrence of specified events, in accordance
with a schedule or formula (including "planned amortization
classes" and "targeted amortization classes"), or on the basis
of collections from designated portions of the mortgage pool,
and which classes may include one or more classes of Accrual
Bonds; or
o other types of classes of bonds, as described in the related
prospectus supplement.
With respect to any series of bonds, the related Equity Certificates, insofar as
they represent the beneficial ownership interest in the Issuer, will be
subordinate to the related bonds. As to each series, the offered bonds will be
rated in one of the four highest rating categories by one or more Rating
Agencies. Credit support for the offered bonds of each series may be provided by
a financial guaranty insurance policy, mortgage pool insurance policy, letter of
credit, reserve fund, overcollateralization, and currency or interest rate
exchange agreements as described under "Description of Credit Enhancement," by
the subordination of one or more other classes of bonds as described under
"--Subordinate Bonds" or by any combination of the foregoing.
22
Form of Bonds
Except as described below, the offered bonds of each series will be issued
as physical bonds in fully registered form only in the denominations specified
in the related prospectus supplement, and will be transferrable and exchangeable
at the corporate trust office of the registrar named in the related prospectus
supplement. No service charge will be made for any registration of exchange or
transfer of offered bonds, but the trustee may require payment of a sum
sufficient to cover any tax or other governmental charge. A "bondholder" or
"holder" is the entity whose name appears on the records of the registrar
(consisting of or including the bond register) as the registered holder of a
bond.
If so specified in the related prospectus supplement, specified classes of
a series of bonds will be initially issued through the book-entry facilities of
the DTC. As to any class of DTC Registered Bonds, the record holder of the bonds
will be DTC's nominee. DTC is a limited-purpose trust company organized under
the laws of the State of New York, which holds bonds for its participants and
facilitates the clearance and settlement of bonds transactions between
participants through electronic book-entry changes in the accounts of
participants. Intermediaries have indirect access to DTC's clearance system.
No Beneficial Owner will be entitled to receive a bond representing its
interest in registered, certificated form, unless either (1) DTC ceases to act
as depository in respect thereof and a successor depository is not obtained, or
(2) the company elects in its sole discretion to discontinue the registration of
the bonds through DTC. Prior to one of these events, Beneficial Owners will not
be recognized by the trustee or the master servicer as holders of the related
bonds for purposes of the related indenture, and Beneficial Owners will be able
to exercise their rights as owners of the bonds only indirectly through DTC,
participants and Intermediaries. Any Beneficial Owner that desires to purchase,
sell or otherwise transfer any interest in DTC Registered Bonds may do so only
through DTC, either directly if the Beneficial Owner is a participant or
indirectly through participants and, if applicable, Intermediaries. Pursuant to
the procedures of DTC, transfers of the beneficial ownership of any DTC
Registered Bonds will be required to be made in minimum denominations specified
in the related prospectus supplement. The ability of a Beneficial Owner to
pledge DTC Registered Bonds to persons or entities that are not participants in
the DTC system, or to otherwise act with respect to the bonds, may be limited
because of the lack of physical bonds evidencing the bonds and because DTC may
act only on behalf of participants.
Distributions in respect of the DTC Registered Bonds will be forwarded by
the trustee or other specified person to DTC, and DTC will be responsible for
forwarding the payments to participants, each of which will be responsible for
disbursing the payments to the Beneficial Owners it represents or, if
applicable, to Intermediaries. Accordingly, Beneficial Owners may experience
delays in the receipt of payments in respect of their bonds. Under DTC's
procedures, DTC will take actions permitted to be taken by holders of any class
of DTC Registered Bonds under the indenture only at the direction of one or more
participants to whose account the DTC Registered Bonds are credited and whose
aggregate holdings represent no less than any minimum amount of Percentage
Interests or voting rights required therefor. DTC may take conflicting actions
with respect to any action of holders of bonds of any class to the extent that
participants authorize these actions. None of the master servicer, the company,
the trustee or any of their respective affiliates will have any liability for
any aspect of the records relating to or payments made on account of beneficial
ownership interests in the DTC Registered Bonds, or for maintaining, supervising
or reviewing any records relating to the beneficial ownership interests.
Global Bonds
Some of the offered bonds may be Global Bonds. Except in some limited
circumstances, the Global Bonds will be available only in book-entry form.
Investors in the Global Bonds may hold those Global Bonds through any of DTC,
Clearstream Banking, societe anonyme, formerly known as Cedelbank SA, or
Euroclear. The Global Bonds will be traceable as home market instruments in both
the European and U.S. domestic markets. Initial settlement and all secondary
trades will settle in same-day funds.
23
Secondary market trading between investors through Clearstream and
Euroclear will be conducted in the ordinary way in accordance with the normal
rules and operating procedures of Clearstream and Euroclear and in accordance
with conventional eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors through DTC will be conducted
according to DTC's rules and procedures applicable to U.S. corporate debt
obligations.
Secondary cross-market trading between Clearstream or Euroclear and DTC
participants holding Bonds will be effected on a delivery-against-payment basis
through the respective Depositaries of Clearstream and Euroclear (in that
capacity) and as DTC participants.
Non-U.S. holders (as described below) of Global Bonds will be subject to
U.S. withholding taxes unless those holders meet various requirements and
deliver appropriate U.S. tax documents to the securities clearing organizations
or their participants.
All Global Bonds will be held in book-entry form by DTC in the name of
Cede & Co. as nominee of DTC. Investors' interests in the Global Bonds will be
represented through financial institutions acting on their behalf as direct and
indirect participants in DTC. As a result, Clearstream and Euroclear will hold
positions on behalf of their participants through their relevant depositary
which in turn will hold those positions in their accounts as DTC participants.
Investors electing to hold their Global Bonds through DTC will follow DTC
settlement practices. Investor securities custody accounts will be credited with
their holdings against payment in same-day funds on the settlement date.
Investors electing to hold their Global Bonds through Clearstream or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global bond and
no "lock-up" or restricted period. Global Bonds will be credited to the
securities custody accounts on the settlement date against payment in same-day
funds.
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.
Secondary market trading between DTC participants will be settled using
the procedures applicable to prior mortgage loan asset-backed bonds issues in
same-day funds. Secondary market trading between Clearstream participants or
Euroclear participants will be settled using the procedures applicable to
conventional eurobonds in same-day funds. When Global Bonds 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 relevant depositary, as the case may be, to
receive the Global Bonds against payment. Payment will include interest accrued
on the Global Bonds from and including the last coupon payment date to and
excluding the settlement date, on the basis of the actual number of days in that
accrual period and a year assumed to consist of 360 days. 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
relevant depositary to the DTC participant's account against delivery of the
Global Bonds. After settlement has been completed, the Global Bonds will be
credited to the respective clearing system and by the clearing system, in
accordance with its usual procedures, to the Clearstream participant's or
Euroclear participant's account. The securities credit will appear the next day
(European time) and the cash debt will be back-valued to, and the interest on
the Global Bonds 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
24
direct means of doing so is to preposition funds for settlement, either from
cash on hand or existing lines of credit, as they would for any settlement
occurring within Clearstream or Euroclear. Under this approach, they may take on
credit exposure to Clearstream or Euroclear until the Global Bonds are credited
to their account 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 to finance settlement. Under this procedure, Clearstream participants
or Euroclear participants purchasing Global Bonds would incur overdraft charges
for one day, assuming they cleared the overdraft when the Global Bonds were
credited to their accounts. However, interest on the Global Bonds would accrue
from the value date. Therefore, in many cases the investment income on the
Global Bonds earned during that one-day period may substantially reduce or
offset the amount of those overdraft charges, although the 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 crediting Global Bonds 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.
Due to time zone differences in their favor, Clearstream participants and
Euroclear participants may employ their customary procedures for transactions in
which Global Bonds 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 credit the Global Bonds to the DTC participant's account against
payment. Payment will include interest accrued on the Global Bonds from and
including the last coupon payment to and excluding the settlement date on the
basis of the actual number of days in that accrual period and a year assumed to
consist to 360 days. 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 Clearstream
participant or Euroclear participant the following day, and receipt of the cash
proceeds in the Clearstream participant's or Euroclear participant's account
would be back-valued to the value date (which would be the preceding day, when
settlement occurred in New York). Should the Clearstream participant or
Euroclear participant have a line of credit with its respective clearing system
and elect to be in debt in anticipation of receipt of the sale proceeds in its
account, the back- valuation will extinguish any overdraft incurred over that
one-day period. If settlement is not completed on the intended value date (i.e.,
the trade fails), receipt of the cash proceeds in the Clearstream participant's
or Euroclear participant's account would instead be valued as of the actual
settlement date.
Finally, day traders that use Clearstream or Euroclear and that purchase
Global Bonds 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 is taken. At least three techniques
should be readily available to eliminate this potential problem:
o borrowing through Clearstream or Euroclear for one day (until
the purchase side of the trade is reflected in their
Clearstream or Euroclear accounts) in accordance with the
clearing system's customary procedures;
o borrowing the Global Bonds in the U.S. from a DTC participant
no later than one day prior to settlement, which would give
the Global Bonds sufficient time to be reflected in their
Clearstream or Euroclear account in order to settle the sale
side of the trade; or
o 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.
25
A beneficial owner of Global Bonds holding bonds through Clearstream or
Euroclear (or through DTC if the holder has an address outside the U.S.) will be
subject to the 30% U.S. withholding tax that generally applies to payments of
interest (including original issue discount) on registered debt issued by U.S.
Persons (as defined below), unless (i) each clearing system, bank or other
financial institution that holds customers' bonds in the ordinary course of its
trade or business in the chain of intermediaries between that beneficial owner
and the U.S. entity required to withhold tax complies with applicable
certification requirements and (ii) that beneficial owner takes one of the
following steps to obtain an exemption or reduced tax rate: Exemption for
Non-U.S. Persons (Form W-8). Beneficial holders of Global Bonds that are
Non-U.S. Persons (as defined below) can obtain a complete exemption from the
withholding tax by filing a signed Form W-8 (Certificate of Foreign Status). If
the information shown on Form W-8 changes, a new Form W-8 must be filed within
30 days of that change.
A Non-U.S. Person (as defined below), including a non-U.S. corporation or
bank with a U.S. branch, for which the interest income is effectively connected
with its conduct of a trade or business in the United States, can obtain an
exemption from the withholding tax by filing Form 4224 (Exemption from
Withholding of Tax on Income Effectively Connected with the Conduct of a Trade
or Business in the United States).
Non-U.S. Persons residing in a country that has a tax treaty with the
United States can obtain an exemption or reduced tax rate (depending on the
treaty terms) by filing Form 1001 (Holdership, Exemption or Reduced Rate
Certificate). If the treaty provides only for a reduced rate, withholding tax
will be imposed at that rate unless the filer alternatively files Form W-8. Form
1001 may be filed by Bondholders or their agent.
U.S. Persons can obtain a complete exemption from the withholding tax by
filing Form W-9 (Payer's Request for Taxpayer Identification Number and
Certification).
The holder of a Global Bond or, in the case of a Form 1001 or a Form 4224
filer, his agent, files by submitting the appropriate form to the person through
whom it holds the bond (the clearing agency, in the case of persons holding
directly on the books of the clearing agency). Form W-8 and Form 1001 are
effective for three calendar years and Form 4224 is effective for one calendar
year. The term "U.S. Person" means a citizen or resident of the United States, a
corporation, partnership or other entity created or organized in, or under the
laws of, the United States or any political subdivision thereof (except, in the
case of a partnership, to the extent provided in regulations), or an estate
whose income is subject to United States federal income tax regardless of its
source, or a trust if a court within the United States is able to exercise
primary supervision over the administration of the trust and one or more United
States Persons have the authority to control all substantial decisions of the
trust. The term "Non-U.S. Person" means any person who is not a U.S. Person.
This summary does not deal with all aspects of U.S. Federal income tax
withholding that may be relevant to foreign holders of the Global Bonds.
Investors are advised to consult their own tax advisors for specific tax advice
concerning their holding and disposing of the Global Bonds.
Assignment of Trust Fund Assets
At the time of issuance of a series of bonds, the company will assign, or
cause to be assigned, to the related trustee (or its nominee), without recourse,
the mortgage loans or mortgage securities being included in the related trust
fund, together with, all principal and interest received on or with respect to
the mortgage loans or mortgage securities after the cut-off date, other than
principal and interest due on or before the cut-off date. If specified in the
related prospectus supplement, the company or any of its affiliates may retain
an interest in the trust fund assets, if any, for itself or transfer the same to
others. The trustee will, concurrently with the assignment, deliver the bonds of
the series to or at the direction of the company in exchange for the mortgage
loans and/or mortgage securities in the related trust fund. Each mortgage loan
will be identified in a schedule appearing as an exhibit to the related
servicing agreement. The schedule will include, among other things, information
as to the principal balance of each mortgage loan in the related trust fund as
of the cut- off date, as well as information respecting the mortgage rate, the
currently scheduled monthly payment of principal and interest, the maturity of
the mortgage note and the loan-to-value ratio at origination or modification
(without regard to any secondary financing).
26
In addition, the company will, as to each mortgage loan, other than
mortgage loans underlying any mortgage securities and other than Contracts,
deliver, or cause to be delivered, to the related trustee (or to the custodian
described below) the following documents:
o the mortgage note endorsed, without recourse, either in blank or to
the order of the trustee (or its nominee),
o the mortgage with evidence of recording indicated on the mortgage
(except for any mortgage not returned from the public recording
office) or, in the case of a cooperative mortgage loan, on the
related financing statement,
o an assignment of the mortgage in blank or to the trustee (or its
nominee) in recordable form (or, with respect to a cooperative
mortgage loan, an assignment of the respective security agreements,
any applicable UCC financing statements, recognition agreements,
relevant stock certificates, related blank stock powers and the
related proprietary leases or occupancy agreements),
o any intervening assignments of the mortgage with evidence of
recording on the assignment (except for any assignment not returned
from the public recording office),
o if applicable, any riders or modifications to the mortgage note and
mortgage, and
o any other documents set forth in the related mortgage loan purchase
agreement or servicing agreement.
The assignments may be blanket assignments covering mortgages on mortgaged
properties located in the same county, if permitted by law.
Notwithstanding the foregoing, a trust fund may include mortgage loans
where the original mortgage note is not delivered to the trustee if the company
delivers, or causes to be delivered, to the related trustee (or the custodian) a
copy or a duplicate original of the mortgage note, together with an affidavit
certifying that the original thereof has been lost or destroyed. In addition, if
the company cannot deliver, with respect to any mortgage loan, the mortgage or
any intervening assignment with evidence of recording on the assignment
concurrently with the execution and delivery of the related servicing agreement
because of a delay caused by the public recording office, the company will
deliver, or cause to be delivered, to the related trustee (or the custodian) a
true and correct photocopy of the mortgage or assignment as submitted for
recording within one year. The company will deliver, or cause to be delivered,
to the related trustee (or the custodian) the mortgage or assignment with
evidence of recording indicated on the assignment after receipt thereof from the
public recording office. If the company cannot deliver, with respect to any
mortgage loan, the mortgage or any intervening assignment with evidence of
recording on the mortgage or assignment concurrently with the execution and
delivery of the related servicing agreement because the mortgage or assignment
has been lost, the company will deliver, or cause to be delivered, to the
related trustee (or the custodian) a true and correct photocopy of the mortgage
or assignment with evidence of recording on the mortgage or assignment.
Assignments of the mortgage loans to the trustee (or its nominee) will be
recorded in the appropriate public recording office, except in states where, in
the opinion of counsel acceptable to the trustee, recording is not required to
protect the trustee's interests in the mortgage loan against the claim of any
subsequent transferee or any successor to or creditor of the company or the
originator of the mortgage loan.
As to each Contract, the company will deliver, or cause to be delivered,
to the related trustee (or the custodian) the following documents:
o the original Contract endorsed, without recourse, to the order of
the trustee,
o copies of documents and instruments related to the Contract and the
security interest in the Manufactured Home securing the Contract,
and
27
o a blanket assignment to the trustee of all Contracts in the related
trust fund and the related documents and instruments.
In order to give notice of the right, title and interest of the bondholders to
the Contracts, the company will cause to be executed and delivered to the
trustee a UCC-1 financing statement identifying the trustee as the secured party
and identifying all Contracts as collateral.
The company will, as to each mortgage security included in a mortgage
pool, deliver, or cause to be delivered, to the related trustee (or the
custodian), a physical bond evidencing the mortgage security, registered in the
name of the related trustee (or its nominee), or endorsed in blank or to the
related trustee (or its nominee), or accompanied by transfer documents
sufficient to effect a transfer to the trustee (or its nominee).
The trustee (or the custodian) will hold the documents in trust for the
benefit of the related bondholders, and generally will review the documents
within 120 days after receipt thereof in the case of documents delivered
concurrently with the execution and delivery of the related indenture, and
within the time period specified in the related indenture in the case of all
other documents delivered. If any document is found to be missing or defective
in any material respect, the trustee (or the custodian) will be required to
promptly so notify the master servicer, the company, and the related Seller. If
the related Seller does not cure the omission or defect within a specified
period after notice is given thereto by the trustee, and the omission or defect
materially and adversely affects the interests of bondholders in the affected
mortgage loan or mortgage security, then, the related Seller will be obligated
to purchase the mortgage loan or mortgage security from the trustee at its
purchase price (or, if and to the extent it would otherwise be permitted to do
so for a breach of representation and warranty as described under "The Mortgage
Pools--Representations of Sellers," to substitute for the mortgage loan or
mortgage security). The trustee will be obligated to enforce this obligation of
the Seller to the extent described above under "The Mortgage
Pools--Representations by Sellers," but there can be no assurance that the
applicable Seller will fulfill its obligation to purchase (or substitute for)
the affected mortgage loan or mortgage security as described above. The company
will not be obligated to purchase or substitute for the mortgage loan or
mortgage security if the Seller defaults on its obligation to do so. This
purchase or substitution obligation constitutes the sole remedy available to the
related bondholders and the related trustee for omission of, or a material
defect in, a constituent document. Any affected mortgage loan or mortgage
security not so purchased or substituted for shall remain in the related trust
fund.
The trustee will be authorized at any time to appoint one or more
custodians pursuant to a custodial agreement to hold title to the mortgage loans
and/or mortgage securities in any mortgage pool, and to maintain possession of
and, if applicable, to review, the documents relating to the mortgage loans
and/or mortgage securities, in any case as the agent of the trustee. The
identity of any custodian to be appointed on the date of initial issuance of the
bonds will be set forth in the related prospectus supplement. A custodian may be
an affiliate of the company or the master servicer.
Except in the case of a Designated Seller Transaction or as to mortgage
loans underlying any mortgage securities, the company will make representations
and warranties as to the types and geographical concentrations of the mortgage
loans and as to the accuracy of some of the information furnished to the related
trustee in respect of each mortgage loan (for example, the original Loan-to-
Value Ratio, the principal balance as of the cut-off date, the mortgage rate and
maturity). Upon a breach of any of these representations which materially and
adversely affects the interests of the bondholders in a mortgage loan, the
company will be obligated to cure the breach in all material respects, to
purchase the mortgage loan at its purchase price or, to substitute for the
mortgage loan a Qualified Substitute Mortgage Loan in accordance with the
provisions for substitution by Affiliated Sellers as described above under "The
Mortgage Pools--Representations by Sellers." However, the company will not be
required to repurchase or substitute for any mortgage loan in connection with a
breach of a representation and warranty if the substance of the breach also
constitutes fraud in the origination of the related mortgage loan. This purchase
or substitution obligation constitutes the sole remedy available to bondholders
or the trustee for a breach of a representation by the company. Any mortgage
loan not so purchased or substituted for shall remain in the related trust fund.
28
Pursuant to the related servicing agreement, the master servicer for any
mortgage pool, either directly or through subservicers, will service and
administer the mortgage loans included in the mortgage pool and assigned to the
related trustee as more fully set forth under "Servicing of Mortgage Loans." The
master servicer will make representations and warranties regarding its authority
to enter into, and its ability to perform its obligations under, the servicing
agreement.
Payment Account
General. The master servicer and/or the trustee will, as to each trust
fund, establish and maintain or cause to be established and maintained a Payment
Account, which will be established so as to comply with the standards of each
Rating Agency that has rated any one or more classes of bonds of the related
series. A Payment Account shall be maintained as an Eligible Account, and the
funds held therein may be held as cash or invested in Permitted Investments. Any
Permitted Investments shall not cause the company to register under the
Investment Company Act of 1940. Any interest or other income earned on funds in
the Payment Account will be paid to the related master servicer or trustee as
additional compensation. If permitted by the Rating Agency or Agencies and so
specified in the related prospectus supplement, a Payment Account may contain
funds relating to more than one series of collateralized asset-backed bonds and
may contain other funds representing payments on mortgage loans owned by the
related master servicer or serviced by it on behalf of others.
Deposits. With respect to each series of bonds, the related master
servicer, trustee or special servicer will be required to deposit or cause to be
deposited in the Payment Account for the related trust fund within a period
following receipt (in the case of collections and payments), the following
payments and collections received, or advances made, by the master servicer, the
trustee or any special servicer subsequent to the cut-off date with respect to
the mortgage loans and/or mortgage securities in the trust fund (other than
payments due on or before the cut-off date):
o all payments on account of principal, including principal
prepayments, on the mortgage loans;
o all payments on account of interest on the mortgage loans, including
any default interest collected, in each case net of any portion
thereof retained by the master servicer, any special servicer or
subservicer as its servicing compensation or as compensation to the
trustee, and further net of any retained interest of the company;
o all payments on the mortgage securities;
o all Insurance Proceeds and Liquidation Proceeds;
o any amounts paid under any instrument or drawn from any fund that
constitutes credit enhancement for the related series of bonds as
described under "Description of Credit Enhancement";
o any advances made as described under "--Advances" below;
o any Buydown Funds (and, if applicable, investment earnings on the
Buydown Funds) required to be paid to bondholders, as described
below;
o any amounts paid by the master servicer to cover Prepayment Interest
Shortfalls arising out of the prepayment of mortgage loans as
described under "Servicing of Mortgage Loans--Servicing and Other
Compensation and Payment of Expenses; Retained Interest";
o to the extent that any item does not constitute additional servicing
compensation to the master servicer or a special servicer, any
payments on account of modification or assumption fees, late payment
charges or prepayment premiums on the mortgage loans;
29
o any amount required to be deposited by the master servicer or the
trustee in connection with losses realized on investments for the
benefit of the master servicer or the trustee, as the case may be,
of funds held in the Payment Account; and
o any other amounts required to be deposited in the Payment Account as
provided in the related servicing agreement and indenture and
described in this prospectus or in the related prospectus
supplement.
With respect to each buydown mortgage loan, the master servicer will be
required to deposit the related Buydown Funds provided to it in a Buydown
Account which will comply with the requirements set forth in this prospectus
with respect to the Payment Account. The terms of all buydown mortgage loans
provide for the contribution of Buydown Funds in an amount equal to or exceeding
either (1) the total payments to be made from the funds pursuant to the related
buydown plan or (2) if the Buydown Funds are to be deposited on a discounted
basis, that amount of Buydown Funds which, together with investment earnings on
the Buydown Funds at a rate as will support the scheduled level of payments due
under the buydown mortgage loan. Neither the master servicer nor the company
will be obligated to add to any discounted Buydown Funds any of its own funds
should investment earnings prove insufficient to maintain the scheduled level of
payments. To the extent that any insufficiency is not recoverable from the
mortgagor or, in an appropriate case, from the Seller, distributions to
bondholders may be affected. With respect to each buydown mortgage loan, the
master servicer will be required monthly to withdraw from the Buydown Account
and deposit in the Payment Account as described above the amount, if any, of the
Buydown Funds (and, if applicable, investment earnings on the Buydown Funds) for
each buydown mortgage loan that, when added to the amount due from the mortgagor
on the buydown mortgage loan, equals the full monthly payment which would be due
on the buydown mortgage loan if it were not subject to the buydown plan. The
Buydown Funds will in no event be a part of the related trust fund.
If the mortgagor on a buydown mortgage loan prepays the mortgage loan in
its entirety during the Buydown Period, the master servicer will be required to
withdraw from the Buydown Account and remit to the mortgagor or the other
designated party in accordance with the related buydown plan any Buydown Funds
remaining in the Buydown Account. If a prepayment by a mortgagor during the
Buydown Period together with Buydown Funds will result in full prepayment of a
buydown mortgage loan, the master servicer generally will be required to
withdraw from the Buydown Account and deposit in the Payment Account the Buydown
Funds and investment earnings on the Buydown Funds, if any, which together with
the prepayment will result in a prepayment in full; provided that Buydown Funds
may not be available to cover a prepayment under some mortgage loan programs.
Any Buydown Funds so remitted to the master servicer in connection with a
prepayment described in the preceding sentence will be deemed to reduce the
amount that would be required to be paid by the mortgagor to repay fully the
related mortgage loan if the mortgage loan were not subject to the buydown plan.
Any investment earnings remaining in the Buydown Account after prepayment or
after termination of the Buydown Period will be remitted to the related
mortgagor or the other designated party pursuant to the Buydown Agreement
relating to each buydown mortgage loan. If the mortgagor defaults during the
Buydown Period with respect to a buydown mortgage loan and the property securing
the buydown mortgage loan is sold in liquidation (either by the master servicer,
the primary insurer, any pool insurer or any other insurer), the master servicer
will be required to withdraw from the Buydown Account the Buydown Funds and all
investment earnings on the Buydown Funds, if any, and either deposit the same in
the Payment Account or, alternatively, pay the same to the primary insurer or
the pool insurer, as the case may be, if the mortgaged property is transferred
to the insurer and the insurer pays all of the loss incurred in respect of the
default.
Withdrawals. With respect to each series of bonds, the master servicer,
trustee or special servicer may make withdrawals from the Payment Account for
the related trust fund for any of the following purposes, unless otherwise
provided in the related agreement and described in the related prospectus
supplement:
(1) to make distributions to the related bondholders on each
distribution date;
(2) to reimburse the master servicer or any other specified person for
unreimbursed amounts advanced by it in respect of mortgage loans in
the trust fund as described
30
under "--Advances" below, these reimbursement to be made out of
amounts received which were identified and applied by the master
servicer as late collections of interest (net of related servicing
fees) on and principal of the particular mortgage loans with respect
to which the advances were made or out of amounts drawn under any
form of credit enhancement with respect to the mortgage loans;
(3) to reimburse the master servicer or a special servicer for unpaid
servicing fees earned by it and some unreimbursed servicing expenses
incurred by it with respect to mortgage loans in the trust fund and
properties acquired in respect thereof, these reimbursement to be
made out of amounts that represent Liquidation Proceeds and
Insurance Proceeds collected on the particular mortgage loans and
properties, and net income collected on the particular properties,
with respect to which the fees were earned or the expenses were
incurred or out of amounts drawn under any form of credit
enhancement with respect to the mortgage loans and properties;
(4) to reimburse the master servicer or any other specified person for
any advances described in clause (2) above made by it and any
servicing expenses referred to in clause (3) above incurred by it
which, in the good faith judgment of the master servicer or the
other person, will not be recoverable from the amounts described in
clauses (2) and (3), respectively, the reimbursement to be made from
amounts collected on other mortgage loans in the trust fund or, if
and to the extent so provided by the related servicing agreement and
indenture and described in the related prospectus supplement, only
from that portion of amounts collected on the other mortgage loans
that is otherwise distributable on one or more classes of
subordinate bonds of the related series;
(5) if and to the extent described in the related prospectus supplement,
to pay the master servicer, a special servicer or another specified
entity (including a provider of credit enhancement) interest accrued
on the advances described in clause (2) above made by it and the
servicing expenses described in clause (3) above incurred by it
while these remain outstanding and unreimbursed;
(6) to reimburse the master servicer, the company, or any of their
respective directors, officers, employees and agents, as the case
may be, for expenses, costs and liabilities incurred thereby, as and
to the extent described under "The Agreements--Certain Matters
Regarding the Master Servicer and the Company";
(7) if and to the extent described in the related prospectus supplement,
to pay the fees of the trustee;
(8) to reimburse the trustee or any of its directors, officers,
employees and agents, as the case may be, for expenses, costs and
liabilities incurred thereby, as and to the extent described under
"The Agreements--The Trustee";
(9) to pay the master servicer or the trustee, as additional
compensation, interest and investment income earned in respect of
amounts held in the Payment Account;
(10) to pay (generally from related income) the master servicer or a
special servicer for costs incurred in connection with the
operation, management and maintenance of any mortgaged property
acquired by the trust fund by foreclosure or by deed in lieu of
foreclosure;
(11) to pay for the cost of an independent appraiser or other expert in
real estate matters retained to determine a fair sale price for a
defaulted mortgage loan or a property acquired in respect thereof in
connection with the liquidation of the mortgage loan or property;
(12) to pay for the cost of various opinions of counsel obtained pursuant
to the related servicing agreement and indenture for the benefit of
the related bondholders;
31
(13) to pay to itself, the company, a Seller or any other appropriate
person all amounts received with respect to each mortgage loan
purchased, repurchased or removed from the trust fund pursuant to
the terms of the related servicing agreement and indenture and not
required to be distributed as of the date on which the related
purchase price is determined;
(14) to make any other withdrawals permitted by the related servicing
agreement and indenture and described in the related prospectus
supplement;
(15) to pay for costs and expenses incurred by the trust fund for
environmental site assessments performed with respect to multifamily
or commercial properties that constitute security for defaulted
mortgage loans, and for any containment, clean-up or remediation of
hazardous wastes and materials present on that mortgaged properties,
as described under "Servicing of Mortgage Loans--Realization Upon or
Sale of Defaulted Mortgage Loans"; and
(16) to clear and terminate the Payment Account upon the termination of
the trust fund.
Distributions
Distributions on the bonds of each series will be made by or on behalf of
the related trustee or master servicer on each distribution date as specified in
the related prospectus supplement from the available distribution amount for the
series and the distribution date. The available distribution amount for any
series of bonds and any distribution date will generally refer to the total of
all payments or other collections (or advances in lieu thereof) on, under or in
respect of the mortgage loans and/or mortgage securities and any other assets
included in the related trust fund that are available for distribution to the
bondholders of the series on that date. The particular components of the
available distribution amount for any series on each distribution date will be
more specifically described in the related prospectus supplement.
Distributions on the bonds of each series (other than the final
distribution in retirement of any bond) will be made to the persons in whose
names the bonds are registered on the Record Date, and the amount of each
distribution will be determined as of the Determination Date. All distributions
with respect to each class of bonds on each distribution date will be allocated
in equal proportion among the outstanding bonds in the class. Payments will be
made either by wire transfer in immediately available funds to the account of a
bondholder at a bank or other entity having appropriate facilities therefor, if
the bondholder has provided the trustee or other person required to make the
payments with wiring instructions no later than five business days prior to the
related Record Date or other date specified in the related prospectus supplement
(and, if so provided in the related prospectus supplement, the bondholder holds
bonds in the requisite amount or denomination specified therein), or by check
mailed to the address of the bondholder as it appears on the bond register;
provided, however, that the final distribution in retirement of any class of
bonds will be made only upon presentation and surrender of the bonds at the
location specified in the notice to bondholders of the final distribution.
Payments will be made to each bondholder in accordance with the holder's
Percentage Interest in a particular class.
Distributions of Interest and Principal on the Bonds
Each class of bonds of each series, other than Strip Bonds that have no
bond interest rate, may have a different per annum rate at which interest
accrues on that class of bonds, which may be fixed, variable or adjustable, or
any combination of rates. The related prospectus supplement will specify the
bond interest rate or, in the case of a variable or adjustable bond interest
rate, the method for determining the bond interest rate, for each class. The
related prospectus supplement will specify whether interest on the bonds of the
series will be calculated on the basis of a 360-day year consisting of twelve
30-day months or on a different method.
Distributions of interest in respect of the bonds of any class, other than
any class of Accrual Bonds or Strip Bonds that is not entitled to any
distributions of interest, will be made on each distribution date based on the
accrued interest for the class and the distribution date, subject to the
32
sufficiency of the portion of the available distribution amount allocable to the
class on the distribution date. Prior to the time interest is distributable on
any class of Accrual Bonds, the amount of accrued interest otherwise
distributable on the class will be added to the principal balance thereof on
each distribution date. With respect to each class of interest-bearing bonds,
accrued interest for each distribution date will be equal to interest at the
applicable bond interest rate accrued for a specified period (generally one
month) on the outstanding principal balance thereof immediately prior to the
distribution date. Accrued interest for each distribution date on Strip Bonds
entitled to distributions of interest will be similarly calculated except that
it will accrue on a notional amount that is based on either (1) based on the
principal balances of some or all of the mortgage loans and/or mortgage
securities in the related trust fund or (2) equal to the principal balances of
one or more other classes of bonds of the same series. Reference to a notional
amount with respect to a class of Strip Bonds is solely for convenience in
making calculations of accrued interest and does not represent the right to
receive any distribution of principal. If so specified in the related prospectus
supplement, the amount of accrued interest that is otherwise distributable on
(or, in the case of Accrual Bonds, that may otherwise be added to the principal
balance of) one or more classes of the bonds of a series will be reduced to the
extent that any Prepayment Interest Shortfalls, as described under "Yield
Considerations", exceed the amount of any sums (including, if and to the extent
specified in the related prospectus supplement, the master servicer's servicing
compensation) that are applied to offset the shortfalls. The particular manner
in which the shortfalls will be allocated among some or all of the classes of
bonds 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 interest that is otherwise distributable on (or, in the case of
Accrual Bonds, that may otherwise be added to the principal balance of) a class
of offered bonds may be reduced as a result of any other contingencies,
including delinquencies, losses and Deferred Interest on or in respect of the
related mortgage loans or application of the Relief Act with respect to the
mortgage loans. Any reduction in the amount of accrued interest otherwise
distributable on a class of bonds by reason of the allocation to the class of a
portion of any Deferred Interest on or in respect of the related mortgage loans
will result in a corresponding increase in the principal balance of the class.
As and to the extent described in the related prospectus supplement,
distributions of principal with respect to a series of bonds will be made on
each distribution date to the holders of the class or classes of bonds of the
series entitled thereto until the principal balance(s) of the bonds have been
reduced to zero. In the case of a series of bonds which includes two or more
classes of bonds, the timing, sequential order, priority of payment or amount of
distributions in respect of principal, and any schedule or formula or other
provisions applicable to the determination thereof (including distributions
among multiple classes of senior bonds or subordinate bonds), shall be as set
forth in the related prospectus supplement. Distributions of principal with
respect to one or more classes of bonds may be made at a rate that is faster
(and, in some cases, substantially faster) than the rate at which payments or
other collections of principal are received on the mortgage loans and/or
mortgage securities in the related trust fund, may not commence until the
occurrence of events such as the retirement of one or more other classes of
bonds of the same series, or may be made at a rate that is slower (and, in some
cases, substantially slower) than the rate at which payments or other
collections of principal are received on the mortgage loans and/or mortgage
securities. In addition, distributions of principal with respect to one or more
classes of bonds may be made, subject to available funds, based on a specified
principal payment schedule and, with respect to one or more classes of bonds,
may be contingent on the specified principal payment schedule for another class
of the same series and the rate at which payments and other collections of
principal on the mortgage loans and/or mortgage securities in the related trust
fund are received.
Pre-Funding Account
If so specified in the related prospectus supplement, the agreements may
provide for the transfer by the Sellers of additional mortgage loans to the
related trust after the Closing Date. The additional mortgage loans will be
required to conform to the requirements set forth in the related Agreement or
other agreement providing for the transfer, and will be underwritten to the same
standards as the mortgage loans initially included in the trust fund as
described in the prospectus supplement. As specified in the related prospectus
supplement, the transfer may be funded by the establishment of a pre- funding
account with the trustee. If a pre-funding account is established, all or a
portion of the proceeds of the sale of one or more classes of bonds of the
related series will be
33
deposited in the account to be released as additional mortgage loans are
transferred. A pre-funding account will be required to be maintained as an
Eligible Account, the amounts therein may be required to be invested in
Permitted Investments and the amount held therein shall at no time exceed 40% of
the aggregate outstanding principal balance of the related bonds. The related
Agreement or other agreement providing for the transfer of additional mortgage
loans generally will provide that the transfers must be made within up to one
year after the Closing Date, and that amounts set aside to fund the transfers
(whether in a pre-funding account or otherwise) and not so applied within the
required period of time will be deemed to be principal prepayments and applied
in the manner set forth in the prospectus supplement. To the extent amounts in
any pre-funding account have not been used to purchase additional mortgage
loans, holders of the bonds may receive an additional prepayment, which may
affect their yield to maturity. In addition, bondholders may not be able to
reinvest amounts received from any pre-funding account in comparable bonds, or
may only be able to do so at a lower interest rate.
Distributions on the Bonds in Respect of Prepayment Premiums
Prepayment premiums will generally be retained by the master servicer or
by the Seller as additional compensation. However, if so provided in the related
prospectus supplement, prepayment premiums received on or in connection with the
mortgage loans or mortgage securities in any trust fund will be distributed on
each distribution date to the holders of the class or classes of bonds of the
related series entitled thereto in accordance with the provisions described in
the prospectus supplement.
Allocation of Losses and Shortfalls
The amount of any losses or shortfalls in collections on the mortgage
loans and/or mortgage securities in any trust fund (to the extent not covered or
offset by draws on any reserve fund or under any instrument of credit
enhancement) will be allocated among the respective classes of bonds of the
related series in the priority and manner, and subject to the limitations,
specified in the related prospectus supplement. As described in the related
prospectus supplement, these allocations may result in reductions in the
entitlements to interest and/or principal balances of one or more classes of
bonds, or may be effected simply by a prioritization of payments among classes
of bonds.
Advances
If and to the extent provided in the related prospectus supplement, and
subject to any limitations specified therein, the related master servicer may be
obligated to advance, or have the option of advancing, on or before each
distribution date, from its or their own funds or from excess funds held in the
related Payment Account that are not part of the available distribution amount
for the related series of bonds for the distribution date, an amount up to the
aggregate of any payments of interest (and, if specified in the related
prospectus supplement, principal) that were due on or in respect of the mortgage
loans during the related Due Period and were delinquent on the related
Determination Date. No notice will be given to the bondholders of these
advances. Scheduled payments on the mortgage loans in any trust fund that became
due during a given Due Period will, to the extent received by the related
Determination Date or advanced by the related master servicer or other specified
person, be distributed on the distribution date next succeeding the
Determination Date.
Advances are intended to maintain a regular flow of scheduled interest and
principal payments to holders of the class or classes of bonds entitled thereto,
rather than to guarantee or insure against losses. Accordingly, all advances
made from the master servicer's own funds will be reimbursable out of related
recoveries on the mortgage loans (including amounts received under any fund or
instrument constituting credit enhancement) respecting which advances were made
and other specific sources as may be identified in the related prospectus
supplement, including amounts which would otherwise be payable to the offered
bonds. No Nonrecoverable Advance will be required to be made by the master
servicer; and, if previously made by a master servicer, a Nonrecoverable Advance
will be reimbursable from any amounts in the related Payment Account prior to
any distributions being made to the related series of bondholders.
34
If advances have been made from excess funds in a Payment Account, the
master servicer that advanced the funds will be required to replace the funds in
the Payment Account on any future distribution date to the extent that funds
then in the Payment Account are insufficient to permit full distributions to
bondholders on that date. If so specified in the related prospectus supplement,
the obligation of a master servicer to make advances may be secured by a cash
advance reserve fund or a surety bond. If applicable, information regarding the
characteristics of, and the identity of any obligor on, a surety bond, will be
set forth in the related prospectus supplement.
If any person other than the master servicer has any obligation to make
advances as described above, the related prospectus supplement will identify the
person.
If and to the extent so provided in the related prospectus supplement, any
entity making advances will be entitled to receive interest on the advances for
the period that the advances are outstanding at the rate specified in the
prospectus supplement, and the entity will be entitled to payment of the
interest periodically from general collections on the mortgage loans in the
related trust fund prior to any payment to bondholders or as otherwise provided
in the related servicing agreement and described in the prospectus supplement.
As specified in the related prospectus supplement with respect to any
series of bonds as to which the trust fund includes mortgage securities, the
advancing obligations with respect to the underlying mortgage loans will be
pursuant to the terms of the mortgage securities, as may be supplemented by the
terms of the applicable servicing agreement, and may differ from the provisions
described above.
Reports to Bondholders
With each distribution to bondholders of a particular class of offered
bonds, the related master servicer or trustee will forward or cause to be
forwarded to each holder of record of the class of bonds a statement or
statements with respect to the related trust fund setting forth the information
specifically described in the related servicing agreement or indenture, which
generally will include the following as applicable except as otherwise provided
therein:
o the amount, if any, of the distribution allocable to principal;
o the amount, if any, of the distribution allocable to interest;
o the amount, if any, of the distribution allocable to prepayment
premiums;
o with respect to a series consisting of two or more classes, the
outstanding principal balance or notional amount of each class after
giving effect to the distribution of principal on the distribution
date;
o the amount of servicing compensation received by the related master
servicer (and, if payable directly out of the related trust fund, by
any special servicer and any subservicer);
o the aggregate amount of advances included in the distributions on
the distribution date, and the aggregate amount of unreimbursed
advances at the close of business on the distribution date;
o the aggregate principal balance of the mortgage loans in the related
mortgage pool on, or as of a specified date shortly prior to, the
distribution date;
o the number and aggregate principal balance of any mortgage loans in
the related mortgage pool in respect of which (A) one scheduled
payment is delinquent, (B) two scheduled payments are delinquent,
(C) three or more scheduled payments are delinquent and (D)
foreclosure proceedings have been commenced;
35
o the book value of any real estate acquired the trust fund by
foreclosure or by a deed in lieu of foreclosure;
o the balance of the reserve fund, if any, at the close of business on
the distribution date;
o the amount of coverage under any financial guaranty insurance
policy, mortgage pool insurance policy or letter of credit covering
default risk as of the close of business on the applicable
Determination Date and a description of any credit enhancement
substituted therefor;
o the amount of any Special Hazard Losses, Fraud Losses and Bankruptcy
Losses as of the close of business on the applicable distribution
date and a description of any change in the calculation of these
amounts;
o with respect to any series of bonds as to which the trust fund
includes mortgage securities, additional information as required
under the related servicing agreement and specified in the related
prospectus supplement; and
o any other material information as required under the related
servicing agreement or indenture.
In the case of information furnished pursuant to the first three items
above, the amounts will be expressed as a dollar amount per minimum denomination
of the relevant class of offered bonds or per a specified portion of the minimum
denomination. In addition to the information described above, reports to
bondholders will contain other information as is set forth in the applicable
servicing agreement or indenture, which may include prepayments, reimbursements
to subservicers and the master servicer and losses borne by the related trust
fund.
In addition, within a reasonable period of time after the end of each
calendar year, the master servicer or trustee will furnish a report to each
holder of record of a class of offered bonds at any time during the calendar
year which, for example, will include information as to the aggregate of amounts
reported pursuant to the first three items above for the calendar year or, in
the event the person was a holder of record of a class of bonds during a portion
of the calendar year, for the applicable portion of the year.
DESCRIPTION OF CREDIT ENHANCEMENT
General
Credit support with respect to the offered bonds of each series may be
comprised of one or more of the following components. Each component will have
limitations and will provide coverage with respect to Realized Losses on the
related mortgage loans. Credit support will cover Defaulted Mortgage Losses, but
coverage may be limited or unavailable with respect to Special Hazard Losses,
Fraud Losses, Bankruptcy Losses and Extraordinary Losses. To the extent that the
credit support for the offered bonds of any series is exhausted, the holders
thereof will bear all further risk of loss.
As set forth below and in the applicable prospectus supplement, coverage
with respect to Realized Losses may be provided by one or more of a financial
guaranty insurance policy, a special hazard insurance policy, a mortgage pool
insurance policy or a letter of credit. In addition, if provided in the
applicable prospectus supplement, in lieu of or in addition to any or all of the
foregoing arrangements, credit enhancement may be in the form of a reserve fund
to cover the losses, in the form of subordination of one or more classes of
subordinate bonds to provide credit support to one or more classes of senior
bonds, in the form of overcollateralization, or in the form of a combination of
the foregoing. The credit support may be provided by an assignment of the right
to receive specified cash amounts, a deposit of cash into a reserve fund or
other pledged assets, or by banks, insurance companies, guarantees or any
combination thereof identified in the applicable prospectus supplement.
36
The amounts and type of credit enhancement arrangement as well as the
provider thereof, if applicable, with respect to the offered bonds of each
series will be set forth in the related prospectus supplement. To the extent
provided in the applicable prospectus supplement and the indenture, the credit
enhancement arrangements may be periodically modified, reduced and substituted
for based on the aggregate outstanding principal balance of the mortgage loans
covered thereby. See "Description of Credit Enhancement--Reduction or
Substitution of Credit Enhancement." If specified in the applicable prospectus
supplement, credit support for the offered bonds of one series may cover the
offered bonds of one or more other series.
In general, references to "mortgage loans" under this "Description of
Credit Enhancement" section are to mortgage loans in a trust fund. However, if
so provided in the prospectus supplement for a series of bonds, any mortgage
securities included in the related trust fund and/or the related underlying
mortgage loans may be covered by one or more of the types of credit support
described in this prospectus. The related prospectus supplement will specify, as
to each form of credit support, the information indicated below with respect
thereto, to the extent the information is material and available.
Subordinate Bonds
If so specified in the related prospectus supplement, one or more classes
of bonds of a series may be subordinate bonds. To the extent specified in the
related prospectus supplement, the rights of the holders of subordinate bonds to
receive distributions from the Payment Account on any distribution date will be
subordinated to the corresponding rights of the holders of senior bonds. If so
provided in the related prospectus supplement, the subordination of a class may
apply only in the event of (or may be limited to) some types of losses or
shortfalls. The related prospectus supplement will set forth information
concerning the manner and amount of subordination provided by a class or classes
of subordinate bonds in a series and the circumstances under which the
subordination will be available. The offered bonds of any series may include one
or more classes of subordinate bonds.
Cross-support
If the mortgage loans and/or mortgage securities in any trust fund are
divided into separate groups, each supporting a separate class or classes of
bonds of the related series, credit enhancement may be provided by cross-support
provisions requiring that distributions be made on senior bonds evidencing
interests in one group of mortgage loans and/or mortgage securities prior to
distributions on subordinate bonds evidencing interests in a different group of
mortgage loans and/or mortgage securities within the trust fund. The prospectus
supplement for a series that includes a cross-support provision will describe
the manner and conditions for applying the provisions.
Overcollateralization
If so specified in the related prospectus supplement, interest collections
on the mortgage loans may exceed interest payments on the bonds for the related
distribution date. The excess interest may be deposited into a reserve fund or
applied as a payment of principal on the bonds. To the extent excess interest is
applied as principal payments on the bonds, the effect will be to reduce the
principal balance of the bonds relative to the outstanding balance of the
mortgage loans, thereby creating overcollateralization and additional protection
to the bondholders, as specified in the related prospectus supplement. If so
provided in the related prospectus supplement, overcollateralization may also be
provided as to any series of bonds by the issuance of bonds in an initial
aggregate principal amount which is less than the aggregate principal amount of
the related mortgage loans.
Financial Guaranty Insurance Policy
If so specified in the related prospectus supplement, a financial guaranty
insurance policy may be obtained and maintained for a class or series of bonds.
The insurer with respect to a financial guaranty insurance policy will be
described in the related prospectus supplement and a copy of the form of
financial guaranty insurance policy will be filed with the related Current
Report on Form 8-K.
37
A financial guaranty insurance policy will be unconditional and
irrevocable and will guarantee to holders of the applicable bonds that an amount
equal to the full amount of payments due to the holders will be received by the
trustee or its agent on behalf of the holders for payment on each distribution
date. The specific terms of any financial guaranty insurance policy will be set
forth in the related prospectus supplement. A financial guaranty insurance
policy may have limitations and generally will not insure the obligation of the
Sellers or the master servicer to purchase or substitute for a defective
mortgage loan and will not guarantee any specific rate of principal prepayments.
The insurer will be subrogated to the rights of each holder to the extent the
insurer makes payments under the financial guaranty insurance policy.
Mortgage Pool Insurance Policies
Any mortgage pool insurance policy obtained by the company for each trust
fund will be issued by the pool insurer named in the applicable prospectus
supplement. Each mortgage pool insurance policy will, subject to the limitations
described below, cover Defaulted Mortgage Losses in an amount equal to a
percentage specified in the applicable prospectus supplement of the aggregate
principal balance of the mortgage loans on the cut-off date. As set forth under
"-- Maintenance of Credit Enhancement" below, the master servicer will use
reasonable efforts to maintain the mortgage pool insurance policy and to present
claims thereunder to the pool insurer on behalf of itself, the related trustee
and the related bondholders. The mortgage pool insurance policies, however, are
not blanket policies against loss, since claims thereunder may only be made
respecting particular defaulted mortgage loans and only upon satisfaction of the
conditions precedent described below. Unless specified in the related prospectus
supplement, the mortgage pool insurance policies may not cover losses due to a
failure to pay or denial of a claim under a Primary Insurance Policy,
irrespective of the reason therefor.
Each mortgage pool insurance policy will generally provide that no claims
may be validly presented thereunder unless, among other things:
o any required Primary Insurance Policy is in effect for the defaulted
mortgage loan and a claim thereunder has been submitted and settled,
o hazard insurance on the property securing the mortgage loan has been
kept in force and real estate taxes and other protection and
preservation expenses have been paid by the master servicer,
o if there has been physical loss or damage to the mortgaged property,
it has been restored to its condition (reasonable wear and tear
excepted) at the cut-off date and
o the insured has acquired good and merchantable title to the
mortgaged property free and clear of liens, except for permitted
encumbrances.
Upon satisfaction of these conditions, the pool insurer will have the option
either (1) to purchase the property securing the defaulted mortgage loan at a
price equal to the principal balance thereof plus accrued and unpaid interest at
the applicable mortgage rate to the date of purchase and expenses incurred by
the master servicer, special servicer or subservicer on behalf of the related
trustee and bondholders, or (2) to pay the amount by which the sum of the
principal balance of the defaulted mortgage loan plus accrued and unpaid
interest at the mortgage rate to the date of payment of the claim and the
aforementioned expenses exceeds the proceeds received from an approved sale of
the mortgaged property, in either case net of amounts paid or assumed to have
been paid under any related Primary Insurance Policy. Bondholders will
experience a shortfall in the amount of interest payable on the related bonds 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, the bondholders will also experience losses with respect
to the related bonds in connection with payments made under a mortgage pool
insurance policy to the extent that the master 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 master
servicer from funds otherwise payable to the
38
bondholders. If any mortgaged property securing a defaulted mortgage loan is
damaged and proceeds, if any (see "--Special Hazard Insurance Policies" below
for risks which are not covered by the policies), 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, the master servicer is not required to
expend its own funds to restore the damaged property unless it determines (x)
that the restoration will increase the proceeds to one or more classes of
bondholders on liquidation of the mortgage loan after reimbursement of the
master servicer for its expenses and (y) that the expenses will be recoverable
by it through Liquidation Proceeds or Insurance Proceeds.
A mortgage pool insurance policy (and most Primary Insurance Policies)
will likely not insure against loss sustained by reason of a default arising
from, among other things, (1) 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 thereof, or (2) failure to
construct a mortgaged property in accordance with plans and specifications.
Depending upon the nature of the event, a breach of representation made by a
Seller may also have occurred. This breach, if it materially and adversely
affects the interests of bondholders and cannot be cured, would give rise to a
purchase obligation on the part of the Seller, as more fully described under
"The Mortgage Pools--Representations by Sellers." However, this event would not
give rise to a breach of a representation and warranty or a purchase obligation
on the part of the company or master servicer.
The original amount of coverage under each mortgage pool insurance policy
will be reduced over the life of the related series of bonds by the aggregate
dollar amount of claims paid less the aggregate of the net amounts realized by
the pool insurer upon disposition of all foreclosed properties. The amount of
claims paid includes expenses incurred by the master servicer, special servicer
or subservicer 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 holders of the related series of bonds. In addition,
unless the master servicer could determine that an advance in respect of a
delinquent mortgage loan would be recoverable to it from the proceeds of the
liquidation of the mortgage loan or otherwise, the master servicer would not be
obligated to make an advance respecting the delinquency since the advance would
not be ultimately recoverable to it from either the mortgage pool insurance
policy or from any other related source. See "Description of the
Bonds--Advances."
Since each mortgage pool insurance policy will require that the property
subject to a defaulted mortgage loan be restored to its original condition prior
to claiming against the pool insurer, the policy will not provide coverage
against hazard losses. As set forth under "Primary Mortgage Insurance, Hazard
Insurance; Claims Thereunder," the hazard policies covering the mortgage loans
typically exclude from coverage physical damage resulting from a number of
causes and, even when the damage is covered, may afford recoveries which are
significantly less than full replacement cost of the losses. Further, no
coverage in respect of Special Hazard Losses, Fraud Losses or Bankruptcy Losses
will cover all risks, and the amount of the coverage will be limited. See
"--Special Hazard Insurance Policies" below. As a result, some hazard risks will
not be insured against and will therefore be borne by the related bondholders.
Letter of Credit
If any component of credit enhancement as to the offered bonds of any
series is to be provided by a letter of credit, a bank will deliver to the
related trustee an irrevocable letter of credit. The letter of credit may
provide direct coverage with respect to the mortgage loans. The bank that
delivered the letter of credit, as well as the amount available under the letter
of credit with respect to each component of credit enhancement, will be
specified in the applicable prospectus supplement. If so specified in the
related prospectus supplement, the letter of credit may permit draws only in the
event of some types of losses and shortfalls. The letter of credit may also
provide for the payment of advances which the master servicer would be obligated
to make with respect to delinquent monthly mortgage payments. The amount
available under the letter of credit will, in all cases, be reduced to the
extent of the unreimbursed payments thereunder and may otherwise be reduced as
described in
39
the related prospectus supplement. The letter of credit will expire on the
expiration date set forth in the related prospectus supplement, unless earlier
terminated or extended in accordance with its terms.
Special Hazard Insurance Policies
Any special hazard insurance policy covering Special Hazard Losses
obtained by the company for a trust fund will be issued by the insurer named in
the applicable prospectus supplement. Each special hazard insurance policy will,
subject to limitations described below, protect holders of the related series of
bonds from Special Hazard Losses. See "Primary Mortgage Insurance, Hazard
Insurance; Claims Thereunder." However, a special hazard insurance policy will
not cover losses occasioned by war, civil insurrection, some governmental
actions, errors in design, faulty workmanship or materials (except under some
circumstances), nuclear reaction, chemical contamination, waste by the mortgagor
and other risks. Aggregate claims under a special hazard insurance policy will
be limited to the amount set forth in the related prospectus supplement and will
be subject to reduction as described in the related prospectus supplement. A
special hazard insurance policy will provide that no claim may be paid unless
hazard and, if applicable, flood insurance on the property securing the mortgage
loan has been kept in force and other protection and preservation expenses have
been paid by the master servicer.
Subject to the foregoing limitations, a special hazard insurance policy
will provide that, where there has been damage to property securing a foreclosed
mortgage loan (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 mortgagor or the master servicer,
special servicer or the subservicer, the insurer will pay the lesser of (1) the
cost of repair or replacement of the property or (2) upon transfer of the
property to the insurer, the unpaid principal balance of the mortgage loan at
the time of acquisition of the property by foreclosure or deed in lieu of
foreclosure, plus accrued interest at the mortgage rate to the date of claim
settlement and expenses incurred by the master servicer, special servicer or
subservicer with respect to the property. If the property is transferred to a
third party in a sale approved by the issuer of the special hazard insurance
policy, the amount that the issuer will pay will be the amount under (ii) above
reduced by the net proceeds of the sale of the property. No claim may be validly
presented under the special hazard insurance policy unless hazard insurance on
the property securing a defaulted mortgage loan has been kept in force and other
reimbursable protection, preservation and foreclosure expenses have been paid
(all of which must be approved in advance by the issuer of the special hazard
insurance policy). If the unpaid principal balance plus accrued interest and
expenses is paid by the insurer, the amount of further coverage under the
related special hazard insurance policy will be reduced by that amount less any
net proceeds from the sale of the property. Any amount paid as the cost of
repair of the property will further reduce coverage by that amount. Restoration
of the property with the proceeds described under (1) above will satisfy the
condition under each mortgage pool insurance policy that the property be
restored before a claim under the mortgage pool insurance policy may be validly
presented with respect to the defaulted mortgage loan secured by the property.
The payment described under (2) above will render presentation of a claim in
respect of the mortgage loan 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 mortgage
loan plus accrued interest and expenses will not affect the total Insurance
Proceeds paid to bondholders, but will affect the relative amounts of coverage
remaining under the related special hazard insurance policy and mortgage pool
insurance policy.
As and to the extent set forth in the applicable prospectus supplement,
coverage in respect of Special Hazard Losses for a series of bonds may be
provided, in whole or in part, by a type of instrument other than a special
hazard insurance policy or by means of a special hazard representation of the
Seller or the company.
Reserve Funds
If so provided in the related prospectus supplement, the company will
deposit or cause to be deposited in a reserve fund account any combination of
cash, one or more irrevocable letters of credit or one or more Permitted
Investments in specified amounts, or any other instrument satisfactory to
40
the relevant Rating Agency or Agencies, which will be applied and maintained in
the manner and under the conditions specified in the prospectus supplement. In
the alternative or in addition to the deposit, to the extent described in the
related prospectus supplement, a reserve fund may be funded through application
of all or a portion of amounts otherwise payable on any related subordinate
bonds, from the retained interest of the company or otherwise. To the extent
that the funding of the reserve fund is dependent on amounts otherwise payable
on related subordinate bonds, any retained interest of the company or other cash
flows attributable to the related mortgage loans or on reinvestment income, the
reserve fund may provide less coverage than initially expected if the cash flows
or reinvestment income on which the funding is dependent are lower than
anticipated. In addition, with respect to any series of bonds as to which credit
enhancement includes a letter of credit, if so specified in the related
prospectus supplement, if specified conditions are met, the remaining amount of
the letter of credit may be drawn by the trustee and deposited in a reserve
fund. Amounts in a reserve fund may be distributed to bondholders, or applied to
reimburse the master servicer for outstanding advances, or may be used for other
purposes, in the manner and to the extent specified in the related prospectus
supplement. The related prospectus supplement will disclose whether a reserve
fund is part of the related trust fund. If set forth in the related prospectus
supplement, a reserve fund may provide coverage to more than one series of
bonds.
In connection with the establishment of any reserve fund, the reserve fund
will be structured so that the trustee will have a perfected security interest
for the benefit of the bondholders in the assets in the reserve fund. However,
to the extent that the company, any affiliate thereof or any other entity has an
interest in any reserve fund, in the event of the bankruptcy, receivership or
insolvency of that entity, there could be delays in withdrawals from the reserve
fund and corresponding payments to the bondholders which could adversely affect
the yield to investors on the related bonds.
Amounts deposited in any reserve fund for a series will be invested in
Permitted Investments by, or at the direction of, and for the benefit of the
master servicer or any other person named in the related prospectus supplement.
Cash Flow Agreements
If so provided in the related prospectus supplement, the trust fund may
include guaranteed investment contracts pursuant to which moneys held in the
funds and accounts established for the related series will be invested at a
specified rate. The principal terms of a guaranteed investment contract or other
cash flow agreement, and the identity of the obligor, will be described in the
prospectus supplement for a series of bonds.
Maintenance of Credit Enhancement
To the extent that the applicable prospectus supplement does not expressly
provide for alternative credit enhancement arrangements in lieu of some or all
of the arrangements mentioned below, the following paragraphs shall apply.
If a financial guaranty insurance policy has been obtained for a series of
bonds, the master servicer will be obligated to exercise reasonable efforts to
keep the financial guaranty insurance policy in full force and effect throughout
the term of the applicable indenture, unless coverage thereunder has been
exhausted through payment of claims or until the financial guaranty insurance
policy is replaced in accordance with the terms of the applicable indenture. The
master servicer will agree to pay the premiums for each financial guaranty
insurance policy on a timely basis. In the event the insurer ceases to be a
qualified insurer as described in the related prospectus supplement, or fails to
make a required payment under the related financial guaranty insurance policy,
the master servicer will have no obligation to replace the insurer. Any losses
associated with any reduction or withdrawal in rating by an applicable Rating
Agency shall be borne by the related bondholders.
If a mortgage pool insurance policy has been obtained for a series of
bonds, the master servicer will be obligated to exercise reasonable efforts to
keep the mortgage pool insurance policy (or an alternate form of credit support)
in full force and effect throughout the term of the applicable servicing
agreement, unless coverage thereunder has been exhausted through payment of
claims or until the mortgage pool insurance policy is replaced in accordance
with the terms of the applicable
41
servicing agreement. The master servicer will agree to pay the premiums for each
mortgage pool insurance policy on a timely basis. In the event the pool insurer
ceases to be a qualified insurer because it ceases to be qualified by law to
transact pool insurance business or coverage is terminated for any reason other
than exhaustion of the coverage, the master servicer will use reasonable efforts
to obtain from another qualified insurer a replacement insurance policy
comparable to the mortgage pool insurance policy with a total coverage equal to
the then outstanding coverage of the mortgage pool insurance policy, provided
that, if the cost of the replacement policy is greater than the cost of the
mortgage pool insurance policy, the coverage of the replacement policy will,
unless otherwise agreed to by the company, be reduced to a level such that its
premium rate does not exceed the premium rate on the mortgage pool insurance
policy. In the event that the pool insurer ceases to be a qualified insurer
because it ceases to be approved as an insurer by Freddie Mac, Fannie Mae or any
successor entity, the master servicer will be obligated to review, not less
often than monthly, the financial condition of the pool insurer with a view
toward determining whether recoveries under the mortgage pool insurance policy
are jeopardized for reasons related to the financial condition of the pool
insurer. If the master servicer determines that recoveries are so jeopardized,
it will be obligated to exercise its best reasonable efforts to obtain from
another qualified insurer a replacement insurance policy as described above,
subject to the same cost limit. Any losses associated with any reduction or
withdrawal in rating by an applicable Rating Agency shall be borne by the
related bondholders.
If a letter of credit or alternate form of credit enhancement has been
obtained for a series of bonds, the master servicer will be obligated to
exercise reasonable efforts cause to be kept or to keep the letter of credit (or
an alternate form of credit support) in full force and effect throughout the
term of the applicable indenture, unless coverage thereunder has been exhausted
through payment of claims or otherwise, or substitution therefor is made as
described below under "--Reduction or Substitution of Credit Enhancement."
Unless otherwise specified in the applicable prospectus supplement, if a letter
of credit obtained for a series of bonds is scheduled to expire prior to the
date the final distribution on the bonds is made and coverage under the letter
of credit has not been exhausted and no substitution has occurred, the trustee
will draw the amount available under the letter of credit and maintain the
amount in trust for the bondholders.
In lieu of the master servicer's obligation to maintain a financial
guaranty insurance policy, mortgage pool insurance policy or letter of credit as
provided above, the master servicer may obtain a substitute financial guaranty
insurance policy, mortgage pool insurance policy or letter of credit. If the
master servicer obtains a substitute, it will maintain and keep the substitute
in full force and effect as provided in this prospectus. Prior to its obtaining
any substitute financial guaranty insurance policy, mortgage pool insurance
policy or letter of credit, the master servicer will obtain written confirmation
from the Rating Agency or Agencies that rated the related series of bonds that
the substitution of the financial guaranty insurance policy, mortgage pool
insurance policy or letter of credit for the existing credit enhancement will
not adversely affect the then-current ratings assigned to the bonds by the
Rating Agency or Agencies.
If a special hazard insurance policy has been obtained for a series of
bonds, the master servicer will also be obligated to exercise reasonable efforts
to maintain and keep the policy in full force and effect throughout the term of
the applicable servicing agreement, unless coverage thereunder has been
exhausted through payment of claims or otherwise or substitution therefor is
made as described below under "--Reduction or Substitution of Credit
Enhancement." If coverage for Special Hazard Losses takes the form of a special
hazard insurance policy, the policy will provide coverage against risks of the
type described in this prospectus under "Description of Credit
Enhancement--Special Hazard Insurance Policies." The master servicer may obtain
a substitute policy for the existing special hazard insurance policy if prior to
the substitution the master servicer obtains written confirmation from the
Rating Agency or Agencies that rated the related bonds that the substitution
shall not adversely affect the then-current ratings assigned to the bonds by the
Rating Agency or Agencies.
The master servicer, on behalf of itself, the trustee and bondholders,
will provide the trustee information required for the trustee to draw under the
letter of credit and will present claims to each pool insurer, to the issuer of
each special hazard insurance policy, and, in respect of defaulted mortgage
loans for which there is no subservicer, to each primary insurer and take any
reasonable
42
steps as are necessary to permit recovery under the letter of credit, insurance
policies or comparable coverage respecting defaulted mortgage loans or mortgage
loans which are the subject of a bankruptcy proceeding. As set forth above, all
collections by the master servicer under any mortgage pool insurance policy or
any Primary Insurance Policy and, where the related property has not been
restored, any special hazard insurance policy, are to be deposited in the
related Payment Account, subject to withdrawal as described above. All draws
under any letter of credit are also to be deposited in the related Payment
Account. In those cases in which a mortgage loan is serviced by a subservicer,
the subservicer, on behalf of itself, the trustee and the bondholders will
present claims to the primary insurer, and all paid claims shall initially be
deposited in a subservicing account that generally meets the requirements for
the Payment Account prior to being delivered to the master servicer for deposit
in the related Payment Account.
If any property securing a defaulted mortgage loan is damaged and
proceeds, if any, from the related hazard insurance policy or any applicable
special hazard insurance policy are insufficient to restore the damaged property
to a condition sufficient to permit recovery under any financial guaranty
insurance policy, mortgage pool insurance policy, letter of credit or any
related Primary Insurance Policy, the master servicer is not required to expend
its own funds to restore the damaged property unless it determines (1) that the
restoration will increase the proceeds to one or more classes of bondholders on
liquidation of the mortgage loan after reimbursement of the master servicer for
its expenses and (2) that the expenses will be recoverable by it through
Liquidation Proceeds or Insurance Proceeds. If recovery under any financial
guaranty insurance policy, mortgage pool insurance policy, letter of credit or
any related Primary Insurance Policy is not available because the master
servicer has been unable to make the above determinations, has made the
determinations incorrectly or recovery is not available for any other reason,
the master servicer is nevertheless obligated to follow the normal practices and
procedures (subject to the preceding sentence) as it deems necessary or
advisable to realize upon the defaulted mortgage loan and in the event the
determination has been incorrectly made, is entitled to reimbursement of its
expenses in connection with the restoration.
Reduction or Substitution of Credit Enhancement
The amount of credit support provided pursuant to any form of credit
enhancement may be reduced. In most cases, the amount available pursuant to any
form of credit enhancement will be subject to periodic reduction in accordance
with a schedule or formula on a nondiscretionary basis pursuant to the terms of
the related indenture. Additionally, in most cases, the form of credit support
(and any replacements therefor) may be replaced, reduced or terminated, and the
formula used in calculating the amount of coverage with respect to Bankruptcy
Losses, Special Hazard Losses or Fraud Losses may be changed, without the
consent of the bondholders, upon the written assurance from each applicable
Rating Agency that the then-current rating of the related series of bonds will
not be adversely affected. Furthermore, in the event that the credit rating of
any obligor under any applicable credit enhancement is downgraded, the credit
rating(s) of the related series of bonds may be downgraded to a corresponding
level, and, the master servicer will not be obligated to obtain replacement
credit support in order to restore the rating(s) of the related series of bonds.
The master servicer will also be permitted to replace the credit support with
other credit enhancement instruments issued by obligors whose credit ratings are
equivalent to the downgraded level and in lower amounts which would satisfy the
downgraded level, provided that the then-current rating(s) of the related series
of bonds are maintained. Where the credit support is in the form of a reserve
fund, a permitted reduction in the amount of credit enhancement will result in a
release of all or a portion of the assets in the reserve fund to the company,
the master servicer or the other person that is entitled thereto. Any assets so
released will not be available for distributions in future periods.
OTHER FINANCIAL OBLIGATIONS RELATED TO THE BONDS
Swaps and Yield Supplement Agreements
The trustee on behalf of a trust fund may enter into interest rate swaps
and related caps, floors and collars to minimize the risk of bondholders from
adverse changes in interest rates, which are collectively referred to as swaps,
and other yield supplement agreements or similar yield maintenance
43
arrangements that do not involve swap agreements or other notional principal
contracts, which are collectively referred to as yield supplement agreements.
An interest rate swap is an agreement between two parties to exchange a
stream of interest payments on an agreed hypothetical or "notional" principal
amount. No principal amount is exchanged between the counterparties to an
interest rate swap. In the typical swap, one party agrees to pay a fixed rate on
a notional principal amount, while the counterparty pays a floating rate based
on one or more reference interest rates including the London Interbank Offered
Rate, or LIBOR, a specified bank's prime rate or U.S. Treasury Bill rates.
Interest rate swaps also permit counterparties to exchange a floating rate
obligation based upon one reference interest rate, such as LIBOR, for a floating
rate obligation based upon another referenced interest rate, such as U.S.
Treasury Bill rates.
Yield supplement agreements may be entered into to supplement the interest
rate or other rates on one or more classes of the bonds of any series.
Additionally, agreements relating to other types of derivative products that are
designed to provide credit enhancement to the related series may be entered into
by a trustee and one or more counterparties. The terms of any derivative product
agreement and any counterparties will be described in the accompanying
prospectus supplement.
There can be no assurance that the trustee will be able to enter into or
offset swaps or enter into yield supplement agreements or derivative product
agreements at any specific time or at prices or on other terms that are
advantageous. In addition, although the terms of the swaps and yield supplement
agreements may provide for termination under various circumstances, there can be
no assurance that the trustee will be able to terminate a swap or yield
supplement agreement when it would be economically advantageous to the trust
fund to do so.
Purchase Obligations
Some types of trust assets and some classes of bonds of any series, as
specified in the accompanying prospectus supplement, may be subject to a
purchase obligation that would become applicable on one or more specified dates,
or upon the occurrence of one or more specified events, or on demand made by or
on behalf of the applicable bondholders. A purchase obligation may be in the
form of a conditional or unconditional purchase commitment, liquidity facility,
remarketing agreement, maturity guaranty, put option or demand feature. The
terms and conditions of each purchase obligation, including the purchase price,
timing and payment procedure, will be described in the accompanying prospectus
supplement. A purchase obligation relating to trust assets may apply to those
trust assets or to the related bonds. Each purchase obligation may be a secured
or unsecured obligation of the provider thereof, which may include a bank or
other financial institution or an insurance company. Each purchase obligation
will be evidenced by an instrument delivered to the trustee for the benefit of
the applicable bondholders of the related series. As specified in the
accompanying prospectus supplement, each purchase obligation relating to trust
assets will be payable solely to the trustee for the benefit of the bondholders
of the related series. Other purchase obligations may be payable to the trustee
or directly to the holders of the bonds to which that obligation relate.
PRIMARY MORTGAGE INSURANCE, HAZARD INSURANCE;
CLAIMS THEREUNDER
General
The mortgaged property with respect to each mortgage loan will be required
to be covered by a hazard insurance policy and, if required as described below,
a Primary Insurance Policy. The following is only a brief description of these
insurance policies and does not purport to summarize or describe all of the
provisions of these policies. The insurance is subject to underwriting and
approval of individual mortgage loans by the respective insurers.
Primary Mortgage Insurance Policies
In a securitization of single family loans, single family loans included
in the related mortgage pool having a loan-to-value ratio at origination of over
80% (or other percentage as described in the
44
related prospectus supplement) may be required by the company to be covered by a
Primary Insurance Policy. The Primary Insurance Policy will insure against
default on a mortgage loan as to at least the principal amount thereof exceeding
75% of the Value of the related mortgaged property (or other percentage as
described in the related prospectus supplement) at origination of the mortgage
loan, unless and until the principal balance of the mortgage loan is reduced to
a level that would produce a loan-to-value ratio equal to or less than at least
80% (or other percentage as described in the prospectus supplement). The company
will represent and warrant that, to the best of the company's knowledge,
mortgage loans of this type are so covered. This type of mortgage loan will not
be considered to be an exception to the foregoing standard if no Primary
Insurance Policy was obtained at origination but the mortgage loan has amortized
to below the above loan-to-value ratio percentage as of the applicable cut-off
date. Mortgage loans which are subject to negative amortization will only be
covered by a Primary Insurance Policy if the coverage was so required upon their
origination, notwithstanding that subsequent negative amortization may cause the
mortgage loan's loan-to-value ratio, based on the then-current balance, to
subsequently exceed the limits which would have required the coverage upon their
origination. Multifamily, commercial and mixed-use loans will not be covered by
a Primary Insurance Policy, regardless of the related loan-to-value ratio.
While the terms and conditions of the Primary Insurance Policies issued by
a primary insurer will differ from those in Primary Insurance Policies issued by
other primary insurers, each Primary Insurance Policy will in general cover the
Primary Insurance Covered Loss. The primary insurer generally will be required
to pay:
o the insured percentage of the Primary Insurance Covered Loss;
o the entire amount of the Primary Insurance Covered Loss, after
receipt by the primary insurer of good and merchantable title to,
and possession of, the mortgaged property; or
o at the option of the Primary Insurer, the sum of the delinquent
monthly payments plus any advances made by the insured, both to the
date of the claim payment and, thereafter, monthly payments in the
amount that would have become due under the mortgage loan if it had
not been discharged plus any advances made by the insured until the
earlier of (1) the date the mortgage loan would have been discharged
in full if the default had not occurred or (2) an approved sale.
As conditions precedent to the filing or payment of a claim under a
Primary Insurance Policy, in the event of default by the mortgagor, the insured
will typically be required, among other things, to:
o advance or discharge (1) hazard insurance premiums and (2) as
necessary and approved in advance by the primary insurer, real
estate taxes, protection and preservation expenses and foreclosure
and related costs;
o in the event of any physical loss or damage to the mortgaged
property, have the mortgaged property restored to at least its
condition at the effective date of the Primary Insurance Policy
(ordinary wear and tear excepted); and
o tender to the primary insurer good and merchantable title to, and
possession of, the mortgaged property.
For any single family loan for which the coverage is required under the
standard described above, the master servicer will maintain or cause each
subservicer to maintain, as the case may be, in full force and effect and to the
extent coverage is available a Primary Insurance Policy with regard to each
single family loan, provided that the Primary Insurance Policy was in place as
of the cut-off date and the company had knowledge of the Primary Insurance
Policy. In the event the company gains knowledge that as of the Closing Date, a
mortgage loan which required a Primary Insurance Policy did not have one, then
the master servicer is required to use reasonable efforts to obtain and maintain
a Primary Insurance Policy to the extent that the policy is obtainable at a
reasonable price. The master servicer or the Seller will not cancel or refuse to
renew a Primary Insurance Policy in effect
45
at the time of the initial issuance of a series of bonds that is required to be
kept in force under the applicable indenture unless the replacement Primary
Insurance Policy for the canceled or non- renewed policy is maintained with an
insurer whose claims-paying ability is acceptable to the Rating Agency or
Agencies that rated the series of bonds for collateralized asset-backed bonds
having a rating equal to or better than the highest then-current rating of any
class of the series of bonds. For further information regarding the extent of
coverage under any mortgage pool insurance policy or Primary Insurance Policy,
see "Description of Credit Enhancement--Mortgage Pool Insurance Policies."
Hazard Insurance Policies
The terms of the mortgage loans require each mortgagor to maintain a
hazard insurance policy for their mortgage loan. Additionally, the servicing
agreement will require the master servicer to cause to be maintained for each
mortgage loan a hazard insurance policy providing for no less than the coverage
of the standard form of fire insurance policy with extended coverage customary
in the state in which the property is located. The coverage generally will be in
an amount equal to the lesser of the principal balance owing on the mortgage
loan or 100% of the insurable value of the improvements securing the mortgage
loan except that, if generally available, the coverage must not be less than the
minimum amount required under the terms thereof to fully compensate for any
damage or loss on a replacement cost basis. The ability of the master servicer
to ensure that hazard insurance proceeds are appropriately applied may be
dependent on its being named as an additional insured under any hazard insurance
policy and under any flood insurance policy referred to below, or upon the
extent to which information in this regard is furnished to the master servicer
by mortgagors or subservicers.
As set forth above, all amounts collected by the master servicer under any
hazard 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
master servicer's normal servicing procedures) will be deposited in the related
Payment Account. The servicing agreement will provide that the master servicer
may satisfy its obligation to cause hazard policies to be maintained by
maintaining a blanket policy insuring against losses on the mortgage loans. If
the blanket policy contains a deductible clause, the master servicer will
deposit in the applicable Payment Account all sums which would have been
deposited therein but for the clause.
In general, the standard form of fire and extended coverage policy covers
physical damage to or destruction of the improvements on the property by fire,
lightning, explosion, smoke, windstorm, hail, riot, strike and civil commotion,
subject to the conditions and exclusions specified in each policy. Although the
policies relating to the mortgage loans will be underwritten by different
insurers under different state laws in accordance with different applicable
state forms and therefore will not contain identical terms and conditions, the
basic terms thereof are dictated by respective state laws, and most of these
policies typically do not cover any physical damage resulting from the
following: war, revolution, governmental actions, floods and other water-related
causes, earth movement (including earthquakes, landslides and mudflows), nuclear
reactions, wet or dry rot, vermin, rodents, insects or domestic animals, theft
and, depending on the case, vandalism. The foregoing list is merely indicative
of the kinds of uninsured risks and is not intended to be all- inclusive. Where
the improvements securing a mortgage loan are located in a federally designated
flood area at the time of origination of the mortgage loan, the servicing
agreement requires the master servicer to cause to be maintained for this
mortgage loan, flood insurance (to the extent available) in an amount equal in
general to the lesser of the amount required to compensate for any loss or
damage on a replacement cost basis or the maximum insurance available under the
federal flood insurance program.
The hazard insurance policies covering the mortgaged properties typically
contain a co- insurance clause which in effect requires the insured at all times
to carry insurance of a specified percentage (generally 80% to 90%) of the full
replacement value of the improvements on the property in order to recover the
full amount of any partial loss. If the insured's coverage falls below this
specified percentage, the clause generally provides that the insurer's liability
in the event of partial loss does not exceed the greater of (1) the replacement
cost of the improvements damaged or
46
destroyed less physical depreciation or (2) the proportion of the loss as the
amount of insurance carried bears to the specified percentage of the full
replacement cost of the improvements.
Since the amount of hazard insurance that mortgagors are required to
maintain on the improvements securing the mortgage loans may decline as the
principal balances of the related mortgage loans decrease, and since residential
properties have historically appreciated in value over time, hazard insurance
proceeds could be insufficient to restore fully the damaged property in the
event of a partial loss. See "Description of Credit Enhancement--Special Hazard
Insurance Policies" for a description of the limited protection afforded by any
special hazard insurance policy against losses occasioned by hazards which are
otherwise uninsured against (including losses caused by the application of the
co-insurance clause described in the preceding paragraph).
Under the terms of the mortgage loans, mortgagors are generally required
to present claims to insurers under hazard insurance policies maintained on the
mortgaged properties. The master servicer, on behalf of the trustee and
bondholders, is obligated to present claims under any special hazard insurance
policy and any blanket insurance policy insuring against hazard losses on the
mortgaged properties. However, the ability of the master servicer to present the
claims is dependent upon the extent to which information in this regard is
furnished to the master servicer or the subservicers by mortgagors.
FHA Insurance
The FHA is responsible for administering various federal programs,
including mortgage insurance, authorized under The Housing Act and the United
States Housing Act of 1937, as amended.
There are two primary FHA insurance programs that are available for
multifamily mortgage loans. Sections 221(d)(3) and (d)(4) of the Housing Act
allow HUD to insure mortgage loans that are secured by newly constructed and
substantially rehabilitated multifamily rental projects. Section 244 of the
Housing Act provides for co-insurance of such mortgage loans made under Sections
221 (d)(3) and (d)(4) by HUD/FHA and a HUD-approved co-insurer. Generally the
term of such a mortgage loan may be up to 40 years and the ratio of the loan
amount to property replacement cost can be up to 90%.
Section 223(f) of the Housing Act allows HUD to insure mortgage loans made
for the purchase or refinancing of existing apartment projects which are at
least three years old. Section 244 also provides for co-insurance of mortgage
loans made under Section 223(f). Under Section 223(f), the loan proceeds cannot
be used for substantial rehabilitation work, but repairs may be made for up to,
in general, the greater of 15% of the value of the project or a dollar amount
per apartment unit established from time to time by HUD. In general the loan
term may not exceed 35 years and a loan to value ratio of no more than 85% is
required for the purchase of a project and 70% for the refinancing of a project.
HUD has the option, in most cases, to pay insurance claims in cash or in
debentures issued by HUD. Presently, claims are being paid in cash, and claims
have not been paid in debentures since 1965. HUD debentures issued in
satisfaction of FHA insurance claims bear interest at the applicable HUD
debenture interest rate. The master servicer will be obligated to purchase a
debenture issued in satisfaction of a defaulted FHA insured mortgage loan
serviced by it for an amount equal to the principal amount of any the debenture.
The master servicer will be required to take steps reasonably necessary to
keep FHA insurance in full force and effect.
VA Mortgage Guaranty
The Servicemen's Readjustment Act of 1944, as amended, permits a veteran
or, in some instances, his or her spouse, to obtain a mortgage loan guaranty by
the VA covering mortgage financing of the purchase of a one-to four-family
dwelling unit to be occupied as the veteran's home at an interest rate not
exceeding the maximum rate in effect at the time the loan is made, as
established by HUD. The program has no limit on the amount of a mortgage loan,
requires no down
47
payment for the purchaser and permits the guaranty of mortgage loans with terms,
limited by the estimated economic life of the property, up to 30 years. The
maximum guaranty that may be issued by the VA under this program is 50% of the
original principal amount of the mortgage loan up to a dollar limit established
by the VA. The liability on the guaranty is reduced or increased pro rata with
any reduction or increase in amount of indebtedness, but in no event will the
amount payable on the guaranty exceed the amount of the original guaranty.
Notwithstanding the dollar and percentage limitations of the guaranty, a
mortgagee will ordinarily suffer a monetary loss only when the difference
between the unsatisfied indebtedness and the proceeds of a foreclosure sale of
mortgaged premises is greater than the original guaranty as adjusted. The VA
may, at its option, and without regard to the guaranty, make full payment to a
mortgagee of the unsatisfied indebtedness on a mortgage upon its assignment to
the VA.
Since there is no limit imposed by the VA on the principal amount of a
VA-guaranteed mortgage loan but there is a limit on the amount of the VA
guaranty, additional coverage under a Primary Mortgage Insurance Policy may be
required by the company for VA loans in excess of amounts specified by the VA.
The amount of the additional coverage will be set forth in the related
prospectus supplement. Any VA guaranty relating to Contracts underlying a series
of bonds will be described in the related prospectus supplement.
THE COMPANY
The company is a wholly-owned subsidiary of Impac Mortgage Holdings, Inc.
The company was incorporated in the State of California on April 12, 1996. The
company was organized for the purpose of serving as a private secondary mortgage
market conduit.
The company maintains its principal office at 1401 Dove Street, Newport
Beach, California 92660, and its telephone number is (949) 475-3700.
IMPAC FUNDING CORPORATION
Impac Funding Corporation, an affiliate of the company, may be a Seller
and may act as master servicer with respect to a mortgage pool. Impac Funding is
a mortgage banking conduit that acquires conventional one- to four-family
residential mortgage loans nationwide and has, from time to time, acquired
condominium conversion loans. Impac Funding is a non-consolidating subsidiary of
Impac Mortgage Holdings, Inc. Impac Funding primarily acquires mortgage loans
from approved correspondents.
Prior to November 1995, Impac Funding was a division of Imperial Credit
Industries, Inc. In November 1995, Imperial Credit Industries, Inc. restructured
its operations pursuant to which Impac Funding became a separate corporation and
Imperial Credit Industries, Inc. contributed, among other things, all of the
outstanding nonvoting preferred stock of Impac Funding, which represents 99% of
the economic interest in Impac Funding, to Impac Mortgage Holdings, Inc., in
exchange for approximately 10% of the common stock of Impac Mortgage Holdings,
Inc. The common stock of Impac Funding was retained by Imperial Credit
Industries, Inc. until March 1997 when it was distributed to certain officers
and/or directors of Impac Funding who are also officers and/or directors of
Impac Mortgage Holdings, Inc.
Impac Funding's executive offices are located at 1401 Dove Street, Newport
Beach, California 92660, and its telephone number is (949) 475-3700.
IMPAC MORTGAGE HOLDINGS, INC.
Impac Mortgage Holdings, Inc. is a publicly traded, recently formed
specialty finance company which operates three businesses: (1) long-term
investment operations, (2) conduit operations, and (3) warehouse lending
operations. The long-term investment operations is a recently- created business
that invests primarily in nonconforming residential mortgage loans and bonds
backed by such loans. The conduit operations, conducted by Impac Funding,
primarily purchases and sells or securitizes non-conforming mortgage loans, and
the warehouse lending operations provides short-term lines of credit to
originators of mortgage loans. These two businesses include certain
48
ongoing operations contributed to Impac Mortgage Holdings by Imperial Credit
Industries, Inc., a leading specialty finance company, in November 1995. Impac
Mortgage Holdings is organized as a real estate investment trust for tax
purposes, which allows it generally to pass through earnings to stockholders
without federal income tax at the corporate level.
Impac Mortgage Holdings, Inc.'s executive offices are located at 1401 Dove
Street, Newport Beach, California 92660, and its telephone number is (949)
475-3700.
THE AGREEMENTS
General
Each series of bonds will be issued pursuant to an indenture. The parties
to each indenture will be the related Issuer and the trustee. The Issuer will be
created pursuant to an owner trust agreement between the company and the owner
trustee.
Forms of the Agreements have been filed as exhibits to the registration
statement of which this prospectus is a part. However, the provisions of each
Agreement will vary depending upon the nature of the related bonds and the
nature of the related trust fund. The following summaries describe provisions
that may appear in either the servicing agreement or indenture. The prospectus
supplement for a series of bonds will describe any provision of the related
Agreements that materially differs from the description thereof set forth below.
The company will provide a copy of the Agreement (without exhibits) that relates
to any series of bonds without charge upon written request of a holder of an
offered bond of the series addressed to it at its principal executive offices
specified in this prospectus under "The Company".
Certain Matters Regarding the Master Servicer and the Company
The servicing agreement for each series of bonds will provide that the
master servicer may not resign from its obligations and duties except upon a
determination that performance of the duties is no longer permissible under
applicable law or except (1) in connection with a permitted transfer of
servicing or (2) upon appointment of a successor servicer reasonably acceptable
to the trustee and upon receipt by the trustee of a letter from each Rating
Agency generally to the effect that the resignation and appointment will not, in
and of itself, result in a downgrading of the bonds. No resignation will become
effective until the trustee or a successor servicer has assumed the master
servicer's responsibilities, duties, liabilities and obligations under the
servicing agreement.
Each servicing agreement and servicing agreement will also provide that
the master servicer, the company and their directors, officers, employees or
agents will not be under any liability to the trust fund or the bondholders for
any action taken or for refraining from the taking of any action in good faith,
or for errors in judgment, unless the liability which would otherwise be imposed
was by reason of willful misfeasance, bad faith or gross negligence in the
performance of duties or by reason of reckless disregard of obligations and
duties. Each servicing agreement will further provide that the master servicer,
the company, and any director, officer, employee or agent of the master servicer
or the company are entitled to indemnification by the trust fund and will be
held harmless against any loss, liability or expense incurred in connection with
any legal action relating to the servicing agreement or the related series of
bonds, other than any loss, liability or expense related to any specific
mortgage loan or mortgage loans (except a loss, liability or expense otherwise
reimbursable pursuant to the servicing agreement) and any loss, liability or
expense incurred by reason of willful misfeasance, bad faith or gross negligence
in the performance of its duties or by reason of reckless disregard of
obligations and duties. In addition, each servicing agreement will provide that
neither the master servicer nor the company will be under any obligation to
appear in, prosecute or defend any legal or administrative action that is not
incidental to its respective duties under the servicing agreement and which in
its opinion may involve it in any expense or liability. The master servicer or
the company may, however, in its discretion undertake any action which it may
deem necessary or desirable with respect to the servicing agreement and the
rights and duties of the parties to that agreement and the interests of the
bondholders. The legal expenses and costs of the action and any resulting
liability will be expenses, costs and liabilities of the trust fund, and the
master servicer or
49
the company, as the case may be, will be entitled reimbursement from funds
otherwise distributable to bondholders.
Any person into which the master servicer may be merged or consolidated,
any person resulting from any merger or consolidation to which the master
servicer is a party or any person succeeding to the business of the master
servicer will be the successor of the master servicer under the related
servicing agreement, provided that (1) the person is qualified to service
mortgage loans on behalf of Fannie Mae or Freddie Mac and (2) the merger,
consolidation or succession does not adversely affect the then-current ratings
of the classes of bonds of the related series that have been rated. In addition,
notwithstanding the prohibition on its resignation, the master servicer may
assign its rights under a servicing agreement to any person to whom the master
servicer is transferring a substantial portion of its mortgage servicing
portfolio, provided clauses (1) and (2) above are satisfied and the person is
reasonably satisfactory to the company and the trustee. In the case of an
assignment, the master servicer will be released from its obligations under the
servicing agreement, exclusive of liabilities and obligations incurred by it
prior to the time of the assignment.
Events of Default and Rights upon Event Default
Servicing Agreement
For a series of bonds, a servicing default under the related servicing
agreement generally will include:
o any failure by the master servicer to make a required deposit to the
Payment Account or, if the master servicer is so required, to
distribute to the holders of any class of bonds or Equity
Certificates of the series any required payment which continues
unremedied for 5 business days (or other period of time described in
the related prospectus supplement) after the giving of written
notice of the failure to the master servicer by the trustee or the
Issuer;
o any failure by the master servicer duly to observe or perform in any
material respect any other of its covenants or agreements in the
servicing agreement with respect to the series of bonds which
continues unremedied for 45 days after the giving of written notice
of the failure to the master servicer by the trustee or the Issuer;
o events of insolvency, readjustment of debt, marshaling of assets and
liabilities or similar proceedings regarding the master servicer and
some actions by the master servicer indicating its insolvency or
inability to pay its obligations, as specified in the related
servicing agreement; and
o any other servicing default as set forth in the servicing agreement.
So long as a servicing default remains unremedied, either the company or
the trustee may, by written notification to the master servicer and to the
Issuer or the trustee or trust fund, as applicable, terminate all of the rights
and obligations of the master servicer under the servicing agreement (other than
any right of the master servicer as bondholder or as holder of the Equity
Certificates and other than the right to receive servicing compensation and
expenses for servicing the mortgage loans during any period prior to the date of
the termination), whereupon the trustee will succeed to all responsibilities,
duties and liabilities of the master servicer under the servicing agreement
(other than any obligation to purchase mortgage loans) and will be entitled to
similar compensation arrangements. In the event that the trustee would be
obligated to succeed the master servicer but is unwilling so to act, it may
appoint (or if it is unable so to act, it shall appoint) or petition a court of
competent jurisdiction for the appointment of an approved mortgage servicing
institution with a net worth of at least $15,000,000 to act as successor to the
master servicer under the servicing agreement (unless otherwise set forth in the
servicing agreement). Pending the appointment, the trustee is obligated to act
in the capacity. The trustee and the successor may agree upon the servicing
compensation to be paid, which in no event may be greater than the compensation
to the initial master servicer under the servicing agreement.
50
Indenture
An event of default under the indenture generally will include:
o a default for five days or more (or other period of time described
in the related prospectus supplement) in the payment of any
principal of or interest on any bond of the series;
o failure to perform any other covenant of the company or the trust
fund in the indenture which continues for a period of thirty days
after notice thereof is given in accordance with the procedures
described in the related prospectus supplement;
o any representation or warranty made by the company or the trust fund
in the indenture or in any certificate or other writing delivered
pursuant thereto or in connection therewith with respect to or
affecting the series having been incorrect in a material respect as
of the time made, and the breach is not cured within thirty days
after notice thereof is given in accordance with the procedures
described in the related prospectus supplement;
o events of bankruptcy, insolvency, receivership or liquidation of the
company or the trust fund, as specified in the indenture; or
o any other event of default provided with respect to bonds of that
series.
If an event of default with respect to the bonds of any series at the time
outstanding occurs and is continuing, the trustee or the holders of a majority
of the then aggregate outstanding amount of the bonds of the series may declare
the principal amount of all the bonds of the series to be due and payable
immediately. The declaration may, in some circumstances, be rescinded and
annulled by the holders of a majority in aggregate outstanding amount of the
related bonds.
If following an event of default with respect to any series of bonds, the
bonds of the series have been declared to be due and payable, the trustee may,
in its discretion, notwithstanding the acceleration, elect to maintain
possession of the collateral securing the bonds of the series and to continue to
apply payments on the collateral as if there had been no declaration of
acceleration if the collateral continues to provide sufficient funds for the
payment of principal of and interest on the bonds of the series as they would
have become due if there had not been a declaration. In addition, the trustee
may not sell or otherwise liquidate the collateral securing the bonds of a
series following an event of default, unless (1) the holders of 100% of the then
aggregate outstanding amount of the bonds of the series consent to the sale, (2)
the proceeds of the sale or liquidation are sufficient to pay in full the
principal of and accrued interest, due and unpaid, on the outstanding bonds of
the series at the date of the sale or (3) the trustee determines that the
collateral would not be sufficient on an ongoing basis to make all payments on
the bonds as the payments would have become due if the bonds had not been
declared due and payable, and the trustee obtains the consent of the holders of
66 2/3% of the then aggregate outstanding amount of the bonds of the series.
In the event that the trustee liquidates the collateral in connection with
an event of default, the indenture provides that the trustee will have a prior
lien on the proceeds of the liquidation for unpaid fees and expenses. As a
result, upon the occurrence of the event of default, the amount available for
payments to the bondholders would be less than would otherwise be the case.
However, the 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 bondholders after the occurrence of the
event of default.
In the event the principal of the bonds of a series is declared due and
payable, as described above, the holders of the bonds issued at a discount from
par may be entitled to receive no more than an amount equal to the unpaid
principal amount thereof less the amount of the discount that is unamortized.
51
No bondholder or holder of an Equity Certificate generally will have any
right under an owner trust agreement or indenture to institute any proceeding
with respect to the Agreement unless (1) that holder previously has given to the
trustee written notice of default and the continuance thereof, (2) the holders
of bonds or Equity Certificates of any class evidencing not less than 25% of the
aggregate Percentage Interests constituting that class (a) have made written
request upon the trustee to institute the proceeding in its own name as trustee
and (b) have offered to the trustee reasonable security or indemnity against the
costs, expenses and liabilities that may be incurred in or because of the
proceeding, (3) the trustee has neglected or refused to institute the proceeding
for 60 days after receipt of the request and indemnity and (4) no direction
inconsistent with the written request has been given to the trustee during the
60 day period by the holders of a majority of the bond balances of that class.
Amendment
With respect to each series of bonds, each related servicing agreement or
indenture may be amended by the parties thereto without the consent of any of
the holders of the bonds covered by the Agreement, to cure any ambiguity, to
correct, modify or supplement any provision therein, or to make any other
provisions with respect to matters or questions arising under the Agreement
which are not inconsistent with the provisions thereof, provided that the action
will not adversely affect in any material respect the interests of any holder of
bonds covered by the Agreement. Each Agreement may also be amended by the
parties thereto with the consent of the holders of bonds evidencing not less
than 66% of the voting rights, for any purpose; provided, however, that the
amendment may not:
(1) reduce in any manner the amount of or delay the timing of, payments
received on trust fund assets which are required to be distributed
on any bond without the consent of the holder of the bond,
(2) adversely affect in any material respect the interests of the
holders of any class of bonds in a manner other than as described in
(1), without the consent of the holders of bonds of the class
evidencing not less than 66% of the aggregate voting rights of the
class or
(3) reduce the aforesaid percentage of voting rights required for the
consent to the amendment without the consent of the holders of all
bonds covered by the Agreement then outstanding.
The voting rights evidenced by any bond will be the portion of the voting rights
of all of the bonds in the related series allocated in the manner described in
the related prospectus supplement.
Termination; Retirement of Bonds
The obligations created by the related Agreements for each series of bonds
(other than the limited payment and notice obligations of the trustee and the
company, respectively) will terminate upon the payment to bondholders of that
series of all amounts held in the Payment Account or by the master servicer and
required to be paid to them pursuant to the Agreements following the earlier of
(1) the final payment or other liquidation or disposition (or any advance with
respect thereto) of the last mortgage loan, REO property and/or mortgage
security subject thereto and (2) the purchase by the master servicer or the
company or if specified in the prospectus supplement, by the holder of the
Equity Certificates, from the trust fund for the series of all remaining
mortgage loans, REO properties and/or mortgage securities. In addition to the
foregoing, the master servicer or the company will have the option to purchase,
in whole but not in part, the bonds specified in the related prospectus
supplement in the manner set forth in the related prospectus supplement. With
respect to any series of bonds, the purchase shall not be made unless the
aggregate principal balance of the bonds as of the date is equal to or less than
the percentage specified in the related prospectus supplement (which shall not
be greater than 25%) of the aggregate principal balance of the bonds as of the
Closing Date or a period specified in the related prospectus supplement (which
shall not be shorter than seven years) has elapsed since the initial
distribution date. Upon the purchase of the bonds or at any time thereafter, at
the option of the master servicer or the company, the assets of the trust fund
may be sold, thereby effecting a retirement of the bonds and the termination of
the trust fund, or the bonds
52
so purchased may be held or resold by the master servicer or the company. In no
event, however, will the trust created by the indenture continue beyond the
expiration of 21 years from the death of the survivor of the persons named in
the indenture. Written notice of termination of the indenture will be given to
each bondholder, and the final distribution will be made only upon surrender and
cancellation of the bonds at an office or agency appointed by the trustee which
will be specified in the notice of termination. If the bondholders are permitted
to terminate the trust under the applicable indenture, a penalty may be imposed
upon the bondholders based upon the fee that would be foregone by the master
servicer because of the termination.
The purchase of mortgage loans and property acquired in respect of
mortgage loans evidenced by a series of bonds shall be made at the option of the
master servicer, the company or the holder of the Equity Certificates at the
price specified in the related prospectus supplement. The exercise of the right
will effect early retirement of the bonds of that series, but the right of the
master servicer, the company or, if applicable, the holder to so purchase is
subject to the aggregate principal balance of the mortgage loans and/or mortgage
securities in the trust fund for that series as of the distribution date on
which the purchase proceeds are to be distributed to bondholders being less than
the percentage specified in the related prospectus supplement of the aggregate
principal balance of the mortgage loans and/or mortgage securities at the
cut-off date for that series. The prospectus supplement for each series of bonds
will set forth the amounts that the holders of the bonds will be entitled to
receive upon the early retirement. The early termination may adversely affect
the yield to holders of the bonds.
Following any optional termination, there will be no continuing direct or
indirect liability of the trust fund or any bondholder as sellers of the assets
of the trust fund.
The Trustee
The trustee under each indenture will be named in the related prospectus
supplement. The commercial bank, national banking association, banking
corporation or trust company that serves as trustee may have typical banking
relationships with the company and its affiliates. The trustee shall at all
times be a corporation or an association organized and doing business under the
laws of any state or the United States of America, authorized under the laws to
exercise corporate trust powers, having a combined capital and surplus of at
least $15,000,000 and subject to supervision or examination by federal or state
authority.
Duties of the Trustee
The trustee for each series of bonds will make no representation as to the
validity or sufficiency of the related Agreements, the bonds or any underlying
mortgage loan, mortgage security or related document and will not be accountable
for the use or application by or on behalf of any master servicer or special
servicer of any funds paid to the master servicer or special servicer in respect
of the bonds or the underlying mortgage loans or mortgage securities, or any
funds deposited into or withdrawn from the Payment Account for the series or any
other account by or on behalf of the master servicer or special servicer. If no
event of default has occurred and is continuing, the trustee for each series of
bonds will be required to perform only those duties specifically required under
the related indenture. However, upon receipt of any of the various certificates,
reports or other instruments required to be furnished to it pursuant to the
related Agreement, a trustee will be required to examine the documents and to
determine whether they conform to the requirements of the agreement.
Some Matters Regarding the Trustee
As and to the extent described in the related prospectus supplement, the
fees and normal disbursements of any trustee may be the expense of the related
master servicer or other specified person or may be required to be borne by the
related trust fund.
The trustee for each series of bonds generally will be entitled to
indemnification, from amounts held in the Payment Account for the series, for
any loss, liability or expense incurred by the trustee in connection with the
trustee's acceptance or administration of its trusts under the related
53
indenture unless the loss, liability, cost or expense was incurred by reason of
willful misfeasance, bad faith or gross negligence on the part of the trustee in
the performance of its obligations and duties, or by reason of its reckless
disregard of its obligations or duties.
RESIGNATION AND REMOVAL OF THE TRUSTEE
The trustee may resign at any time, in which event the company will be
obligated to appoint a successor trustee. The company may also remove the
trustee if the trustee ceases to be eligible to continue under the indenture or
if the trustee becomes insolvent. Upon becoming aware of the circumstances, the
company will be obligated to appoint a successor trustee. The trustee may also
be removed at any time by the holders of bonds evidencing not less than 51% of
the aggregate undivided interests (or, if applicable, voting rights) in the
related trust fund. Any resignation or removal of the trustee and appointment of
a successor trustee will not become effective until acceptance of the
appointment by the successor trustee.
YIELD CONSIDERATIONS
The yield to maturity of an offered bond will depend on the price paid by
the holder for the bond, the bond interest rate on a bond entitled to payments
of interest (which bond interest rate may vary if so specified in the related
prospectus supplement) and the rate and timing of principal payments (including
prepayments, defaults, liquidations and repurchases) on the mortgage loans and
the allocation thereof to reduce the principal balance of the bond (or notional
amount thereof if applicable) and other factors.
A class of bonds may be entitled to payments of interest at a fixed bond
interest rate, a variable bond interest rate or adjustable bond interest rate,
or any combination of the bond interest rates, each as specified in the related
prospectus supplement. A variable bond interest rate may be calculated based on
the weighted average of the Net Mortgage Rates of the related mortgage loans for
the month preceding the distribution date if so specified in the related
prospectus supplement. As will be described in the related prospectus
supplement, the aggregate payments of interest on a class of bonds, and their
yield to maturity, will be affected by the rate of payment of principal on the
bonds (or the rate of reduction in the notional balance of bonds entitled only
to payments of interest) and, in the case of bonds evidencing interests in ARM
Loans, by changes in the Net Mortgage Rates on the ARM Loans. See "Maturity and
Prepayment Considerations" below. The yield on the bonds will also be affected
by liquidations of mortgage loans following mortgagor defaults and by purchases
of mortgage loans in the event of breaches of representations made in respect of
the mortgage loans by the company, the master servicer and others, or
conversions of ARM Loans to a fixed interest rate. See "The Mortgage
Pools--Representations by Sellers" and "Descriptions of the Bonds--Assignment of
Trust Fund Assets" above. Holders of Strip Bonds or a class of bonds having a
bond interest rate that varies based on the weighted average mortgage rate of
the underlying mortgage loans may be affected by disproportionate prepayments
and repurchases of mortgage loans having higher Net Mortgage Rates or rates
applicable to the Strip Bonds, as applicable.
With respect to any series of bonds, a period of time will elapse between
the date upon which payments on the related mortgage loans are due and the
distribution date on which the payments are passed through to bondholders. That
delay will effectively reduce the yield that would otherwise be produced if
payments on the mortgage loans were distributed to bondholders on or near the
date they were due.
In general, if a class of bonds is purchased at initial issuance at a
premium and payments of principal on the related mortgage loans occur at a rate
faster than anticipated at the time of purchase, the purchaser's actual yield to
maturity will be lower than that assumed at the time of purchase. Similarly, if
a class of bonds is purchased at initial issuance at a discount and payments of
principal on the related mortgage loans occur at a rate slower than that assumed
at the time of purchase, the purchaser's actual yield to maturity will be lower
than that originally anticipated. The effect of principal prepayments,
liquidations and purchases on yield will be particularly significant in the case
of a series of bonds having a class entitled to payments of interest only or to
payments of interest that are disproportionately high relative to the principal
payments to which the class is entitled. This class will likely be sold at a
substantial premium to its principal balance and any faster than anticipated
54
rate of prepayments will adversely affect the yield to holders thereof.
Extremely rapid prepayments may result in the failure of the holders to recoup
their original investment. In addition, the yield to maturity on other types of
classes of bonds, including Accrual Bonds and bonds with a bond interest rate
which fluctuates inversely with or at a multiple of an index, may be relatively
more sensitive to the rate of prepayment on the related mortgage loans than
other classes of bonds.
The timing of changes in the rate of principal payments on or repurchases
of the mortgage loans may significantly affect an investor's actual yield to
maturity, even if the average rate of principal payments experienced over time
is consistent with an investor's expectation. In general, the earlier a
prepayment of principal on the underlying mortgage loans or a repurchase
thereof, the greater will be the effect on an investor's yield to maturity. As a
result, the effect on an investor's yield of principal payments and repurchases
occurring at a rate higher (or lower) than the rate anticipated by the investor
during the period immediately following the issuance of a series of bonds would
not be fully offset by a subsequent like reduction (or increase) in the rate of
principal payments.
When a principal prepayment in full is made on a mortgage loan, the
borrower is generally charged interest only for the period from the due date of
the preceding scheduled payment up to the date of the prepayment, instead of for
the full accrual period, that is, the period from the due date of the preceding
scheduled payment up to the due date for the next scheduled payment. In
addition, a partial principal prepayment may likewise be applied as of a date
prior to the next scheduled due date (and, accordingly, be accompanied by
accrued interest for less than the full accrual period). However, interest
accrued and distributable on any series of bonds on any distribution date will
generally correspond to interest accrued on the principal balance of mortgage
loans for their respective full accrual periods. Consequently, if a prepayment
on any mortgage loan is distributable to bondholders on a particular
distribution date, but the prepayment is not accompanied by accrued interest for
the full accrual period, the interest charged to the borrower (net of servicing
and administrative fees and any retained interest of the company) may be less
than the corresponding amount of interest accrued and otherwise payable on the
related mortgage loan, and a Prepayment Interest Shortfall will result. If and
to the extent that the shortfall is allocated to a class of offered bonds, its
yield will be adversely affected. The prospectus supplement for a series of
bonds will describe the manner in which the shortfalls will be allocated among
the classes of the bonds. If so specified in the related prospectus supplement,
the master servicer will be required to apply some or all of its servicing
compensation for the corresponding period to offset the amount of the
shortfalls. The related prospectus supplement will also describe any other
amounts available to offset the shortfalls. See "Servicing of Mortgage
Loans--Servicing and Other Compensation and Payment of Expenses; Retained
Interest".
The trust fund with respect to any series may include convertible ARM
Loans. As is the case with conventional, fixed-rate mortgage loans originated in
a high interest rate environment which may be subject to a greater rate of
principal prepayments when interest rates decrease, convertible ARM Loans may be
subject to a greater rate of principal prepayments (or purchases by the related
subservicer or the master servicer) due to their refinancing or conversion to
fixed interest rate loans in a low interest rate environment. For example, if
prevailing interest rates fall significantly, convertible ARM Loans could be
subject to higher prepayment and conversion rates than if prevailing interest
rates remain constant because the availability of fixed-rate or other
adjustable-rate mortgage loans at competitive interest rates may encourage
mortgagors to refinance their adjustable-rate mortgages to "lock in" a lower
fixed interest rate or to take advantage of the availability of other
adjustable-rate mortgage loans, or, in the case of convertible adjustable-rate
mortgage loans, to exercise their option to convert the adjustable interest
rates to fixed interest rates. The conversion feature may also be exercised in a
rising interest rate environment as mortgagors attempt to limit their risk of
higher rates. A rising interest rate environment may also result in an increase
in the rate of defaults on the mortgage loans. If the related subservicer or the
master servicer purchases convertible ARM Loans, a mortgagor's exercise of the
conversion option will result in a distribution of the principal portion thereof
to the bondholders, as described in this prospectus. Alternatively, to the
extent subservicers or the master servicer fail to purchase converting ARM
Loans, the mortgage pool will include fixed-rate mortgage loans.
55
The rate of defaults on the mortgage loans will also affect the rate and
timing of principal payments on the mortgage loans and thus the yield on the
bonds. In general, defaults on single family loans are expected to occur with
greater frequency in their early years. However, there is a risk that mortgage
loans, including multifamily loans, that require balloon payments may default at
maturity, or that the maturity of such a mortgage loan may be extended in
connection with a workout. The rate of default on single family loans which are
refinance or limited documentation mortgage loans, and on mortgage loans,
including multifamily 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 will be affected by
the general economic condition of the region of the country in which the related
mortgaged properties are located. The risk of delinquencies and loss is greater
and prepayments are less likely in regions where a weak or deteriorating economy
exists, as may be evidenced by, among other factors, increasing unemployment or
falling property values.
With respect to some mortgage loans in a mortgage pool, the mortgage rate
at origination may be below the rate that would result if the index and margin
relating thereto were applied at origination. Under the applicable underwriting
standards, the mortgagor under each mortgage loan generally will be qualified,
or the mortgage loan otherwise approved, on the basis of the mortgage rate in
effect at origination. The repayment of the mortgage loan may thus be dependent
on the ability of the mortgagor to make larger level monthly payments following
the adjustment of the mortgage rate. In addition, 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 under
applicable underwriting guidelines, and may accordingly increase the risk of
default with respect to the related mortgage loan.
The mortgage rates on ARM Loans subject to negative amortization generally
adjust monthly and their amortization schedules adjust less frequently. During a
period of rising interest rates as well as immediately after origination
(initial mortgage rates are generally lower than the sum of the Indices
applicable at origination and the related Note Margins), the amount of interest
accruing on the principal balance of the mortgage loans may exceed the amount of
their minimum scheduled monthly payment. As a result, a portion of the accrued
interest on negatively amortizing mortgage loans may become Deferred Interest
which will be added to the principal balance thereof and will bear interest at
the applicable mortgage rate. The addition of the Deferred Interest to the
principal balance of any related class or classes of bonds will lengthen the
weighted average life thereof and may adversely affect yield to holders thereof,
depending upon the price at which the bonds were purchased. In addition, with
respect to ARM Loans subject to negative amortization, during a period of
declining interest rates, it might be expected that each minimum scheduled
monthly payment on the mortgage loan would exceed the amount of scheduled
principal and accrued interest on the principal balance thereof, and since the
excess will be applied to reduce the principal balance of the related class or
classes of bonds, the weighted average life of the bonds will be reduced and may
adversely affect yield to holders thereof, depending upon the price at which the
bonds were purchased.
MATURITY AND PREPAYMENT CONSIDERATIONS
As indicated above under "The Mortgage Pools," the original terms to
maturity of the mortgage loans in a given mortgage pool will vary depending upon
the type of mortgage loans included in the mortgage pool. The prospectus
supplement for a series of bonds will contain information with respect to the
types and maturities of the mortgage loans in the related mortgage pool. All of
the mortgage loans may be prepaid without penalty in full or in part at any
time. The prepayment experience with respect to the mortgage loans in a mortgage
pool will affect the life and yield of the related series of bonds.
With respect to balloon loans, payment of the balloon payment (which,
based on the amortization schedule of the mortgage loans, is expected to be a
substantial amount) will generally depend on the mortgagor's ability to obtain
refinancing of the mortgage loans or to sell the mortgaged property prior to the
maturity of the balloon loan. The ability to obtain refinancing will depend on a
number of factors prevailing at the time refinancing or sale is required,
including real estate values, the mortgagor's financial situation, prevailing
mortgage loan interest rates, the mortgagor's equity
56
in the related mortgaged property, tax laws and prevailing general economic
conditions. None of the company, the master servicer, or any of their affiliates
will be obligated to refinance or repurchase any mortgage loan or to sell the
mortgaged property.
The extent of prepayments of principal of the mortgage loans may be
affected by a number of factors, including solicitations and the availability of
mortgage credit, the relative economic vitality of the area in which the
mortgaged properties are located and, in the case of multifamily, commercial and
mixed-use loans, the quality of management of the mortgage properties, the
servicing of the mortgage loans, possible changes in tax laws and other
opportunities for investment. In addition, the rate of principal payments on the
mortgage loans may be affected by the existence of lock-out periods and
requirements that principal prepayments be accompanied by prepayment premiums,
as well as due-on- sale and due-on-encumbrance provisions, and by the extent to
which the provisions may be practicably enforced. See "Servicing of Mortgage
Loans--Collection and Other Servicing Procedures; Mortgage Loan Modifications"
and "Legal Aspects of the Mortgage Loans--Enforceability of Some Provisions" for
a description of provisions of the servicing agreement and legal aspects of
mortgage loans that may affect the prepayment experience on the mortgage loans.
The rate of prepayment on a pool of mortgage loans is also affected by
prevailing market interest rates for mortgage loans of a comparable type, term
and risk level. When the prevailing market interest rate is below a mortgage
coupon, a borrower may have an increased incentive to refinance its mortgage
loan. In addition, as prevailing market interest rates decline, even borrowers
with ARM Loans that have experienced a corresponding interest rate decline may
have an increased incentive to refinance for purposes of either (1) converting
to a fixed rate loan and thereby "locking in" the rate or (2) taking advantage
of the initial "teaser rate" (a mortgage interest rate below what it would
otherwise be if the applicable index and gross margin were applied) on another
adjustable rate mortgage loan. Moreover, although the mortgage rates on ARM
Loans will be subject to periodic adjustments, the adjustments generally will
not increase or decrease the mortgage rates by more than a fixed percentage
amount on each adjustment date, will not increase the mortgage rates over a
fixed percentage amount during the life of any ARM Loan and will be based on an
index (which may not rise and fall consistently with mortgage interest rates)
plus the related Note Margin (which may be different from margins being used at
the time for newly originated adjustable rate mortgage loans). As a result, the
mortgage rates on the ARM Loans at any time may not equal the prevailing rates
for similar, newly originated adjustable rate mortgage loans. In high interest
rate environments, the prevailing rates on fixed-rate mortgage loans may be
sufficiently high in relation to the then-current mortgage rates on newly
originated ARM Loans that the rate of prepayment may increase as a result of
refinancings. There can be no assurance as to the rate of prepayments on the
mortgage loans during any period or over the life of any series of bonds.
If the applicable servicing agreement for a series of bonds provides for a
pre-funding account or other means of funding the transfer of additional
mortgage loans to the related trust fund, as described under "Description of the
Bonds--Pre-Funding Account" in this prospectus, and the trust fund is unable to
acquire the additional mortgage loans within any applicable time limit, the
amounts set aside for the purpose may be applied as principal payments on one or
more classes of bonds of the series. See "Yield Considerations."
There can be no assurance as to the rate of prepayment of the mortgage
loans. The company is not aware of any publicly available statistics relating to
the principal prepayment experience of diverse portfolios of mortgage loans such
as the mortgage loans over an extended period of time. All statistics known to
the company that have been compiled with respect to prepayment experience on
mortgage loans indicate that while some mortgage loans may remain outstanding
until their stated maturities, a substantial number will be paid prior to their
respective stated maturities. No representation is made as to the particular
factors that will affect the prepayment of the mortgage loans or as to the
relative importance of these factors.
As described in this prospectus and in the prospectus supplement, the
master servicer, the company or a person specified in the related prospectus
supplement (other than the holder of any class of offered bonds) may have the
option to purchase the assets in a trust fund and effect early retirement of the
related series of bonds. See "The Agreements--Termination; Retirement of Bonds."
57
LEGAL ASPECTS OF MORTGAGE LOANS
The following discussion summarizes legal aspects of mortgage loans that
is general in nature. The summaries do not purport to be complete. They do not
reflect the laws of any particular state nor the laws of all states in which the
mortgaged properties may be situated. This is because these legal aspects are
governed in part by the law of the state that applies to a particular mortgaged
property and the laws of the states may vary substantially. You should refer to
the applicable federal and state laws governing the mortgage loans.
Mortgages
Each single family, multifamily, commercial and mixed-use loan and, if
applicable, the Contracts (in each case other than cooperative mortgage loans),
will be evidenced by a note or bond and secured by an instrument granting a
security interest in real property, which may be a mortgage, deed of trust or a
deed to secure debt, depending upon the prevailing practice and law in the state
in which the related mortgaged property is located, and may have first, second
or third priority. Mortgages and deeds to secure debt are referred to as
"mortgages." Contracts evidence both the obligation of the obligor to repay the
loan evidenced thereby and grant a security interest in the related Manufactured
Homes to secure repayment of the loan. However, as Manufactured Homes have
become larger and often have been attached to their sites without any apparent
intention by the borrowers to move them, courts in many states have held that
Manufactured Homes may become subject to real estate title and recording laws.
See "--Contracts" below. In some states, a mortgage or deed of trust creates a
lien upon the real property encumbered by the mortgage or deed of trust.
However, in other states, the mortgage or deed of trust conveys legal title to
the property respectively, to the mortgagee or to a trustee for the benefit of
the mortgagee subject to a condition subsequent (i.e., the payment of the
indebtedness secured thereby). The lien created by the mortgage or deed of trust
is not prior to the lien for real estate taxes and assessments and other charges
imposed under governmental police powers. Priority between mortgages depends on
their terms or on the terms of separate subordination or inter-creditor
agreements, the knowledge of the parties in some cases and generally on the
order of recordation of the mortgage in the appropriate recording office. There
are two parties to a mortgage, the mortgagor, who is the borrower and homeowner,
and the mortgagee, who is the lender. Under the mortgage instrument, the
mortgagor delivers to the mortgagee a note or bond and the mortgage. In the case
of a land trust, there are three parties because title to the property is held
by a land trustee under a land trust agreement of which the borrower is the
beneficiary; at origination of a mortgage loan, the borrower executes a separate
undertaking to make payments on the mortgage note. Although a deed of trust is
similar to a mortgage, a deed of trust has three parties: the trustor who is the
borrower-homeowner; the beneficiary who is the lender; and a third-party grantee
called the trustee. Under a deed of trust, the borrower grants the property,
irrevocably until the debt is paid, in trust, generally with a power of sale, to
the trustee to secure payment of the obligation. The trustee's authority under a
deed of trust, the grantee's authority under a deed to secure debt and the
mortgagee's authority under a mortgage are governed by the law of the state in
which the real property is located, the express provisions of the deed of trust
or mortgage, and, in deed of trust transactions, the directions of the
beneficiary.
Cooperative Mortgage Loans
If specified in the prospectus supplement relating to a series of
certificates, the mortgage loans and Contracts may include cooperative mortgage
loans. Each mortgage note evidencing a cooperative mortgage loan will be secured
by a security interest in shares issued by the related Cooperative, and in the
related proprietary lease or occupancy agreement granting exclusive rights to
occupy a specific dwelling unit in the Cooperative's building. The security
agreement will create a lien upon the shares of the Cooperative, the priority of
which will depend on, among other things, the terms of the particular security
agreement as well as the order of recordation and/or filing of the agreement (or
financing statements related thereto) in the appropriate recording office.
All Cooperative buildings relating to the cooperative mortgage loans are
located primarily in the State of New York. Generally, each Cooperative owns in
fee or has a long-term leasehold interest in all the real property and owns in
fee or leases the building and all separate dwelling units therein. The
Cooperative is directly responsible for property management and, in most cases,
payment
58
of real estate taxes, other governmental impositions and hazard and liability
insurance. If there is an underlying mortgage (or mortgages) on the
Cooperative's building or underlying land, as is generally the case, or an
underlying lease of the land, as is the case in some instances, the Cooperative,
as mortgagor or lessor, as the case may be, is also responsible for fulfilling
the mortgage or rental obligations. An underlying mortgage loan is ordinarily
obtained by the Cooperative in connection with either the construction or
purchase of the Cooperative's building or the obtaining of capital by the
Cooperative. The interest of the occupant under proprietary leases or occupancy
agreements as to which that Cooperative is the landlord is generally subordinate
to the interest of the holder of an underlying mortgage and to the interest of
the holder of a land lease. If the Cooperative is unable to meet the payment
obligations (1) arising under an underlying mortgage, the mortgagee holding an
underlying mortgage could foreclose on that mortgage and terminate all
subordinate proprietary leases and occupancy agreements or (2) arising under its
land lease, the holder of the landlord's interest under the land lease could
terminate it and all subordinate proprietary leases and occupancy agreements. In
addition, an underlying mortgage on a Cooperative may provide financing in the
form of a mortgage that does not fully amortize, with a significant portion of
principal being due in one final payment at maturity. The inability of the
Cooperative to refinance a mortgage and its consequent inability to make the
final payment could lead to foreclosure by the mortgagee. Similarly, a land
lease has an expiration date and the inability of the Cooperative to extend its
term or, in the alternative, to purchase the land, could lead to termination of
the Cooperative's interest in the property and termination of all proprietary
leases and occupancy agreements. In either event, a foreclosure by the holder of
an underlying mortgage or the termination of the underlying lease could
eliminate or significantly diminish the value of any collateral held by the
mortgagee who financed the purchase by an individual tenant-stockholder of
shares of the Cooperative or, in the case of the mortgage loans, the collateral
securing the cooperative mortgage loans.
Each Cooperative is owned by shareholders (referred to as
tenant-stockholders) who, through ownership of stock or shares in the
Cooperative, receive proprietary leases or occupancy agreements which confer
exclusive rights to occupy specific dwellings. Generally, a tenant-stockholder
of a Cooperative must make a monthly payment to the Cooperative pursuant to the
proprietary lease, which payment represents the tenant-stockholder's
proportional share of the Cooperative's payments for its underlying mortgage,
real property taxes, maintenance expenses and other capital or ordinary
expenses. An ownership interest in a Cooperative and accompanying occupancy
rights may be financed through a cooperative mortgage loan evidenced by a
mortgage note and secured by an assignment of and a security interest in the
occupancy agreement or proprietary lease and a security interest in the related
shares of the related Cooperative. The mortgagee generally takes possession of
the share certificate and a counterpart of the proprietary lease or occupancy
agreement and a financing statement covering the proprietary lease or occupancy
agreement and the Cooperative shares is filed in the appropriate state and local
offices to perfect the mortgagee'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 mortgage note, dispose of the collateral at a public
or private sale or otherwise proceed against the collateral or
tenant-stockholder as an individual as provided in the security agreement
covering the assignment of the proprietary lease or occupancy agreement and the
pledge of Cooperative shares. See "--Foreclosure on Shares of Cooperatives"
below.
Tax Aspects of Cooperative Ownership
In general, a "tenant-stockholder" (as defined in Section 216(b)(2) of the
Code) of a corporation that qualifies as a "cooperative housing corporation"
within the meaning of Section 216(b)(1) of the Code is allowed a deduction for
amounts paid or accrued within his taxable year to the corporation representing
his proportionate share of interest expenses and real estate taxes allowable as
a deduction under Section 216(a) of the Code to the corporation under Sections
163 and 164 of the Code. In order for a corporation to qualify under Section
216(b)(1) of the Code for its taxable year in which the items are allowable as a
deduction to the corporation, the section requires, among other things, that at
least 80% of the gross income of the corporation be derived from its
tenant-stockholders. By virtue of this requirement, the status of a corporation
for purposes of Section 216(b)(1) of the Code must be determined on a
year-to-year basis. Consequently, there can be no assurance that Cooperatives
relating to the cooperative mortgage loans will qualify under the section for
any particular year. In the event that the Cooperative fails to qualify for one
or more years, the value of the collateral securing any related cooperative
mortgage loans could be significantly
59
impaired because no deduction would be allowable to tenant- stockholders under
Section 216(a) of the Code with respect to those years. In view of the
significance of the tax benefits accorded tenant- stockholders of a corporation
that qualifies under Section 216(b)(1) of the Code, the likelihood that a
failure would be permitted to continue over a period of years appears remote.
Leases and Rents
Mortgages that encumber income-producing multifamily and commercial
properties often contain an assignment of rents and leases, pursuant to which
the borrower assigns to the lender the borrower's right, title and interest as
landlord under each lease and the income derived therefrom, while (unless rents
are to be paid directly to the lender) retaining a revocable license to collect
the rents for so long as there is no default. If the borrower 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.
Contracts
Under the laws of most states, manufactured housing constitutes personal
property and is subject to the motor vehicle registration laws of the state or
other jurisdiction in which the unit is located. In a few states, where
certificates of title are not required for manufactured homes, security
interests are perfected by the filing of a financing statement under Article 9
of the UCC which has been adopted by all states. Financing statements are
effective for five years and must be renewed prior to the end of each five year
period. The certificate of title laws adopted by the majority of states provide
that ownership of motor vehicles and manufactured housing shall be evidenced by
a certificate of title issued by the motor vehicles department (or a similar
entity) of the state. In the states that have enacted certificate of title laws,
a security interest in a unit of manufactured housing, so long as it is not
attached to land in so permanent a fashion as to become a fixture, is generally
perfected by the recording of the interest on the certificate of title to the
unit in the appropriate motor vehicle registration office or by delivery of the
required documents and payment of a fee to the office, depending on state law.
The master servicer will be required under the related servicing agreement
to effect the notation or delivery of the required documents and fees, and to
obtain possession of the certificate of title, as appropriate under the laws of
the state in which any Manufactured Home is registered. In the event the master
servicer fails, due to clerical errors or otherwise, to effect the 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
trustee 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 by the borrowers to
move them, courts in many states have held that manufactured homes 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. Generally, Contracts will contain provisions prohibiting the obligor
from permanently attaching the Manufactured Home to its site. So long as the
obligor 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 that is prior to the security interest originally retained by
the Seller and transferred to the company.
The company will assign or cause to be assigned a security interest in the
Manufactured Homes to the trustee, on behalf of the bondholders. Neither the
company, the master servicer nor the trustee will amend the certificates of
title to identify the trustee, on behalf of the bondholders, as the new secured
party and, accordingly, the company or the Seller will continue to be named as
the
60
secured party on the certificates of title relating to the Manufactured Homes.
In most states, the assignment is an effective conveyance of the security
interest without amendment of any lien noted on the related certificate of title
and the new secured party succeeds to the company's rights as the secured party.
However, in some states there exists a risk that, in the absence of an amendment
to the certificate of title, the assignment of the security interest might not
be held effective against creditors of the company or Seller.
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 company on
the certificate of title or delivery of the required documents and fees will be
sufficient to protect the trustee against the rights of subsequent purchasers of
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 company
has failed to perfect or cause to be perfected the security interest assigned to
the trust fund, the 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, on
behalf of the bondholders, 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 the Manufactured Home initially is registered,
under the laws of most states the perfected security interest in the
Manufactured Home would continue for four months after the relocation and
thereafter until the owner re-registers the Manufactured Home in the state. If
the owner were to relocate a Manufactured Home to another state and re-register
the Manufactured Home in the state, and if the company did not take steps to
re-perfect its security interest in the 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 company must surrender possession if it holds the certificate
of title to the Manufactured Home or, in the case of Manufactured Homes
registered in states that provide for notation of lien, the company would
receive notice of surrender if the security interest in the Manufactured Home is
noted on the certificate of title. Accordingly, the company would have the
opportunity to re-perfect its security interest in the Manufactured Home in the
state of relocation. In states that do not require a certificate of title for
registration of a manufactured home, re-registration could defeat perfection.
Similarly, when an obligor under a manufactured housing conditional sales
contract sells a manufactured home, the obligee must surrender possession of the
certificate of title or it will receive notice as a result of its lien noted
thereon and accordingly will have an opportunity to require satisfaction of the
related manufactured housing conditional sales contract before release of the
lien. Under each related servicing agreement, the master servicer will be
obligated to take these steps, at the master 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 take priority even over a perfected security interest. The
company will obtain the representation of the related Seller that it has no
knowledge of any of these liens with respect to any Manufactured Home securing a
Contract. However, these liens could arise at any time during the term of a
Contract. No notice will be given to the trustee or bondholders in the event
this type of lien arises.
Foreclosure on Mortgages and Some Contracts
Foreclosure of a deed of trust is generally accomplished by a non-judicial
trustee's sale under a specific provision in the deed of trust which authorizes
the trustee to sell the property upon any default by the borrower under the
terms of the note or deed of trust. In addition to any notice requirements
contained in a deed of trust, in some states, the trustee must record a notice
of default and send a copy to the borrower trustor and to any person who has
recorded a request for a copy of notice of default and notice of sale. In
addition, the trustee must provide notice in some states to any other individual
having an interest of record in the real property, including any junior
lienholders. If the deed of trust is not reinstated within a specified period, a
notice of sale must be posted in a public place and, in most states, published
for a specific period of time in one or more newspapers in a specified manner
prior to the date of trustee's sale. In addition, some state laws require that a
61
copy of the notice of sale be posted on the property and sent to all parties
having an interest of record in the real property.
In some states, the borrower-trustor has the right to reinstate the loan
at any time following default until shortly before the trustee's sale. In
general, in these states, the borrower, or any other person having a junior
encumbrance on the real estate, may, during a reinstatement period, cure the
default by paying the entire amount in arrears plus the costs and expenses
incurred in enforcing the obligation.
Foreclosure of a mortgage is generally accomplished by judicial action.
Generally, the action is initiated by the service of legal pleadings upon all
parties having an interest of record in the real property. Delays in completion
of the foreclosure may occasionally result from difficulties in locating
necessary parties. Judicial foreclosure proceedings are often not contested by
any of the applicable parties. If the mortgagee's right to foreclose is
contested, the legal proceedings necessary to resolve the issue can be
time-consuming.
In the case of foreclosure under either a mortgage or a deed of trust, the
sale by the referee or other designated officer or by the trustee is a public
sale. However, because of the difficulty a potential buyer at the sale would
have in determining the exact status of title and because the physical condition
of the property may have deteriorated during the foreclosure proceedings, it is
uncommon for a third party to purchase the property at a foreclosure sale.
Rather, it is common for the lender to purchase the property from the trustee or
referee for a credit bid less than or equal to the unpaid principal amount of
the note plus the accrued and unpaid interest and the expense of foreclosure, in
which case the mortgagor's debt will be extinguished unless the lender purchases
the property for a lesser amount in order to preserve its right against a
borrower to seek a deficiency judgment and the remedy is available under state
law and the related loan documents. In the same states, there is a statutory
minimum purchase price which the lender may offer for the property and
generally, state law controls the amount of foreclosure costs and expenses,
including attorneys' fees, which may be recovered by a lender. Thereafter,
subject to the right of the borrower in some states to remain in possession
during the redemption period, the lender will assume the burdens of ownership,
including obtaining hazard insurance, paying taxes and making the repairs at its
own expense as are necessary to render the property suitable for sale.
Generally, the lender will 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 and, in some states, the
lender may be entitled to a deficiency judgment. Any loss may be reduced by the
receipt of any mortgage insurance proceeds or other forms of credit enhancement
for a series of bonds. See "Description of Credit Enhancement".
A junior mortgagee may not foreclose on the property securing a junior
mortgage unless it forecloses subject to the senior mortgages. The junior
mortgagee must either pay the entire amount due on the senior mortgages prior to
or at the time of the foreclosure sale or undertake to pay on any senior
mortgages that the mortgagor is currently in a state of default under. Under
either course of action, the junior mortgagee may add the amounts paid to the
balance due on the junior loan, and may be subrogated to the rights of the
senior mortgagees. In addition, in the event that the foreclosure of a junior
mortgage triggers the enforcement of a "due-on-sale" clause, the junior
mortgagee may be required to pay the full amount of the senior mortgages to the
senior mortgagees. Accordingly, with respect to those single family loans and
multifamily loans which are junior mortgage loans, if the lender purchases the
property, the lender's title will be subject to all senior liens and claims and
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 or deed of trust under
which the sale was conducted. Any remaining proceeds are generally payable to
the holders of junior mortgages or deeds of trust and other liens and claims in
order of their priority, whether or not the borrower is in default. Any
additional proceeds are generally payable to the mortgagor or trustor. The
payment of the proceeds to the holders of junior mortgages may occur in the
foreclosure action of the senior mortgagee or may require the institution of
separate legal proceeds.
In foreclosure, courts have imposed general equitable principles. The
equitable principles are generally designed to relieve the borrower from the
legal effect of its defaults under the loan
62
documents. Examples of judicial remedies that have been 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 that
lenders reinstate loans or recast payment schedules in order to accommodate
borrowers who are suffering from temporary financial disability. In other cases,
courts have limited the right of a lender to foreclose if the default under the
mortgage instrument is not monetary, such as the borrower's failure to
adequately maintain the property or the borrower's execution of a second
mortgage or deed of trust affecting the property. Finally, some courts have been
faced with the issue of whether or not federal or state constitutional
provisions reflecting due process concerns for adequate notice require that
borrowers under deeds of trust or mortgages receive notices in addition to the
statutorily-prescribed minimums. For the most part, these cases have upheld the
notice provisions as being reasonable or have found that 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 protection to the
borrower.
Foreclosure on Shares of Cooperatives
The Cooperative shares owned by the tenant-stockholder, together with the
rights of the tenant- stockholder under the proprietary lease or occupancy
agreement, are pledged to the lender and 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 in the proprietary lease or occupancy
agreement. The Cooperative may cancel the proprietary lease or occupancy
agreement, even while pledged, for failure by the tenant- stockholder to pay its
obligations or charges owed by the tenant-stockholder, including mechanics'
liens against the Cooperative's building incurred by the tenant-stockholder.
Generally, obligations and charges arising under a proprietary lease or
occupancy agreement which are owed to the Cooperative are made liens upon the
shares to which the proprietary lease or occupancy agreement relates. In
addition, the Cooperative may generally terminate a proprietary lease or
occupancy agreement in the event the borrower breaches its covenants in the
proprietary lease or occupancy agreement. Typically, the lender and the
Cooperative enter into a recognition agreement which, together with any lender
protection provisions contained in the proprietary lease or occupancy agreement,
establishes the rights and obligations of both parties in the event of a default
by the tenant-stockholder on its obligations under the proprietary lease or
occupancy agreement. A default by the tenant-stockholder under the proprietary
lease or occupancy agreement will usually constitute a default under the
security agreement between the lender and the tenant- stockholder.
The recognition agreement generally provides that, in the event that the
tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the Cooperative will take no action to terminate the lease or
agreement until the lender has been provided with notice of and 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 a sale of the shares and the
proprietary lease or occupancy agreement allocated to the dwelling, subject,
however, to the Cooperative's right to sums due under the proprietary lease or
occupancy agreement or which have become liens on the shares relating to the
proprietary lease or occupancy agreement. The total amount owed to the
Cooperative by the tenant-stockholder, which the lender generally cannot
restrict and does not monitor, could reduce the amount realized upon a sale of
the collateral below the outstanding principal balance of the cooperative
mortgage loan and accrued and unpaid interest on the loan.
Recognition agreements also generally provide that in the event the lender
succeeds to the tenant- shareholder's shares and proprietary lease or occupancy
agreement as the result of realizing upon its collateral for a cooperative
mortgage loan, the lender must obtain the approval or consent of the board of
directors of the Cooperative as required by the proprietary lease before
transferring the Cooperative shares or assigning the proprietary lease. The
approval or consent is usually based on the prospective purchaser's income and
net worth, among other factors, and may significantly reduce the number of
potential purchasers, which could limit the ability of the lender to sell and
realize upon the value of the collateral. Generally, the lender is not limited
in any rights it may have to dispossess the tenant- stockholder.
63
Because of the nature of cooperative mortgage loans, lenders do not
require the tenant- stockholder (i.e., the borrower) to obtain title insurance
of any type. Consequently, the existence of any prior liens or other
imperfections of title affecting the Cooperative's building or real estate also
may adversely affect the marketability of the shares allocated to the dwelling
unit in the event of foreclosure.
In New York, foreclosure on the Cooperative shares is accomplished by
public sale in accordance with the provisions of Article 9 of the New York UCC
and the security agreement relating to those shares. Article 9 of the New York
UCC requires that a sale be conducted in a "commercially reasonable" manner.
Whether a 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 sale and the sale price. Generally, a sale conducted
according to the usual practice of banks selling similar collateral in the same
area will be considered reasonably conducted.
Article 9 of the UCC provides that the proceeds of the sale will be
applied first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to reimbursement
is subject to the right of the Cooperative corporation to receive sums due under
the proprietary lease or occupancy agreement. If there are proceeds remaining,
the lender must account to the tenant-stockholder for the surplus. Conversely,
if a portion of the indebtedness remains unpaid, the tenant-stockholder is
generally responsible for the deficiency. See "--Anti-Deficiency Legislation and
Other Limitations on Lenders" below.
Repossession with Respect to Contracts
General. Repossession of manufactured housing is governed by state law. A
few states have enacted legislation that requires that the debtor be given an
opportunity to cure its default (typically 30 days to bring the account current)
before repossession can commence. So long as a manufactured home has not become
so attached to real estate that it would be treated as a part of the real estate
under the law of the state where it is located, repossession of the home in the
event of a default by the obligor generally will be governed by the UCC (except
in Louisiana). Article 9 of the UCC provides the statutory framework for the
repossession of manufactured housing. While the UCC as adopted by the various
states may vary in small particulars, the general repossession procedure
established by the UCC is as follows:
o Except in those states where the debtor must receive notice of the
right to cure a default, repossession can commence immediately upon
default without prior notice. Repossession may be effected either
through self-help (peaceable retaking without court order),
voluntary repossession or through judicial process (repossession
pursuant to court-issued writ of replevin). The self-help and/or
voluntary repossession methods are more commonly employed, and are
accomplished simply by retaking possession of the manufactured home.
In cases in which the debtor objects or raises a defense to
repossession, a court order must be obtained from the appropriate
state court, and the manufactured home must then be repossessed in
accordance with that order. Whether the method employed is
self-help, voluntary repossession or judicial repossession, the
repossession can be accomplished either by an actual physical
removal of the manufactured home to a secure location for
refurbishment and resale or by removing the occupants and their
belongings from the manufactured home and maintaining possession of
the manufactured home on the location where the occupants were
residing. Various factors may affect whether the manufactured home
is physically removed or left on location, such as the nature and
term of the lease of the site on which it is located and the
condition of the unit. In many cases, leaving the manufactured home
on location is preferable, in the event that the home is already set
up, because the expenses of retaking and redelivery will be saved.
However, in those cases where the home is left on location, expenses
for site rentals will usually be incurred.
64
o Once repossession has been achieved, preparation for the subsequent
disposition of the manufactured home can commence. The disposition
may be by public or private sale provided the method, manner, time,
place and terms of the sale are commercially reasonable.
o Sale proceeds are to be applied first to repossession expenses
(expenses incurred in retaking, storage, preparing for sale to
include refurbishing costs and selling) and then to satisfaction of
the indebtedness. While some states impose prohibitions or
limitations on deficiency judgments if the net proceeds from resale
do not cover the full amount of the indebtedness, the remainder may
be sought from the debtor in the form of a deficiency judgement in
those states that do not prohibit or limit the judgments. The
deficiency judgment is a personal judgment against the debtor for
the shortfall. Occasionally, after resale of a manufactured home and
payment of all expenses and indebtedness, there is a surplus of
funds. In that case, the UCC requires the party suing for the
deficiency judgment to remit the surplus to the debtor. Because the
defaulting owner of a manufactured home generally has very little
capital or income available following repossession, a deficiency
judgment may not be sought in many cases or, if obtained, will be
settled at a significant discount in light of the defaulting owner's
strained financial condition.
Louisiana Law. Any contract secured by a manufactured home located in
Louisiana will be governed by Louisiana law rather than Article 9 of the UCC.
Louisiana laws provide similar mechanisms for perfection and enforcement of
security interests in manufactured housing used as collateral for an installment
sale contract or installment loan agreement.
Under Louisiana law, a manufactured home that has been permanently affixed
to real estate will nevertheless remain subject to the motor vehicle
registration laws unless the obligor and any holder of a security interest in
the property execute and file in the real estate records for the parish in which
the property is located a document converting the unit into real property. A
manufactured home that is converted into real property but is then removed from
its site can be converted back to personal property governed by the motor
vehicle registration laws if the obligor executes and files various documents in
the appropriate real estate records and all mortgagees under real estate
mortgages on the property and the land to which it was affixed file releases
with the motor vehicle commission.
So long as a manufactured home remains subject to the Louisiana motor
vehicle laws, liens are recorded on the certificate of title by the motor
vehicle commissioner and repossession can be accomplished by voluntary consent
of the obligor, executory process (repossession proceedings which must be
initiated through the courts but which involve minimal court supervision) or a
civil suit for possession. In connection with a voluntary surrender, the obligor
must be given a full release from liability for all amounts due under the
contract. In executory process repossessions, a sheriff's sale (without court
supervision) is permitted, unless the obligor brings suit to enjoin the sale,
and the lender is prohibited from seeking a deficiency judgment against the
obligor unless the lender obtained an appraisal of the manufactured home prior
to the sale and the property was sold for at least two- thirds of its appraised
value.
Rights of Redemption
Single Family, Multifamily and Commercial Properties. The purposes of a
foreclosure action in respect of a mortgaged property is to enable the lender to
realize upon its security and to bar the borrower, and all persons who have
interests in the property that are subordinate to that of the foreclosing
lender, from exercise of their "equity of redemption". The doctrine of equity of
redemption provides that, until the property encumbered by a mortgage has been
sold in accordance with a properly conducted foreclosure and foreclosure sale,
those having interests that are subordinate to that of the foreclosing lender
have an equity of redemption and may redeem the property by paying the entire
debt with interest. 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 terminated.
65
The equity of redemption is a common-law (non-statutory) right which
should be distinguished from post-sale statutory rights of redemption. In some
states, after sale pursuant to a deed of trust or foreclosure of a mortgage, the
borrower and foreclosed junior lienors are given a statutory period in which to
redeem the property. In some states, statutory redemption may occur only upon
payment of the foreclosure sale price. In other states, redemption may be
permitted if the former borrower pays only a portion of the sums due. The effect
of a statutory right of redemption is to diminish the ability of the lender to
sell the foreclosed property because the exercise of a right of redemption would
defeat the title of any purchase through a foreclosure. 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.
Manufactured Homes. While state laws do not usually require notice to be
given to debtors prior to repossession, many states do require delivery of a
notice of default and of the debtor's right to cure defaults before
repossession. The law in most states also requires that the debtor be given
notice of sale prior to the resale of the home so that the owner may redeem at
or before resale. In addition, the sale must comply with the requirements of the
UCC.
Anti-deficiency Legislation and Other Limitations on Lenders
Single Family, Multifamily and Commercial Loans. Some 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 (including California),
statutes limit the right of the beneficiary or mortgagee to obtain a deficiency
judgment against the borrower following non-judicial foreclosure by power of
sale. A deficiency judgment is a personal judgment against the former borrower
equal in most cases to the difference between the net amount realized upon the
public sale of the real property and the amount due to the lender. In the case
of a mortgage loan secured by a property owned by a trust where the mortgage
note is executed on behalf of the trust, a deficiency judgment against the trust
following foreclosure or sale under a deed of trust, even if obtainable under
applicable law, may be of little value to the mortgagee or beneficiary if there
are no trust assets against which the deficiency judgment may be executed. Some
state statutes require the beneficiary or mortgagee to exhaust the security
afforded under a deed of trust or mortgage by foreclosure in an attempt to
satisfy the full debt before bringing a personal action against the borrower. In
other states, the lender has the option of bringing a personal action against
the borrower on the debt without first exhausting the security; however in some
of these states, the lender, following judgment on the personal action, may be
deemed to have elected a remedy and may be precluded from exercising remedies
with respect to the security. Consequently, the practical effect of the election
requirement, in those states permitting the election, is that lenders will
usually proceed against the security first rather than bringing a personal
action against the borrower. Finally, in some states, statutory provisions limit
any deficiency judgment against the former borrower following a foreclosure to
the excess of the outstanding debt over the fair value of the property at the
time of the public sale. The purpose of these statutes is generally to prevent a
beneficiary or mortgagee from obtaining a large deficiency judgment against the
former borrower as a result of low or no bids at the judicial sale.
Generally, Article 9 of the UCC governs foreclosure on Cooperative shares
and the related proprietary lease or occupancy agreement. Some courts have
interpreted Article 9 to prohibit or limit a deficiency award in some
circumstances, including circumstances where the disposition of the collateral
(which, in the case of a cooperative mortgage loan, would be the shares of the
Cooperative and the related proprietary lease or occupancy agreement) was not
conducted in a commercially reasonable manner.
In addition to laws limiting or prohibiting deficiency judgments, numerous
other federal and state statutory provisions, including the federal bankruptcy
laws and state laws affording relief to debtors, may interfere with or affect
the ability of the secured mortgage lender to realize upon collateral or enforce
a deficiency judgment. For example, under the federal Bankruptcy Code, virtually
all actions (including foreclosure actions and deficiency judgment proceedings)
to collect a debt are automatically stayed upon the filing of the bankruptcy
petition and, often, no interest or principal payments are made during the
course of the bankruptcy case. The delay and the
66
consequences thereof caused by the automatic stay can be significant. Also,
under the Bankruptcy Code, the filing of a petition in a bankruptcy by or on
behalf of a junior lienor may stay the senior lender from taking action to
foreclose out the junior lien. Moreover, with respect to federal bankruptcy law,
a court with federal bankruptcy jurisdiction may permit a debtor through his or
her Chapter 11 or Chapter 13 rehabilitative plan to cure a monetary default in
respect of a mortgage loan on a debtor's residence by paying arrearage within a
reasonable time period and reinstating the original mortgage loan payment
schedule even though the lender accelerated the mortgage loan and final judgment
of foreclosure had been entered in state court (provided no sale of the
residence had yet occurred) prior to the filing of the debtor's petition. Some
courts with federal bankruptcy jurisdiction have approved plans, based on the
particular facts of the reorganization case, that effected the curing of a
mortgage loan default by paying arrearage over a number of years.
Courts with federal bankruptcy jurisdiction have also indicated that the
terms of a mortgage loan secured by property of the debtor may be modified.
These courts have allowed modifications that include reducing the amount of each
monthly payment, changing the rate of interest, altering the repayment schedule,
forgiving all or a portion of the debt and reducing the lender's security
interest to the value of the residence, thus leaving the lender a general
unsecured creditor for the difference between the value of the residence and the
outstanding balance of the loan. Generally, however, the terms of a mortgage
loan secured only by a mortgage on real property that is the debtor's principal
residence may not be modified pursuant to a plan confirmed pursuant to Chapter
13 except with respect to mortgage payment arrearages, which may be cured within
a reasonable time period.
In the case of income-producing multifamily properties, federal bankruptcy
law may also have the effect of interfering with or affecting the ability of the
secured lender to enforce the borrower's assignment of rents and leases related
to the mortgaged property. Under Section 362 of the Bankruptcy Code, the lender
will be stayed from enforcing the assignment, and the legal proceedings
necessary to resolve the issue could be time-consuming, with resulting delays in
the lender's receipt of the rents.
Tax liens arising under the Code may have priority over the lien of a
mortgage or deed of trust. 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 TILA, as implemented by Regulation Z, Real Estate Settlement
Procedures Act, as implemented by Regulation X, Equal Credit Opportunity Act, as
implemented by Regulation B, Fair Credit Billing Act, Fair Credit Reporting Act
and related statutes. These federal laws impose specific statutory liabilities
upon lenders who originate mortgage loans and who fail to comply with the
provisions of the law. In some cases, this liability may affect assignees of the
mortgage loans. In particular, an originator's failure to comply with certain
requirements of the federal TILA, as implemented by Regulation Z, could subject
both originators and assignees of such obligations to monetary penalties and
could result in obligors' rescinding the mortgage loans either against the
originators or assignees.
Some of the mortgage loans may High Cost Loans be subject to the Home
Ownership and Equity Protection Act of 1994, or Homeownership Act, which amended
TILA to provide new requirements applicable to loans that exceed certain
interest rates and/or points and fees thresholds. Purchasers or assignees of any
High Cost Loan, including any trust, could be liable under federal law for all
claims and subject to all defenses that the borrower could assert against the
originator of the High Cost Loan. Remedies available to the borrower include
monetary penalties, as well as rescission rights if the appropriate disclosures
were not given as required. The maximum damages that may be recovered under
these provisions from an assignee, including the trust, is the remaining amount
of indebtedness plus the total amount paid by the borrower in connection with
the mortgage loan.
In addition to the Homeownership Act, a number of legislative proposals
have been introduced at both the federal and state level that are designed to
discourage predatory lending practices. Some states have enacted, or may enact,
laws or regulations that prohibit inclusion of some provisions in mortgage loans
that have interest rates or origination costs in excess of prescribed levels,
and require that borrowers be given certain disclosures prior to the
consummation of the mortgage loans. In some cases, state law may impose
requirements and restrictions greater than those in the Homeownership Act. An
originators' failure to comply with these laws could subject the trust
67
(and other assignees of the mortgage loans) to monetary penalties and could
result in the borrowers rescinding the mortgage loans against either the trust
or subsequent holders of the mortgage loans.
Lawsuits have been brought in various states making claims against
assignees of High Cost Loans for violations of state law allegedly committed by
the originator. Named defendants in these cases include numerous participants
within the secondary mortgage market, including some securitization trusts.
Contracts. In addition to the laws limiting or prohibiting deficiency
judgments, numerous other statutory provisions, including federal bankruptcy
laws and related state laws, may interfere with or affect the ability of a
lender to realize upon collateral and/or enforce a deficiency judgment. For
example, in a Chapter 13 proceeding under the federal bankruptcy law, a court
may prevent a lender from repossessing a home, and, as part of the
rehabilitation plan, reduce the amount of the secured indebtedness to the market
value of the home at the time of bankruptcy (as determined by the court),
leaving the party providing financing as a general unsecured creditor for the
remainder of the indebtedness. A bankruptcy court may also reduce the monthly
payments due under a contract or change the rate of interest and time of
repayment of the indebtedness.
Environmental Legislation
Under CERCLA, and under state law in some states, a secured party which
takes a deed-in- lieu of foreclosure, purchases a mortgaged property at a
foreclosure sale, or operates a mortgaged property may become liable for the
costs of cleaning up hazardous substances regardless of whether they have
contaminated the property. CERCLA imposes strict, as well as joint and several,
liability on several classes of potentially responsible parties, including
current owners and operators of the property who did not cause or contribute to
the contamination. Furthermore, liability under CERCLA is not limited to the
original or unamortized principal balance of a loan or to the value of the
property securing a loan. Lenders may be held liable under CERCLA as owners or
operators unless they qualify for the secured creditor exemption to CERCLA. This
exemption exempts from the definition of owners and operators those who, without
participating in the management of a facility, hold indicia of ownership
primarily to protect a security interest in the facility.
The Conservation Act amended, among other things, the provisions of CERCLA
with respect to lender liability and the secured creditor exemption. The
Conservation Act offers substantial protection to lenders by defining the
activities in which a lender can engage and still have the benefit of the
secured creditor exemption. In order for lender to be deemed to have
participated in the management of a mortgaged property, the lender must actually
participate in the operational affairs of the property of the borrower. The
Conservation Act provides that "merely having the capacity to influence, or
unexercised right to control" operations does not constitute participation in
management. A lender will lose the protection of the secured creditor exemption
only if it exercises decision-making control over the borrower's environmental
compliance and hazardous substance handling and disposal practices, or assumes
day-to-day management of all operational functions of the mortgaged property.
The Conservation Act also provides that a lender will continue to have the
benefit of the secured creditor exemption even if it forecloses on a mortgaged
property, purchases it at a foreclosure sale or accepts a deed-in-lieu of
foreclosure provided that the lender seeks to sell the mortgaged property at the
earliest practicable commercially reasonable time on commercially reasonable
terms.
Other federal and state laws may impose liability on a secured party which
takes a deed-in- lieu of foreclosure, purchases a mortgaged property at a
foreclosure sale, or operates a mortgaged property on which contaminants other
than CERCLA hazardous substances are present, including petroleum, agricultural
chemicals, hazardous wastes, asbestos, radon, and lead-based paint. The cleanup
costs may be substantial. It is possible that the cleanup costs could become a
liability of a trust fund and reduce the amounts otherwise distributable to the
holders of the related series of bonds. Moreover, federal statutes and states by
statute may impose a lien for any cleanup costs incurred by the state on the
property that is the subject of the cleanup costs. All subsequent liens on the
property generally are subordinated to the lien and, in some states, even prior
recorded liens are subordinated to such lien. In the latter states, the security
interest of the trustee in a related parcel of real property that is subject to
the lien could be adversely affected.
68
Traditionally, many residential mortgage lenders have not taken steps to
evaluate whether contaminants 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. Accordingly, the company has not made
and will not make the evaluations prior to the origination of the mortgage
loans. Neither the company nor any replacement servicer will be required by any
Agreement to undertake these evaluations prior to foreclosure or accepting a
deed-in-lieu of foreclosure. The company does not make any representations or
warranties or assume any liability with respect to the absence or effect of
contaminants on any related real property or any casualty resulting from the
presence or effect of contaminants. However, the company will not be obligated
to foreclose on related real property or accept a deed-in-lieu of foreclosure if
it knows or reasonably believes that there are material contaminated conditions
on the property. A failure so to foreclose may reduce the amounts otherwise
available to bondholders of the related series.
Consumer Protection Laws with Respect to Contracts
Numerous federal and state consumer protection laws impose substantial
requirements upon creditors involved in consumer finance which are described in
"--Anti-Deficiency Legislation and Other Limitations on Lenders" above.
Manufactured housing contracts often contain provisions obligating the
obligor to pay late charges if payments are not timely made. Federal and state
law may specifically limit the amount of late charges that may be collected.
Under the related servicing agreement, late charges will be retained by the
master servicer as additional servicing compensation, and any inability to
collect these amounts will not affect payments to bondholders.
Courts have imposed general equitable principles upon repossession and
litigation involving deficiency balances. These equitable principles are
generally designed to relieve a consumer from the legal consequences of a
default.
In several cases, consumers have asserted that the remedies provided to
secured parties under the UCC and related laws violate the due process
protections provided under the 14th Amendment to the Constitution of the United
States. For the most part, courts have upheld the notice provisions of the UCC
and related laws as reasonable or have found that the repossession and resale by
the creditor does not involve sufficient state action to afford constitutional
protection to consumers.
The FTC Rule has the effect of subjecting a seller (and some related
creditors and their assignees) in a consumer credit transaction and any assignee
of the creditor to all claims and defenses which the debtor in the transaction
could assert against the seller of the goods. Liability under the FTC Rule is
limited to the amounts paid by a debtor on the contract, and the holder of the
contract may also be unable to collect amounts still due under the contract.
Most of the Contracts in a trust fund will be subject to the requirements of the
FTC Rule. Accordingly, the trust fund, as holder of the Contracts, will be
subject to any claims or defenses that the purchaser of the related manufactured
home may assert against the seller of the manufactured home, subject to a
maximum liability equal to the amounts paid by the obligor on the Contract. If
an obligor is successful in asserting the claim or defense, and if the Seller
had or should have had knowledge of the claim or defense, the master servicer
will have the right to require the Seller to repurchase the Contract because of
a breach of its Seller's representation and warranty that no claims or defenses
exist that would affect the obligor's obligation to make the required payments
under the Contract. The Seller would then have the right to require the
originating dealer to repurchase the Contract from it and might also have the
right to recover from the dealer any losses suffered by the Seller with respect
to which the dealer would have been primarily liable to the obligor.
Enforceability of Some Provisions
Transfer of Mortgaged Properties. Unless the related prospectus supplement
indicates otherwise, the mortgage loans generally contain due-on-sale clauses.
These clauses permit the lender to accelerate the maturity of the loan if the
borrower sells, transfers or conveys the property without the prior consent of
the lender. The enforceability of these clauses has been the subject of
legislation or litigation in many states, and in some cases the enforceability
of these clauses was limited or
69
denied. However, Garn-St Germain Act 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
limited exceptions. The Garn-St Germain Act does "encourage" lenders to permit
assumption of loans at the original rate of interest or at some other rate less
than the average of the original rate and the market rate.
The Garn-St Germain Act also sets forth nine specific instances in which a
mortgage lender covered by the Garn-St Germain Act 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, some transfers by operation
of law, leases of fewer than three years and the creation of a junior
encumbrance. Regulations promulgated under the Garn-St Germain Act also prohibit
the imposition of a prepayment penalty upon the acceleration of a loan pursuant
to a due-on-sale clause.
The inability to enforce a due-on-sale clause may result in a mortgage
loan bearing an interest rate below the current market rate being assumed by the
buyer rather than being paid off, which may have an impact upon the average life
of the mortgage loans and the number of mortgage loans which may be outstanding
until maturity.
Transfer of Manufactured Homes. Generally, manufactured housing contracts
contain provisions prohibiting the sale or transfer of the related manufactured
homes without the consent of the obligee on the contract and permitting the
acceleration of the maturity of the contracts by the obligee on the contract
upon the sale or transfer that is not consented to. The master servicer will, to
the extent it has knowledge of the conveyance or proposed conveyance, exercise
or cause to be exercised its rights to accelerate the maturity of the related
Contracts through enforcement of due-on- sale clauses, subject to applicable
state law. In some 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 as to which the master
servicer desires to accelerate the maturity of the related Contract, the master
servicer's ability to do so will depend on the enforceability under state law of
the due-on-sale clause. The Garn-St Germain Act preempts, subject to certain
exceptions and conditions, state laws prohibiting enforcement of due-on-sale
clauses applicable to the Manufactured Homes. Consequently, in some cases the
master servicer may be prohibited from enforcing a due-on-sale clause in respect
of a Manufactured Home.
Late Payment Charges and Prepayment Restrictions. Notes and mortgages, as
well as manufactured housing conditional sales contracts and installment loan
agreements, may contain provisions that obligate the borrower to pay a late
charge or additional interest if payments are not timely made, and in some
circumstances, may prohibit prepayments for a specified period and/or condition
prepayments upon the borrower's payment of prepayment fees or yield maintenance
penalties. In some states, there are or may be specific limitations upon the
late charges which a lender may collect from a borrower for delinquent payments
or the amounts that a lender may collect from a borrower as an additional charge
if the loan is prepaid even when the loans expressly provide for the collection
of those charges. Although the Parity Act permits the collection of prepayment
charges and late fees in connection with some types of eligible loans preempting
any contrary state law prohibitions, some states may not recognize the
preemptive authority of the Parity Act or have formally opted out of the Parity
Act. As a result, it is possible that prepayment charges and late fees may not
be collected even on loans that provide for the payment of those charges unless
otherwise specified in the accompanying prospectus supplement. The master
servicer or another entity identified in the accompanying prospectus supplement
will be entitled to all prepayment charges and late payment charges received on
the loans and those amounts will not be available for payment on the bonds. The
OTS, the agency that administers the Parity Act for unregulated housing
creditors, withdrew its favorable Parity Act regulations and Chief Counsel
Opinions that previously authorized lenders to charge prepayment charges and
late fees in certain circumstances notwithstanding contrary state law, effective
with respect to loans originated on or after July 1, 2003. However, the OTS's
ruling does not retroactively affect loans originated before July 1, 2003.
In addition, the enforceability of provisions that provide for prepayment
fees or penalties upon an involuntary prepayment is unclear under the laws of
many states.
70
Subordinate Financing
When the 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 an 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.
Installment Contracts
The trust fund assets may also consist of installment sales contracts.
Under an installment contract the seller (referred to in this section as the
"lender") retains legal title to the property and enters into an agreement with
the purchaser (referred to in this section as the "borrower") for the payment of
the purchase price, plus interest, over the term of the contract. Only after
full performance by the borrower of the installment contract is the lender
obligated to convey title to the property to the purchaser. As with mortgage or
deed of trust financing, during the effective period of the installment
contract, the borrower is generally responsible for the maintaining the property
in good condition and for paying real estate taxes, assessments and hazard
insurance premiums associated with the property.
The method of enforcing the rights of the lender under an installment
contract varies on a state-by- state basis depending upon the extent to which
state courts are willing, or able pursuant to state statute, to enforce the
contract strictly according to its terms. The terms of installment contracts
generally provide that upon a default by the borrower, the borrower loses his or
her right to occupy the property, the entire indebtedness is accelerated and the
buyer's equitable interest in the property is forfeited. The lender in this
situation is not required to foreclose in order to obtain title to the property,
although in some cases a quiet title action is in order if the borrower has
filed the installment contract in local land records and an ejectment action may
be necessary to recover possession. In a few states, particularly in cases of
borrower default during the early years of an installment contract, the courts
will permit ejectment of the buyer and a forfeiture of his or her interest in
the property. However, most state legislatures have enacted provisions by
analogy to mortgage law protecting borrowers under installment contracts from
the harsh consequences of forfeiture. Under these statutes, a judicial or
nonjudicial foreclosure may be required, the lender may be required to give
notice of default and the borrower may be granted some grace period during which
the installment contract may be reinstated upon full payment of the defaulted
amount and the borrower may have a post-foreclosure statutory redemption right.
In other states, courts in equity may permit a borrower with significant
investment in the property under an installment contract for the sale of real
estate to share in the proceeds of sale of the property after the indebtedness
is repaid or may otherwise refuse to enforce the forfeiture clause.
Nevertheless, the lender's procedures for obtaining possession and clear title
under an installment contract in a given state are simpler and less time
consuming and costly than are the procedures for foreclosing and obtaining clear
title to a property subject to one or more liens.
Applicability of Usury Laws
Title V provides that state usury limitations shall not apply to some
types of residential first mortgage loans originated by some 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 OTS 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 which
expressly rejects application of the federal law. In
71
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. Some states have taken action to reimpose interest
rate limits or to limit discount points or other charges.
Title V also provides that, subject to the following conditions, state
usury limitations shall not apply to any loan that is secured by a first lien on
some kinds of manufactured housing. Contracts would be covered if they satisfy
conditions including, among other things, terms governing 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 this type of 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. In any state in which application of Title V was expressly
rejected or a provision limiting discount points or other charges has been
adopted, no Contract which imposes finance charges or provides for discount
points or charges in excess of permitted levels has been included in the trust
fund.
Usury limits apply to junior mortgage loans in many states. Any applicable
usury limits in effect at origination will be reflected in the maximum mortgage
rates for ARM Loans, as set forth in the related prospectus supplement.
As indicated above under "The Mortgage Pools--Representations by Sellers,"
each Seller of a mortgage loan will have represented that the mortgage loan was
originated in compliance with then applicable state laws, including usury laws,
in all material respects. However, the mortgage rates on the mortgage loans will
be subject to applicable usury laws as in effect from time to time.
Alternative Mortgage Instruments
Alternative mortgage instruments, including adjustable rate mortgage loans
and early ownership mortgage loans, originated by non-federally chartered
lenders historically have been subjected to a variety of restrictions. The
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. Title VIII provides that, notwithstanding any state law to the contrary,
(1) 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,
(2) 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 (3) 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
OTS, with respect to origination of alternative mortgage instruments by federal
savings and loan associations. Title VIII provides that any state may reject
applicability of the provisions of Title VIII by adopting, prior to October 15,
1985, a law or constitutional provision expressly rejecting the applicability of
the provisions. Some states have taken this action.
Formaldehyde Litigation with Respect to Contracts
A number of lawsuits are pending in the United States alleging personal
injury from exposure to the chemical formaldehyde, which is present in many
building materials, including components of manufactured housing such as plywood
flooring and wall paneling. Some of these lawsuits are pending against
manufacturers of manufactured housing, suppliers of component parts, and related
persons in the distribution process. The company is aware of a limited number of
cases in which plaintiffs have won judgments in these lawsuits.
72
Under the FTC Rule, which is described above under "Consumer Protection
Laws", the holder of any Contract secured by a Manufactured Home with respect to
which a formaldehyde claim has been successfully asserted may be liable to the
obligor for the amount paid by the obligor on the related Contract and may be
unable to collect amounts still due under the Contract. In the event an obligor
is successful in asserting this claim, the related bondholders could suffer a
loss if (1) the related Seller fails or cannot be required to repurchase the
affected Contract for a breach of representation and warranty and (2) the master
servicer or the trustee were unsuccessful in asserting any claim of contribution
or subrogation on behalf of the bondholders against the manufacturer or other
persons who were directly liable to the plaintiff for the damages. Typical
products liability insurance policies held by manufacturers and component
suppliers of manufactured homes may not cover liabilities arising from
formaldehyde in manufactured housing, with the result that recoveries from these
manufacturers, suppliers or other persons may be limited to their corporate
assets without the benefit of insurance.
Soldiers' and Sailors' Civil Relief Act of 1940
Under the terms of the Relief Act, a mortgagor who enters military service
after the origination of the 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) above
an annual rate of 6% during the period of the mortgagor's active duty status,
unless a court orders otherwise upon application of the lender. The Relief Act
applies to mortgagors who are members of the Army, Navy, Air Force, Marines,
National Guard, Reserves, Coast Guard, and officers of the U.S. Public Health
Service assigned to duty with the military. Because the Relief Act applies to
mortgagors who enter military service, including reservists who are called to
active duty, after origination of the related mortgage loan, no information can
be provided as to the number of loans that may be affected by the Relief Act.
Application of the Relief Act would adversely affect, for an indeterminate
period of time, the ability of the master servicer to collect full amounts of
interest on the mortgage loans subject to the Relief Act. Any shortfall in
interest collections resulting from the application of the Relief Act or similar
legislation or regulations, which would not be recoverable from the related
mortgage loans, would result in a reduction of the amounts distributable to the
holders of the related bonds, and would not be covered by advances by the master
servicer or other entity or by any form of credit enhancement provided in
connection with the related series of bonds, unless described in the prospectus
supplement. In addition, the Relief Act imposes limitations that would impair
the ability of the master servicer to foreclose on an affected single family
loan or enforce rights under a Contract during the mortgagor's period of active
duty status, and, under some circumstances, during an additional three month
period thereafter. Thus, in the event that the Relief Act or similar legislation
or regulations applies to any mortgage loan which goes into default, there may
be delays in payment and losses on the related bonds in connection therewith.
Any other interest shortfalls, deferrals or forgiveness of payments on the
mortgage loans resulting from similar legislation or regulations may result in
delays in payments or losses to bondholders of the related series.
Forfeitures in Drug and Rico Proceedings
Federal law provides that property owned by persons convicted of
drug-related crimes or of criminal violations of RICO can be seized by the
government if the property was used in, or purchased with the proceeds of, these
crimes. Under procedures contained in the Crime Control Act, the government may
seize the property even before conviction. The government must publish notice of
the forfeiture proceeding and may give notice to all parties "known to have an
alleged interest in the property", including the holders of mortgage loans.
A lender may avoid forfeiture of its interest in the property if it
establishes that: (1) its mortgage was executed and recorded before commission
of the crime upon which the forfeiture is based, or (2) the lender was, at the
time of execution of the mortgage, "reasonably without cause to believe" that
the property was used in, or purchased with the proceeds of, illegal drug or
RICO activities.
73
Junior Mortgages
Some of the mortgage loans may be secured by mortgages or deeds of trust
which are junior to senior mortgages or deeds of trust which are not part of the
trust fund. The rights of the bondholders, as mortgagee under a junior mortgage,
are subordinate to those of the mortgagee under the senior mortgage, including
the prior rights of the senior mortgagee to receive hazard insurance and
condemnation proceeds and to cause the property securing the mortgage loan to be
sold upon default of the mortgagor, which may extinguish the junior mortgagee's
lien unless the junior mortgagee asserts its subordinate interest in the
property in foreclosure litigation and, in some cases, either reinitiates or
satisfies the defaulted senior loan or loans. A junior mortgagee may satisfy a
defaulted senior loan in full or, in some states, may cure the default and bring
the senior loan current thereby reinstating the senior loan, in either event
usually adding the amounts expended to the balance due on the junior loan. In
most states, absent a provision in the mortgage or deed of trust, no notice of
default is required to be given to a junior mortgagee. Where applicable law or
the terms of the senior mortgage or deed of trust do not require notice of
default to the junior mortgagee, the lack of this notice may prevent the junior
mortgagee from exercising any right to reinstate the loan which applicable law
may provide.
The standard form of the mortgage or deed of trust used by most
institutional lenders confers on the mortgagee the right both to receive all
proceeds collected under any hazard insurance policy and all awards made in
connection with condemnation proceedings, and to apply the proceeds and awards
to any indebtedness secured by the mortgage or deed of trust, in the order the
mortgagee may determine. Thus, in the event improvements on the property are
damaged or destroyed by fire or other casualty, or in the event the property is
taken by condemnation, the mortgagee or beneficiary under underlying senior
mortgages will have the prior right to collect any insurance proceeds payable
under a hazard insurance policy and any award of damages in connection with the
condemnation and to apply the same to the indebtedness secured by the senior
mortgages. Proceeds in excess of the amount of senior mortgage indebtedness, in
most cases, may be applied to the indebtedness of junior mortgages in the order
of their priority.
Another provision sometimes found in the form of the mortgage or deed of
trust used by institutional lenders obligates the mortgagor to pay before
delinquency all taxes and assessments on the property and, when due, all
encumbrances, charges and liens on the property which are prior to the mortgage
or deed of trust, to provide and maintain fire insurance on the property, to
maintain and repair the property and not to commit or permit any waste thereof,
and to appear in and defend any action or proceeding purporting to affect the
property or the rights of the mortgagee under the mortgage. Upon a failure of
the mortgagor to perform any of these obligations, the mortgagee or beneficiary
is given the right under some mortgages or deeds of trust to perform the
obligation itself, at its election, with the mortgagor agreeing to reimburse the
mortgagee for any sums expended by the mortgagee on behalf of the mortgagor. All
sums so expended by a senior mortgagee become part of the indebtedness secured
by the senior mortgage.
Negative Amortization Loans
A recent case decided by the United States Court of Appeals, First
Circuit, held that state restrictions on the compounding of interest are not
preempted by the provisions of the DIDMC and as a result, a mortgage loan that
provided for negative amortization violated New Hampshire's requirement that
first mortgage loans provide for computation of interest on a simple interest
basis. The holding was limited to the effect of DIDMC on state laws regarding
the compounding of interest and the court did not address the applicability of
the Parity Act, which authorizes lenders to make residential mortgage loans that
provide for negative amortization. The First Circuit's decision is binding
authority only on Federal District Courts in Maine, New Hampshire,
Massachusetts, Rhode Island and Puerto Rico.
74
FEDERAL INCOME TAX CONSEQUENCES
General
The following discussion is the opinion of Thacher Proffitt & Wood LLP,
counsel to the company, with respect to the anticipated material federal income
tax consequences of the purchase, ownership and disposition of offered bonds
offered under this prospectus and the prospectus supplement insofar as it
relates to matters of law or legal conclusions with respect thereto. This
discussion is directed solely to bondholders that hold the bonds as capital
assets within the meaning of Section 1221 of the Code and does not purport to
discuss all federal income tax consequences that may be applicable to the
individual circumstances of particular categories of investors, some of which
(such as banks, insurance companies and foreign investors) may be subject to
special treatment under the Code. 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. Prospective
investors should note that no rulings have been or will be sought from the IRS
with respect to any of the federal income tax consequences discussed below, and
no assurance can be given the IRS will not take contrary positions. Taxpayers
and preparers of tax returns (including those filed by any issuer) should be
aware that under applicable Treasury regulations a provider of advice on
specific issues of law is not considered an income tax return preparer unless
the advice (1) is given with respect to events that have occurred at the time
the advice is rendered and is not given with respect to the consequences of
contemplated actions, and (2) is directly relevant to the determination of an
entry on a tax return. Accordingly, taxpayers should consult their own tax
advisors and tax return preparers regarding the preparation of any item on a tax
return, even where the anticipated tax treatment has been discussed in this
prospectus. In addition to the federal income tax consequences described in this
prospectus, potential investors should consider the state and local tax
consequences, if any, of the purchase, ownership and disposition of the bonds.
See "State and Other Tax Consequences."
The following discussion is based in part upon the OID Regulations. The
OID Regulations do not adequately address issues relevant to bonds such as the
offered bonds. In some instances, the OID Regulations provide that they are not
applicable to bonds such as the offered bonds.
On or prior to the date of the related prospectus supplement with respect
to the proposed issuance of each series of bonds, Thacher Proffitt & Wood LLP,
counsel to the company, will deliver its opinion to the effect that, assuming
compliance with all provisions of the indenture, owner trust agreement and other
related documents, for federal income tax purposes (1) the bonds will be treated
as indebtedness to a bondholder other than the owner of the Equity Certificates
and (2) the Issuer, as created pursuant to the terms and conditions of the owner
trust agreement, will not be characterized as an association (or publicly traded
partnership) taxable as a corporation or as a taxable mortgage pool. For
purposes of this tax discussion, references to a "bondholder" or a "holder" are
to the beneficial owner of a bond.
Status as Real Property Loans
(1) Bonds held by a domestic building and loan association will not
constitute "loans . . . secured by an interest in real property" within the
meaning of Code section 7701(a)(19)(C)(v); and (2) bonds held by a real estate
investment trust will not constitute "real estate assets" within the meaning of
Code section 856(c)(4)(A) and interest on bonds will not be considered "interest
on obligations secured by mortgages on real property" within the meaning of Code
section 856(c)(3)(B). In addition, the bonds will not be "qualified mortgages"
within the meaning of Section 860G(a)(3) of the Code.
Taxation of Owners of Bonds.
Interest and Original Issue Discount. A bond may be issued with "original
issue discount" within the meaning of Section 1273(a) of the Code. Any holder of
a bond issued with original issue discount generally will be required to include
original issue discount in income as it accrues, in accordance with the
"constant yield" method described below, in advance of the receipt of the cash
attributable to that income. In addition, Section 1272(a)(6) of the Code
provides special rules
75
applicable to bonds and some other debt instruments issued with original issue
discount; regulations have not been issued under that section.
The Code requires that a reasonable prepayment assumption be used with
respect to mortgage loans held by a trust fund in computing the accrual of
original issue discount on bonds issued by that trust fund, and that adjustments
be made in the amount and rate of accrual of that discount to reflect
differences between the actual prepayment rate and the prepayment assumption.
The prepayment assumption is to be determined in a manner prescribed in Treasury
regulations; as noted above, those regulations have not been issued. The
Committee Report indicates that the regulations will provide that the prepayment
assumption used with respect to a bond must be the same as that used in pricing
the initial offering of the bond. The Prepayment Assumption used in reporting
original issue discount for each series of bonds will be consistent with this
standard and will be disclosed in the related prospectus supplement. However,
none of the company, the master servicer or the trustee will make any
representation that the mortgage loans will in fact prepay at a rate conforming
to the Prepayment Assumption or at any other rate.
The original issue discount, if any, on a bond will be the excess of its
stated redemption price at maturity over its issue price. The issue price of a
particular class of bonds will be the first cash price at which a substantial
amount of bonds of that class is sold (excluding sales to bond houses, brokers
and underwriters). If less than a substantial amount of a particular class of
bonds is sold for cash on or prior to the Closing Date, the issue price for that
class will be the fair market value of that class on the Closing Date. Under the
OID Regulations, the stated redemption price of a bond is equal to the total of
all payments to be made on the bond other than "qualified stated interest."
"Qualified stated interest" is interest that is unconditionally payable at least
annually (during the entire term of the instrument) at a single fixed rate, or
at a "qualified floating rate," an "objective rate," a combination of a single
fixed rate and one or more "qualified floating rates" or one "qualified inverse
floating rate," or a combination of "qualified floating rates" that does not
operate in a manner that accelerates or defers interest payments on the bond.
In the case of bonds bearing adjustable interest rates, the determination
of the total amount of original issue discount and the timing of the inclusion
thereof will vary according to the characteristics of the bonds. If the original
issue discount rules apply to the bonds in a particular series, the related
prospectus supplement will describe the manner in which these rules will be
applied with respect to the bonds in that series that bear an adjustable
interest rate in preparing information returns to the bondholders and the IRS.
The first interest payment on a bond may be made more than one month after
the date of issuance, which is a period longer than the subsequent monthly
intervals between interest payments. Assuming the "accrual period" (as defined
below) for original issue discount is each monthly period that ends on the day
prior to each distribution date, in some cases, as a consequence of this "long
first accrual period," some or all interest payments may be required to be
included in the stated redemption price of the bond and accounted for as
original issue discount. Because interest on bonds must in any event be
accounted for under an accrual method, applying this analysis would result in
only a slight difference in the timing of the inclusion in income of the yield
on the bonds.
In addition, if the accrued interest to be paid on the first distribution
date is computed with respect to a period that begins prior to the Closing Date,
a portion of the purchase price paid for a bond will reflect the accrued
interest. In such cases, information returns to the bondholders and the IRS will
be based on the position that the portion of the purchase price paid for the
interest accrued with respect to periods prior to the Closing Date is treated as
part of the overall cost of the bond (and not as a separate asset the cost of
which is recovered entirely out of interest received on the next distribution
date) and that portion of the interest paid on the first distribution date in
excess of interest accrued for a number of days corresponding to the number of
days from the Closing Date to the first distribution date should be included in
the stated redemption price of the bond. However, the OID Regulations state that
all or some portion of the accrued interest may be treated as a separate asset
the cost of which is recovered entirely out of interest paid on the first
distribution date. It is unclear how an election to do so would be made under
the OID Regulations and whether such an election could be made unilaterally by a
bondholder.
76
Notwithstanding the general definition of original issue discount,
original issue discount on a bond will be considered to be de minimis if it is
less than 0.25% of the stated redemption price of the bond multiplied by its
weighted average life. For this purpose, the weighted average life of a bond is
computed as the sum of the amounts determined, as to each payment included in
the stated redemption price of the bond, by multiplying (1) the number of
complete years (rounding down for partial years) from the issue date until that
payment is expected to be made (presumably taking into account the Prepayment
Assumption) by (2) a fraction, the numerator of which is the amount of the
payment, and the denominator of which is the stated redemption price at maturity
of the bond. Under the OID Regulations, original issue discount of only a de
minimis amount (other than de minimis original issue discount attributable to a
so-called "teaser" interest rate or an initial interest holiday) will be
included in income as each payment of stated principal is made, based on the
product of the total amount of de minimis original issue discount attributable
to that bond and a fraction, the numerator of which is the amount of the
principal payment and the denominator of which is the outstanding stated
principal amount of the bond. The OID Regulations also would permit a bondholder
to elect to accrue de minimis original issue discount into income currently
based on a constant yield method. See "Taxation of Owners of Bonds--Market
Discount" below for a description of this election under the OID Regulations.
If original issue discount on a bond is in excess of a de minimis amount,
the holder of the bond must include in ordinary gross income the sum of the
"daily portions" of original issue discount for each day during its taxable year
on which it held the bond, including the purchase date but excluding the
disposition date. In the case of an original holder of a bond, the daily
portions of original issue discount will be determined as follows.
As to each "accrual period," that is, each period that ends on a date that
corresponds to the day prior to each distribution date and begins on the first
day following the immediately preceding accrual period (or in the case of the
first such period, begins on the Closing Date), a calculation will be made of
the portion of the original issue discount that accrued during the accrual
period. The portion of original issue discount that accrues in any accrual
period will equal the excess, if any, of (1) the sum of (a) the present value,
as of the end of the accrual period, of all of the distributions remaining to be
made on the bond, if any, in future periods and (b) the distributions made on
the bond during the accrual period of amounts included in the stated redemption
price, over (2) the adjusted issue price of the bond at the beginning of the
accrual period. The present value of the remaining distributions referred to in
the preceding sentence will be calculated (1) assuming that distributions on the
bond will be received in future periods based on the mortgage loans being
prepaid at a rate equal to the Prepayment Assumption, (2) using a discount rate
equal to the original yield to maturity of the bond and (3) taking into account
events (including actual prepayments) that have occurred before the close of the
accrual period. For these purposes, the original yield to maturity of the bond
will be calculated based on its issue price and assuming that distributions on
the bond will be made in all accrual periods based on the mortgage loans being
prepaid at a rate equal to the Prepayment Assumption. The adjusted issue price
of a bond at the beginning of any accrual period will equal the issue price of
the bond, increased by the aggregate amount of original issue discount that
accrued with respect to the bond in prior accrual periods, and reduced by the
amount of any distributions made on the bond in prior accrual periods of amounts
included in the stated redemption price. The original issue discount accruing
during any accrual period, computed as described above, will be allocated
ratably to each day during the accrual period to determine the daily portion of
original issue discount for that day.
A subsequent purchaser of a bond that purchases a bond that is treated as
having been issued with original issue discount at a cost (excluding any portion
of the cost attributable to accrued qualified stated interest) less than its
remaining stated redemption price will also be required to include in gross
income the daily portions of any original issue discount with respect to the
bond. However, each such daily portion will be reduced, if the cost of the bond
is in excess of its "adjusted issue price," in proportion to the ratio the
excess bears to the aggregate original issue discount remaining to be accrued on
the bond. The adjusted issue price of a bond on any given day equals the sum of
(1) the adjusted issue price (or, in the case of the first accrual period, the
issue price) of the bond at the beginning of the accrual period which includes
that day and (2) the daily portions of original issue discount for all days
during the accrual period prior to that day.
77
Market Discount. A bondholder that purchases a bond at a market discount,
that is, in the case of a bond issued without original issue discount, at a
purchase price less than its remaining stated principal amount, or in the case
of a bond issued with original issue discount, at a purchase price less than its
adjusted issue price will recognize gain upon receipt of each distribution
representing stated redemption price. In particular, under Section 1276 of the
Code such a bondholder generally will be required to allocate the portion of
each distribution representing stated redemption price first to accrued market
discount not previously included in income, and to recognize ordinary income to
that extent. A bondholder may elect to include market discount in income
currently as it accrues rather than including it on a deferred basis in
accordance with the foregoing. If made, the election will apply to all market
discount bonds acquired by the bondholder on or after the first day of the first
taxable year to which the election applies. In addition, the OID Regulations
permit a bondholder to elect to accrue all interest, discount (including de
minimis market or original issue discount) in income as interest, and to
amortize premium, based on a constant yield method. If such an election were
made with respect to a bond with market discount, the bondholder would be deemed
to have made an election to include currently market discount in income with
respect to all other debt instruments having market discount that the bondholder
acquires during the taxable year of the election or thereafter, and possibly
previously acquired instruments. Similarly, a bondholder that made this election
for a bond that is acquired at a premium would be deemed to have made an
election to amortize bond premium with respect to all debt instruments having
amortizable bond premium that the bondholder owns or acquires. See "Taxation of
Owners of Bonds--Premium" below. Each of these elections to accrue interest,
discount and premium with respect to a bond on a constant yield method or as
interest would be irrevocable, except with the approval of the IRS.
However, market discount with respect to a bond will be considered to be
de minimis for purposes of Section 1276 of the Code if the market discount is
less than 0.25% of the remaining stated redemption price of the bond multiplied
by the number of complete years to maturity remaining after the date of its
purchase. In interpreting a similar rule with respect to original issue discount
on obligations payable in installments, the OID Regulations refer to the
weighted average maturity of obligations, and it is likely that the same rule
will be applied with respect to market discount, presumably taking into account
the Prepayment Assumption. If market discount is treated as de minimis under
this rule, it appears that the actual discount would be treated in a manner
similar to original issue discount of a de minimis amount. See "Taxation of
Owners of Bonds--Interest and Original Issue Discount" above. This treatment
would result in discount being included in income at a slower rate than discount
would be required to be included in income using the method described above.
Section 1276(b)(3) of the Code specifically authorizes the Treasury
Department to issue regulations providing for the method for accruing market
discount on debt instruments, the principal of which is payable in more than one
installment. Until regulations are issued by the Treasury Department, the rules
described in the Committee Report apply. The Committee Report indicates that in
each accrual period market discount on bonds should accrue, at the bondholder's
option: (1) on the basis of a constant yield method, (2) in the case of a bond
issued without original issue discount, in an amount that bears the same ratio
to the total remaining market discount as the stated interest paid in the
accrual period bears to the total amount of stated interest remaining to be paid
on the bond as of the beginning of the accrual period, or (3) in the case of a
bond issued with original issue discount, in an amount that bears the same ratio
to the total remaining market discount as the original issue discount accrued in
the accrual period bears to the total original issue discount remaining on the
bond at the beginning of the accrual period. Moreover, the Prepayment Assumption
used in calculating the accrual of original issue discount is also used in
calculating the accrual of market discount. Because the regulations referred to
in this paragraph have not been issued, it is not possible to predict what
effect these regulations might have on the tax treatment of a bond purchased at
a discount in the secondary market.
To the extent that bonds provide for monthly or other periodic
distributions throughout their term, the effect of these rules may be to require
market discount to be includible in income at a rate that is not significantly
slower than the rate at which the discount would accrue if it were original
issue discount. Moreover, in any event a holder of a bond generally will be
required to treat a portion of any gain on the sale or exchange of the bond as
ordinary income to the extent of the market
78
discount accrued to the date of disposition under one of the foregoing methods,
less any accrued market discount previously reported as ordinary income.
Further, under Section 1277 of the Code a holder of a bond may be required
to defer a portion of its interest deductions for the taxable year attributable
to any indebtedness incurred or continued to purchase or carry a bond purchased
with market discount. For these purposes, the de minimis rule referred to above
applies. Any such deferred interest expense would not exceed the market discount
that accrues during the taxable year and is, in general, allowed as a deduction
not later than the year in which the market discount is includible in income. If
a holder elects to include market discount in income currently as it accrues on
all market discount instruments acquired by the holder in that taxable year or
thereafter, the interest deferral rule described above will not apply.
Premium. A bond purchased at a cost (excluding any portion of the cost
attributable to accrued qualified stated interest) greater than its remaining
stated redemption price will be considered to be purchased at a premium. The
holder of a bond may elect under Section 171 of the Code to amortize the premium
under the constant yield method over the life of the bond. If made, the election
will apply to all debt instruments having amortizable bond premium that the
holder owns or subsequently acquires. Amortizable premium will be treated as an
offset to interest income on the related debt instrument, rather than as a
separate interest deduction. The OID Regulations also permit bondholders to
elect to include all interest, discount and premium in income based on a
constant yield method, further treating the bondholder as having made the
election to amortize premium generally. See "Taxation of Owners of Bonds--Market
Discount" above. The Committee Report states that the same rules that apply to
accrual of market discount (which rules will require use of a Prepayment
Assumption in accruing market discount with respect to bonds without regard to
whether the bonds have original issue discount) will also apply in amortizing
bond premium under Section 171 of the Code. The use of an assumption that there
will be no prepayments might be required.
Realized Losses. Under Section 166 of the Code, both corporate holders of
the bonds and noncorporate holders of the bonds that acquire the bonds in
connection with a trade or business should be allowed to deduct, as ordinary
losses, any losses sustained during a taxable year in which their bonds become
wholly or partially worthless as the result of one or more realized losses on
the mortgage loans. However, it appears that a noncorporate holder that does not
acquire a bond in connection with a trade or business will not be entitled to
deduct a loss under Section 166 of the Code until the holder's bond becomes
wholly worthless (i.e., until its outstanding principal balance has been reduced
to zero) and that the loss will be characterized as a short-term capital loss.
Each holder of a bond will be required to accrue interest and original
issue discount with respect to the bond, without giving effect to any reductions
in distributions attributable to defaults or delinquencies on the mortgage loans
or the bond underlying the bonds, as the case may be, until it can be
established this the reduction ultimately will not be recoverable. As a result,
the amount of taxable income reported in any period by the holder of a bond
could exceed the amount of economic income actually realized by that holder in
the period. Although the holder of a bond eventually will recognize a loss or
reduction in income attributable to previously accrued and included income that
as the result of a realized loss ultimately will not be realized, the law is
unclear with respect to the timing and character of this loss or reduction in
income.
Sales of Bonds. If a bond is sold, the selling bondholder will recognize
gain or loss equal to the difference between the amount realized on the sale and
its adjusted basis in the bond. The adjusted basis of a bond generally will
equal the cost of the bond to the bondholder, increased by income reported by
the bondholder with respect to the bond (including original issue discount and
market discount income) and reduced (but not below zero) by distributions on the
bond received by the bondholder and by any amortized premium. Except as provided
in the following three paragraphs, any such gain or loss will be capital gain or
loss, provided the bond is held as a capital asset (generally, property held for
investment) within the meaning of Section 1221 of the Code.
Gain recognized on the sale of a bond by a seller who purchased the bond
at a market discount will be taxable as ordinary income in an amount not
exceeding the portion of the discount that accrued during the period the bond
was held by the holder, reduced by any market discount included
79
in income under the rules described above under "--Taxation of Owners of
Bonds--Market Discount" and "Premium."
A portion of any gain from the sale of a bond that might otherwise be
capital gain may be treated as ordinary income to the extent that the bond is
held as part of a "conversion transaction" within the meaning of Section 1258 of
the Code. A conversion transaction generally is one in which the taxpayer has
taken two or more positions in the same or similar property that reduce or
eliminate market risk, if substantially all of the taxpayer's return is
attributable to the time value of the taxpayer's net investment in the
transaction. The amount of gain so realized in a conversion transaction that is
recharacterized as ordinary income generally will not exceed the amount of
interest that would have accrued on the taxpayer's net investment at 120% of the
appropriate "applicable Federal rate" (which rate is computed and published
monthly by the IRS) at the time the taxpayer enters into the conversion
transaction, subject to appropriate reduction for prior inclusion of interest
and other ordinary income items from the transaction.
Finally, a taxpayer may elect to have net capital gain taxed at ordinary
income rates rather than capital gains rates in order to include the net capital
gain in total net investment income for the taxable year, for purposes of the
rule that limits the deduction of interest on indebtedness incurred to purchase
or carry property held for investment to a taxpayer's net investment income.
Information Reporting. The Servicer is required to furnish or cause to be
furnished to each bondholder with each payment a statement setting forth the
amount of that payment allocable to principal on the bond and to interest
thereon. In addition, the Servicer is required to furnish or cause to be
furnished, within a reasonable time after the end of each calendar year, to each
bondholder who was a holder at any time during that year, a report indicating
such other customary factual information as the Servicer deems necessary to
enable holders of bonds to prepare their tax returns and will furnish comparable
information to the IRS as and when required by law to do so. If the bonds are
issued with OID, the Servicer will provide or cause to be provided to the IRS
and, as applicable, to the bondholder information statements with respect to OID
as required by the Code or as holders of those bonds may reasonably request from
time to time. If the bonds are issued with OID, those information reports, even
if otherwise accepted as accurate by the IRS, will in any event be accurate only
as to an initial bondholder which purchased its bond at the initial offering
price used in preparing those reports. Bondholders should consult their own tax
advisors to determine the amount of any OID and market discount includible in
income during a calendar year.
As applicable, the bond information reports will include a statement of
the adjusted issue price of the bonds at the beginning of each Collection
Period. In addition, the reports will include information required by
regulations for computing the accrual of any market discount. Because exact
computation of the accrual of market discount on a constant yield method would
require information relating to the bondholder's purchase price that the
Servicer will not have, such regulations only require that information
pertaining to the appropriate proportionate method of accruing market discount
be provided. See "Market Discount" above.
As applicable, the bond information reports will include a statement of
the adjusted issue price of the bond at the beginning of each accrual period. In
addition, the reports will include information required by regulations with
respect to computing the accrual of any market discount. Because exact
computation of the accrual of market discount on a constant yield method would
require information relating to the holder's purchase price that the trust fund
may not have, Treasury regulations only require that information pertaining to
the appropriate proportionate method of accruing market discount be provided.
See "--Taxation of Owners of Bonds--Market Discount."
Backup Withholding with Respect to Bonds. Payments of interest and
principal, as well as payments of proceeds from the sale of the bonds, may be
subject to the "backup withholding tax" under Section 3406 of the Code if
recipients of the payments fail to furnish to the payor certain information,
including their taxpayer identification numbers, or otherwise fail to establish
an exemption from the backup withholding tax. Any amounts deducted and withheld
from a distribution to a recipient would be allowed as a credit against the
recipient's federal income tax. Furthermore, penalties may be imposed by the IRS
on a recipient of payments that is required to supply information but that does
not do so in the proper manner.
80
Foreign Investors in Bonds. A bondholder that is not a United States
Person and is not subject to federal income tax as a result of any direct or
indirect connection to the United States in addition to its ownership of a bond
will not be subject to United States federal income or withholding tax in
respect of a distribution on a bond, provided that the holder complies to the
extent necessary with certain identification requirements, including delivery of
a statement, signed by the bondholder under penalties of perjury, certifying
that the bondholder is not a United States person and providing the name and
address of the bondholder and provided further that the non-United States Person
(i) does not own directly or indirectly 10% or more of the voting power of all
classes of stock in the Issuer entitled to vote, (ii) is not a bank that is
treated as receiving that interest "on an extension of credit made under a loan
agreement entered into in the ordinary course of its trade or business", or
(iii) is not a "controlled foreign corporation", within the meaning of section
957 of the Code, with respect to which the Issuer is a "related person", within
the meaning of section 881(c)(3)(C) of the Code. If the holder does not qualify
for exemption, distributions of interest, including distributions in respect of
accrued original issue discount, to the holder may be subject to a tax rate of
30%, subject to reduction under any applicable tax treaty, provided the
bondholder supplies at the time of its initial purchase, and at all subsequent
times as are required under the Treasury regulations, a properly executed IRS
Form W-8BEN to report its eligibility for that reduced rate or exemption.
A bondholder that is not a U.S. Person will not be subject to U.S. federal
income tax on the gain realized on the sale, exchange or other disposition of
the bond unless (i) that bondholder is an individual who is present in the
United States for 183 days or more in the taxable year of sale, exchange or
other disposition and certain other conditions are met; (ii) the gain is
effectively connected with the conduct by the bondholder of a trade or business
within the United States and, if an income tax treaty applies, is attributable
to a United States permanent establishment of the bondholder; or (iii) the
bondholder is subject to certain rules applicable to expatriates.
Interest on or gain from the sale, exchange of other disposition of a bond
received by a bondholder that is not a United States Person, which constitutes
income that is effectively connected with a United States trade or business
carried on by the bondholder, will not be subject to withholding tax, but rather
will be subject to United States federal income tax at the graduated rates
applicable to U.S. persons, provided the bondholder provides a properly executed
IRS Form W-8ECI, certifying that the income is, or is expected to be,
effectively connected with the conduct of a trade or business within the United
States of that bondholder and that this income is includible in the bondholder's
gross income for the taxable year. This statement must include, among other
things, the name and address of the bondholder, the bondholder's identifying
number and the trade or business with which the income is, or is expected to be,
effectively connected.
Special rules apply to partnerships, estates and trusts, and in certain
circumstances certifications as to foreign status and other matters may be
required to be provided by partners and beneficiaries thereof.
In addition, the foregoing rules will not apply to exempt a United States
shareholder of a controlled foreign corporation from taxation on the United
States shareholder's allocable portion of the interest income received by the
controlled foreign corporation.
Further, it appears that a bond would not be included in the estate of a
non-resident alien individual and would not be subject to United States estate
taxes. However, bondholders who are non-resident alien individuals should
consult their tax advisors concerning this question.
Grantor Trust Funds
Classification of Grantor Trust Funds. On or prior to the date of the
related prospectus supplement with respect to the proposed issuance of each
series of Grantor Trust Certificates, Thacher Proffitt & Wood LLP, counsel to
the company, will deliver its opinion generally to the effect that, assuming
compliance with all provisions of the related indenture and servicing agreement,
the related Grantor Trust Fund will be classified as a grantor trust under
subpart E, part I of subchapter J of Chapter 1 of the Code and not as a
partnership or an association taxable as a corporation.
81
Characterization of Investments in Grantor Trust Certificates.
Grantor Trust Fractional Interest Certificates. In the case of Grantor
Trust Fractional Interest Certificates, except as disclosed in the related
prospectus supplement, counsel to the company will deliver an opinion that, in
general, Grantor Trust Fractional Interest Certificates will represent interests
in (1) "loans . . . secured by an interest in real property" within the meaning
of Section 7701(a)(19)(C)(v) of the Code; (2) "obligation[s] (including any
participation or Certificate of beneficial ownership therein) which [are]
principally secured by an interest in real property" within the meaning of
Section 860G(a)(3) of the Code; and (3) "real estate assets" within the meaning
of Section 856(c)(4)(A) of the Code. In addition, counsel to the company will
deliver an opinion that interest on Grantor Trust Fractional Interest
Certificates will to the same extent be considered "interest on obligations
secured by mortgages on real property or on interests in real property" within
the meaning of Section 856(c)(3)(B) of the Code.
Grantor Trust Strip Certificates. Even if Grantor Trust Strip Certificates
evidence an interest in a Grantor Trust Fund consisting of mortgage loans that
are "loans . . . secured by an interest in real property" within the meaning of
Section 7701(a)(19)(C)(v) of the Code, and "real estate assets" within the
meaning of Section 856(c)(4)(A) of the Code, and the interest on which is
"interest on obligations secured by mortgages on real property" within the
meaning of Section 856(c)(3)(B) of the Code, it is unclear whether the Grantor
Trust Strip Certificates, and the income therefrom, will be so characterized.
However, the policies underlying these sections (namely, to encourage or require
investments in mortgage loans by thrift institutions and real estate investment
trusts) may suggest that this characterization is appropriate. Counsel to the
company will not deliver any opinion on these questions. Prospective purchasers
to which the characterization of an investment in Grantor Trust Strip
Certificates is material should consult their tax advisors regarding whether the
Grantor Trust Strip Certificates, and the income therefrom, will be so
characterized.
The Grantor Trust Strip Certificates will be "obligation[s] (including any
participation or Certificate of beneficial ownership therein) which . . .[are]
principally secured by an interest in real property" within the meaning of
Section 860G(a)(3)(A) of the Code.
Taxation of Owners of Grantor Trust Fractional Interest Certificates.
Holders of a particular series of Grantor Trust Fractional Interest Certificates
generally will be required to report on their federal income tax returns their
shares of the entire income from the mortgage loans (including amounts used to
pay reasonable servicing fees and other expenses) and will be entitled to deduct
their shares of any such reasonable servicing fees and other expenses. Because
of stripped interests, market or original issue discount, or premium, the amount
includible in income on account of a Grantor Trust Fractional Interest
Certificate may differ significantly from the amount distributable thereon
representing interest on the mortgage loans. Under Section 67 of the Code, an
individual, estate or trust holding a Grantor Trust Fractional Interest
Certificate directly or through some pass-through entities will be allowed a
deduction for the reasonable servicing fees and expenses only to the extent that
the aggregate of the holder's miscellaneous itemized deductions exceeds two
percent of the holder's adjusted gross income. In addition, Section 68 of the
Code provides that the amount of itemized deductions otherwise allowable for an
individual whose adjusted gross income exceeds a specified amount will be
reduced by the lesser of (1) 3% of the excess of the individual's adjusted gross
income over the amount or (2) 80% of the amount of itemized deductions otherwise
allowable for the taxable year. The amount of additional taxable income
reportable by holders of Grantor Trust Fractional Interest Certificates who are
subject to the limitations of either Section 67 or Section 68 of the Code may be
substantial. Further, certificateholders (other than corporations) subject to
the alternative minimum tax may not deduct miscellaneous itemized deductions in
determining the holder's alternative minimum taxable income. Although it is not
entirely clear, it appears that in transactions in which multiple classes of
Grantor Trust Certificates (including Grantor Trust Strip Certificates) are
issued, the fees and expenses should be allocated among the classes of Grantor
Trust Certificates using a method that recognizes that each such class benefits
from the related services. In the absence of statutory or administrative
clarification as to the method to be used, it currently is intended to base
information returns or reports to the IRS and certificateholders on a method
that allocates the expenses among classes of Grantor Trust Certificates with
respect to each period based on the distributions made to each such class during
that period.
82
The federal income tax treatment of Grantor Trust Fractional Interest
Certificates of any series will depend on whether they are subject to the
"stripped bond" rules of Section 1286 of the Code. Grantor Trust Fractional
Interest Certificates may be subject to those rules if (1) a class of Grantor
Trust Strip Certificates is issued as part of the same series of certificates
or(2) the company or any of its affiliates retains (for its own account or for
purposes of resale) a right to receive a specified portion of the interest
payable on the mortgage loans. Further, the IRS has ruled that an unreasonably
high servicing fee retained by a seller or servicer will be treated as a
retained ownership interest in mortgages that constitutes a stripped coupon. For
purposes of determining what constitutes reasonable servicing fees for various
types of mortgages the IRS has established "safe harbors." The servicing fees
paid with respect to the mortgage loans for a series of Grantor Trust
Certificates may be higher than the "safe harbors" and, accordingly, may not
constitute reasonable servicing compensation. The related prospectus supplement
will include information regarding servicing fees paid to the master servicer,
any subservicer or their respective affiliates necessary to determine whether
the preceding "safe harbor" rules apply.
If Stripped Bond Rules Apply. If the stripped bond rules apply, each
Grantor Trust Fractional Interest Certificate will be treated as having been
issued with "original issue discount" within the meaning of Section 1273(a) of
the Code, subject, however, to the discussion below regarding the treatment of
some stripped bonds as market discount bonds and the discussion regarding de
minimis market discount. See "--Taxation of Owners of Grantor Trust Fractional
Interest Certificates--Market Discount" below. Under the stripped bond rules,
the holder of a Grantor Trust Fractional Interest Certificate (whether a cash or
accrual method taxpayer) will be required to report interest income from its
Grantor Trust Fractional Interest Certificate for each month in an amount equal
to the income that accrues on the certificate in that month calculated under a
constant yield method, in accordance with the rules of the Code relating to
original issue discount.
The original issue discount on a Grantor Trust Fractional Interest
Certificate will be the excess of the certificate's stated redemption price over
its issue price. The issue price of a Grantor Trust Fractional Interest
Certificate as to any purchaser will be equal to the price paid by the purchaser
for the Grantor Trust Fractional Interest Certificate. The stated redemption
price of a Grantor Trust Fractional Interest Certificate will be the sum of all
payments to be made on the certificate, other than "qualified stated interest,"
if any, as well as the certificate's share of reasonable servicing fees and
other expenses. See "--Taxation of Owners of Grantor Trust Fractional Interest
Certificates--If Stripped Bond Rules Do Not Apply" for a definition of
"qualified stated interest." In general, the amount of the income that accrues
in any month would equal the product of the holder's adjusted basis in the
Grantor Trust Fractional Interest Certificate at the beginning of the month (see
"Sales of Grantor Trust Certificates") and the yield of the Grantor Trust
Fractional Interest Certificate to the holder. This yield would be computed at
the rate (compounded based on the regular interval between distribution dates)
that, if used to discount the holder's share of future payments on the mortgage
loans, would cause the present value of those future payments to equal the price
at which the holder purchased the certificate. In computing yield under the
stripped bond rules, a certificateholder's share of future payments on the
mortgage loans will not include any payments made in respect of any ownership
interest in the mortgage loans retained by the company, the master servicer, any
subservicer or their respective affiliates, but will include the
certificateholder's share of any reasonable servicing fees and other expenses.
To the extent the Grantor Trust Fractional Interest Certificates represent
an interest in any pool of debt instruments the yield on which may be affected
by reason of prepayments, Section 1272(a)(6) of the Code requires (1) the use of
a reasonable prepayment assumption in accruing original issue discount and (2)
adjustments in the accrual of original issue discount when prepayments do not
conform to the prepayment assumption. It is unclear whether those provisions
would be applicable to the Grantor Trust Fractional Interest Certificates that
do not represent an interest in any pool of debt instruments the yield on which
may be affected by reason of prepayments. It is also uncertain, if a prepayment
assumption is used, whether the assumed prepayment rate would be determined
based on conditions at the time of the first sale of the Grantor Trust
Fractional Interest Certificate or, with respect to any holder, at the time of
purchase of the Grantor Trust Fractional Interest Certificate by that holder.
Certificateholders are advised to consult their own tax advisors concerning
reporting original issue discount with respect to Grantor Trust Fractional
Interest
83
Certificates and, in particular, whether a prepayment assumption should be used
in reporting original issue discount.
In the case of a Grantor Trust Fractional Interest Certificate acquired at
a price equal to the principal amount of the mortgage loans allocable to the
certificate, the use of a prepayment assumption generally would not have any
significant effect on the yield used in calculating accruals of interest income.
In the case, however, of a Grantor Trust Fractional Interest Certificate
acquired at a discount or premium (that is, at a price less than or greater than
the principal amount, respectively), the use of a reasonable prepayment
assumption would increase or decrease the yield, and thus accelerate or
decelerate, respectively, the reporting of income.
If a prepayment assumption is not used, then when a mortgage loan prepays
in full, the holder of a Grantor Trust Fractional Interest Certificate acquired
at a discount or a premium generally will recognize ordinary income or loss
equal to the difference between the portion of the prepaid principal amount of
the mortgage loan that is allocable to the certificate and the portion of the
adjusted basis of the certificate that is allocable to the certificateholder's
interest in the mortgage loan. If a prepayment assumption is used, it appears
that no separate item of income or loss should be recognized upon a prepayment.
Instead, a prepayment should be treated as a partial payment of the stated
redemption price of the Grantor Trust Fractional Interest Certificate and
accounted for under a method similar to that described for taking account of
original issue discount on Bonds. See "--General--Taxation of Owners of
Bonds--Interest and Original Issue Discount." It is unclear whether any other
adjustments would be required to reflect differences between an assumed
prepayment rate and the actual rate of prepayments.
It is currently intended to base information reports or returns to the IRS
and certificateholders in transactions subject to the stripped bond rules on a
Prepayment Assumption that will be disclosed in the related prospectus
supplement and on a constant yield computed using a representative initial
offering price for each class of certificates. However, none of the company, the
master servicer or the trustee will make any representation that the mortgage
loans will in fact prepay at a rate conforming to the Prepayment Assumption or
any other rate and certificateholders should bear in mind that the use of a
representative initial offering price will mean that the information returns or
reports, even if otherwise accepted as accurate by the IRS, will in any event be
accurate only as to the initial certificateholders of each series who bought at
that price.
Under Treasury regulation Section 1.1286-1, some stripped bonds are to be
treated as market discount bonds and, accordingly, any purchaser of such a bond
is to account for any discount on the bond as market discount rather than
original issue discount. This treatment only applies, however, if immediately
after the most recent disposition of the bond by a person stripping one or more
coupons from the bond and disposing of the bond or coupon (1) there is no
original issue discount (or only a de minimis amount of original issue discount)
or (2) the annual stated rate of interest payable on the original bond is no
more than one percentage point lower than the gross interest rate payable on the
original mortgage loan (before subtracting any servicing fee or any stripped
coupon). If interest payable on a Grantor Trust Fractional Interest Certificate
is more than one percentage point lower than the gross interest rate payable on
the mortgage loans, the related prospectus supplement will disclose that fact.
If the original issue discount or market discount on a Grantor Trust Fractional
Interest Certificate determined under the stripped bond rules is less than 0.25%
of the stated redemption price multiplied by the weighted average maturity of
the mortgage loans, then that original issue discount or market discount will be
considered to be de minimis. Original issue discount or market discount of only
a de minimis amount will be included in income in the same manner as de minimis
original issue and market discount described in "Characteristics of Investments
in Grantor Trust Certificates--If Stripped Bond Rules Do Not Apply" and"--Market
Discount" below.
If Stripped Bond Rules Do Not Apply. Subject to the discussion below on
original issue discount, if the stripped bond rules do not apply to a Grantor
Trust Fractional Interest Certificate, the certificateholder will be required to
report its share of the interest income on the mortgage loans in accordance with
the certificateholder's normal method of accounting. The original issue discount
rules will apply to a Grantor Trust Fractional Interest Certificate to the
extent it evidences an interest in mortgage loans issued with original issue
discount.
84
The original issue discount, if any, on the mortgage loans will equal the
difference between the stated redemption price of the mortgage loans and their
issue price. Under the OID Regulations, the stated redemption price is equal to
the total of all payments to be made on the mortgage loan other than "qualified
stated interest." "Qualified stated interest" is interest that is
unconditionally payable at least annually at a single fixed rate, or at a
"qualified floating rate," an "objective rate," a combination of a single fixed
rate and one or more "qualified floating rates" or one "qualified inverse
floating rate," or a combination of "qualified floating rates" that does not
operate in a manner that accelerates or defers interest payments on the mortgage
loan. In general, the issue price of a mortgage loan will be the amount received
by the borrower from the lender under the terms of the mortgage loan, less any
"points" paid by the borrower, and the stated redemption price of a mortgage
loan will equal its principal amount, unless the mortgage loan provides for an
initial below-market rate of interest or the acceleration or the deferral of
interest payments. The determination as to whether original issue discount will
be considered to be de minimis will be calculated using the same test described
in the discussion of the Bonds. See "--General--Taxation of Owners of
Bonds--Interest and Original Issue Discount" above.
In the case of mortgage loans bearing adjustable or variable interest
rates, the related prospectus supplement will describe the manner in which the
rules will be applied with respect to those mortgage loans by the master
servicer or the trustee in preparing information returns to the
certificateholders and the IRS.
If original issue discount is in excess of a de minimis amount, all
original issue discount with respect to a mortgage loan will be required to be
accrued and reported in income each month, based on a constant yield.
Section1272(a)(6) of the Code requires that a prepayment assumption be made in
computing yield with respect to any pool of debt instruments the yield on which
may be affected by reason of prepayments. Accordingly, for certificates backed
by these pools, it is intended to base information reports and returns to the
IRS and certificateholders on the use of a prepayment assumption.
Certificateholders are advised to consult their own tax advisors concerning
whether a prepayment assumption should be used in reporting original issue
discount with respect to Grantor Trust Fractional Interest Certificates.
Certificateholders should refer to the related prospectus supplement with
respect to each series to determine whether and in what manner the original
issue discount rules will apply to mortgage loans in the series.
A purchaser of a Grantor Trust Fractional Interest Certificate that
purchases the Grantor Trust Fractional Interest Certificate at a cost less than
the certificate's allocable portion of the aggregate remaining stated redemption
price of the mortgage loans held in the related trust fund will also be required
to include in gross income the certificate's daily portions of any original
issue discount with respect to the mortgage loans. However, each such daily
portion will be reduced, if the cost of the Grantor Trust Fractional Interest
Certificate to the purchaser is in excess of the certificate's allocable portion
of the aggregate "adjusted issue prices" of the mortgage loans held in the
related trust fund, approximately in proportion to the ratio the excess bears to
the certificate's allocable portion of the aggregate original issue discount
remaining to be accrued on the mortgage loans. The adjusted issue price of a
mortgage loan on any given day equals the sum of (1) the adjusted issue price
(or, in the case of the first accrual period, the issue price) of the mortgage
loan at the beginning of the accrual period that includes the day and (2) the
daily portions of original issue discount for all days during the accrual period
prior to the day. The adjusted issue price of a mortgage loan at the beginning
of any accrual period will equal the issue price of the mortgage loan, increased
by the aggregate amount of original issue discount with respect to the mortgage
loan that accrued in prior accrual periods, and reduced by the amount of any
payments made on the mortgage loan in prior accrual periods of amounts included
in its stated redemption price.
In addition to its regular reports, the master servicer or the trustee,
except as provided in the related prospectus supplement, will provide to any
holder of a Grantor Trust Fractional Interest Certificate such information as
the holder may reasonably request from time to time with respect to original
issue discount accruing on Grantor Trust Fractional Interest Certificates. See
"Grantor Trust Reporting" below.
Market Discount. If the stripped bond rules do not apply to the Grantor
Trust Fractional Interest Certificate, a certificateholder may be subject to the
market discount rules of Sections 1276
85
through 1278 of the Code to the extent an interest in a mortgage loan is
considered to have been purchased at a "market discount," that is, in the case
of a mortgage loan issued without original issue discount, at a purchase price
less than its remaining stated redemption price (as defined above), or in the
case of a mortgage loan issued with original issue discount, at a purchase price
less than its adjusted issue price (as defined above). If market discount is in
excess of a de minimis amount (as described below), the holder generally will be
required to include in income in each month the amount of the discount that has
accrued (under the rules described in the next paragraph) through the month that
has not previously been included in income, but limited, in the case of the
portion of the discount that is allocable to any mortgage loan, to the payment
of stated redemption price on the mortgage loan that is received by (or, in the
case of accrual basis certificateholders, due to) the trust fund in that month.
A certificateholder may elect to include market discount in income currently as
it accrues (under a constant yield method based on the yield of the certificate
to the holder) rather than including it on a deferred basis in accordance with
the foregoing under rules similar to those described in "--Taxation of Owners of
Bonds--Market Discount" above.
Section 1276(b)(3) of the Code authorized the Treasury Department to issue
regulations providing for the method for accruing market discount on debt
instruments, the principal of which is payable in more than one installment.
Until such time as regulations are issued by the Treasury Department, some rules
described in the Committee Report will apply. Under those rules, in each accrual
period market discount on the mortgage loans should accrue, at the
certificateholder's option: (1) on the basis of a constant yield method, (2) in
the case of a mortgage loan issued without original issue discount, in an amount
that bears the same ratio to the total remaining market discount as the stated
interest paid in the accrual period bears to the total stated interest remaining
to be paid on the mortgage loan as of the beginning of the accrual period, or(3)
in the case of a mortgage loan issued with original issue discount, in an amount
that bears the same ratio to the total remaining market discount as the original
issue discount accrued in the accrual period bears to the total original issue
discount remaining at the beginning of the accrual period. The prepayment
assumption, if any, used in calculating the accrual of original issue discount
is to be used in calculating the accrual of market discount. The effect of using
a prepayment assumption could be to accelerate the reporting of the discount
income. Because the regulations referred to in this paragraph have not been
issued, it is not possible to predict what effect the regulations might have on
the tax treatment of a mortgage loan purchased at a discount in the secondary
market.
Because the mortgage loans will provide for periodic payments of stated
redemption price, the market discount may be required to be included in income
at a rate that is not significantly slower than the rate at which the discount
would be included in income if it were original issue discount.
Market discount with respect to mortgage loans may be considered to be de
minimis and, if so, will be includible in income under de minimis rules similar
to those described above in "--General--Taxation of Owners of Bonds--Interest
and Original Issue Discount" with the exception that it is less likely that a
prepayment assumption will be used for purposes of these rules with respect to
the mortgage loans.
Further, under the rules described in "--General--Taxation of Owners of
Bonds--Market Discount," above, any discount that is not original issue discount
and exceeds a de minimis amount may require the deferral of interest expense
deductions attributable to accrued market discount not yet includible in income,
unless an election has been made to report market discount currently as it
accrues. This rule applies without regard to the origination dates of the
mortgage loans.
Premium. If a certificateholder is treated as acquiring the underlying
mortgage loans at a premium, that is, at a price in excess of their remaining
stated redemption price, the certificateholder may elect under Section 171 of
the Code to amortize using a constant yield method the portion of the premium
allocable to mortgage loans. Amortizable premium is treated as an offset to
interest income on the related debt instrument, rather than as a separate
interest deduction. However, premium allocable to mortgage loans for which an
amortization election is not made, should be allocated among the payments of
stated redemption price on the mortgage loan and be allowed as a deduction as
these payments are made (or, for a certificateholder using the accrual method of
accounting, when the payments of stated redemption price are due).
86
It is unclear whether a prepayment assumption should be used in computing
amortization of premium allowable under Section 171 of the Code. If premium is
not subject to amortization using a prepayment assumption and a mortgage loan
prepays in full, the holder of a Grantor Trust Fractional Interest Certificate
acquired at a premium should recognize a loss, equal to the difference between
the portion of the prepaid principal amount of the mortgage loan that is
allocable to the certificate and the portion of the adjusted basis of the
certificate that is allocable to the mortgage loan. If a prepayment assumption
is used to amortize premium, it appears that such a loss would be unavailable.
Instead, if a prepayment assumption is used, a prepayment should be treated as a
partial payment of the stated redemption price of the Grantor Trust Fractional
Interest Certificate and accounted for under a method similar to that described
for taking account of original issue discount on the Bonds. See
"General--Taxation of Owners of Bonds--Interest and Original Issue discount." It
is unclear whether any other adjustments would be required to reflect
differences between the prepayment assumption used, and the actual rate of
prepayments.
Taxation of Owners of Grantor Trust Strip Certificates. The "stripped
coupon" rules of Section 1286 of the Code will apply to the Grantor Trust Strip
Certificates. Except as described above in "Characterization of Investments in
Grantor Trust Certificates--If Stripped Bond Rules Apply," no regulations or
published rulings under Section 1286 of the Code have been issued and some
uncertainty exists as to how it will be applied to securities such as the
Grantor Trust Strip Certificates. Accordingly, holders of Grantor Trust Strip
Certificates should consult their own tax advisors concerning the method to be
used in reporting income or loss with respect to the certificates.
The OID Regulations do not apply to "stripped coupons," although they
provide general guidance as to how the original issue discount sections of the
Code will be applied. In addition, the discussion below is subject to the
discussion under "--Possible Application of Contingent Payment Rules" and
assumes that the holder of a Grantor Trust Strip Certificate will not own any
Grantor Trust Fractional Interest Certificates.
Under the stripped coupon rules, it appears that original issue discount
will be required to be accrued in each month on the Grantor Trust Strip
Certificates based on a constant yield method. In effect, each holder of Grantor
Trust Strip Certificates would include as interest income in each month an
amount equal to the product of the holder's adjusted basis in the Grantor Trust
Strip Certificate at the beginning of that month and the yield of the Grantor
Trust Strip Certificate to the holder. The yield would be calculated based on
the price paid for that Grantor Trust Strip Certificate by its holder and the
payments remaining to be made thereon at the time of the purchase, plus an
allocable portion of the servicing fees and expenses to be paid with respect to
the mortgage loans. See "Characterization of Investments in Grantor Trust
Certificates--If Stripped Bond Rules Apply" above.
As noted above, Section 1272(a)(6) of the Code requires that a prepayment
assumption be used in computing the accrual of original issue discount with
respect to some categories of debt instruments, and that adjustments be made in
the amount and rate of accrual of the discount when prepayments do not conform
to the prepayment assumption. To the extent the Grantor Trust Strip Certificates
represent an interest in any pool of debt instruments the yield on which may be
affected by reason of prepayments, those provisions will apply to the Grantor
Trust Strip Certificates for taxable years beginning after August 5, 1997. It is
unclear whether those provisions would be applicable to the Grantor Trust Strip
Certificates that do not represent an interest in any such pool or for taxable
years beginning prior to August 5, 1997, or whether use of a prepayment
assumption may be required or permitted in the absence of these provisions. It
is also uncertain, if a prepayment assumption is used, whether the assumed
prepayment rate would be determined based on conditions at the time of the first
sale of the Grantor Trust Strip Certificate or, with respect to any subsequent
holder, at the time of purchase of the Grantor Trust Strip Certificate by that
holder.
The accrual of income on the Grantor Trust Strip Certificates will be
significantly slower if a prepayment assumption is permitted to be made than if
yield is computed assuming no prepayments. It currently is intended to base
information returns or reports to the IRS and certificateholders on the
prepayment Assumption disclosed in the related prospectus supplement and on a
constant yield computed using a representative initial offering price for each
class of certificates. However, none of the company, the master servicer or the
trustee will make any representation that the mortgage
87
loans will in fact prepay at a rate conforming to the Prepayment Assumption or
at any other rate and certificateholders should bear in mind that the use of a
representative initial offering price will mean that the information returns or
reports, even if otherwise accepted as accurate by the IRS, will in any event be
accurate only as to the initial certificateholders of each series who bought at
that price. Prospective purchasers of the Grantor Trust Strip Certificates
should consult their own tax advisors regarding the use of the Prepayment
Assumption.
It is unclear under what circumstances, if any, the prepayment of a
mortgage loan will give rise to a loss to the holder of a Grantor Trust Strip
Certificate. If a Grantor Trust Strip Certificate is treated as a single
instrument (rather than an interest in discrete mortgage loans) and the effect
of prepayments is taken into account in computing yield with respect to the
Grantor Trust Strip Certificate, it appears that no loss may be available as a
result of any particular prepayment unless prepayments occur at a rate faster
than the Prepayment Assumption. However, if a Grantor Trust Strip Certificate is
treated as an interest in discrete mortgage loans, or if the Prepayment
Assumption is not used, then when a mortgage loan is prepaid, the holder of a
Grantor Trust Strip Certificate should be able to recognize a loss equal to the
portion of the adjusted issue price of the Grantor Trust Strip Certificate that
is allocable to the mortgage loan.
Possible Application of Contingent Payment Rules. The coupon stripping
rules' general treatment of stripped coupons is to regard them as newly issued
debt instruments in the hands of each purchaser. To the extent that payments on
the Grantor Trust Strip Certificates would cease if the mortgage loans were
prepaid in full, the Grantor Trust Strip Certificates could be considered to be
debt instruments providing for contingent payments. Under the OID Regulations,
debt instruments providing for contingent payments are not subject to the same
rules as debt instruments providing for noncontingent payments. Regulations were
promulgated on June 14, 1996, regarding contingent payment debt instruments (the
"Contingent Payment Regulations"), but it appears that Grantor Trust Strip
Certificates, to the extent subject to Section 1272(a)(6) of the Code, as
described above, or due to their similarity to other mortgage-backed securities
(such as debt instruments subject to Section 1272(a)(6) of the Code) that are
expressly excepted from the application of the Contingent Payment Regulations,
are or may be excepted from these regulations. Like the OID Regulations, the
Contingent Payment Regulations do not specifically address securities, such as
the Grantor Trust Strip Certificates, that are subject to the stripped bond
rules of Section 1286 of the Code.
If the contingent payment rules under the Contingent Payment Regulations
were to apply, the holder of a Grantor Trust Strip Certificate would be required
to apply the "noncontingent bond method." Under the "noncontingent bond method,"
the issuer of a Grantor Trust Strip Certificate determines a projected payment
schedule on which interest will accrue. Holders of Grantor Trust Strip
Certificates are bound by the issuer's projected payment schedule. The projected
payment schedule consists of all noncontingent payments and a projected amount
for each contingent payment based on the projected yield (as described below) of
the Grantor Trust Strip Certificate. The projected amount of each payment is
determined so that the projected payment schedule reflects the projected yield.
The projected amount of each payment must reasonably reflect the relative
expected values of the payments to be received by the holder of a Grantor Trust
Strip Certificate. The projected yield referred to above is a reasonable rate,
not less than the "applicable Federal rate" that, as of the issue date, reflects
general market conditions, the credit quality of the issuer, and the terms and
conditions of the mortgage loans. The holder of a Grantor Trust Strip
Certificate would be required to include as interest income in each month the
adjusted issue price of the Grantor Trust Strip Certificate at the beginning of
the period multiplied by the projected yield, and would add to, or subtract
from, the income any variation between the payment actually received in that
month and the payment originally projected to be made in that month.
Assuming that a prepayment assumption were used, if the Contingent Payment
Regulations or their principles were applied to Grantor Trust Strip
Certificates, the amount of income reported with respect thereto would be
substantially similar to that described under "Taxation of Owners of Grantor
Trust Strip Certificates". Certificateholders should consult their tax advisors
concerning the possible application of the contingent payment rules to the
Grantor Trust Strip Certificates.
Sales of Grantor Trust Certificates. Any gain or loss equal to the
difference between the amount realized on the sale or exchange of a Grantor
Trust Certificate and its adjusted basis,
88
recognized on the sale or exchange of a Grantor Trust Certificate by an investor
who holds the Grantor Trust Certificate as a capital asset, will be capital gain
or loss, except to the extent of accrued and unrecognized market discount, which
will be treated as ordinary income, and (in the case of banks and other
financial institutions)except as provided under Section 582(c) of the Code. The
adjusted basis of a Grantor Trust Certificate generally will equal its cost,
increased by any income reported by the seller (including original issue
discount and market discount income) and reduced (but not below zero) by any
previously reported losses, any amortized premium and by any distributions with
respect to the Grantor Trust Certificate.
Gain or loss from the sale of a Grantor Trust Certificate may be partially
or wholly ordinary and not capital in some circumstances. Gain attributable to
accrued and unrecognized market discount will be treated as ordinary income, as
will gain or loss recognized by banks and other financial institutions subject
Section 582(c) of the Code. Furthermore, a portion of any gain that might
otherwise be capital gain may be treated as ordinary income to the extent that
the Grantor Trust Certificate is held as part of a "conversion
transaction"within the meaning of Section 1258 of the Code. A conversion
transaction generally is one in which the taxpayer has taken two or more
positions in the same or similar property that reduce or eliminate market risk,
if substantially all of the taxpayer's return is attributable to the time value
of the taxpayer's net investment in the transaction. The amount of gain realized
in a conversion transaction that is recharacterized as ordinary income generally
will not exceed the amount of interest that would have accrued on the taxpayer's
net investment at 120% of the appropriate "applicable Federal rate" (which rate
is computed and published monthly by the IRS) at the time the taxpayer enters
into the conversion transaction, subject to appropriate reduction for prior
inclusion of interest and other ordinary income items from the transaction.
Finally, a taxpayer may elect to have net capital gain taxed at ordinary income
rates rather than capital gains rates in order to include the net capital gain
in total net investment income for that taxable year, for purposes of the rule
that limits the deduction of interest on indebtedness incurred to purchase or
carry property held for investment to a taxpayer's net investment income.
Grantor Trust Reporting. The master servicer or the trustee will furnish
to each holder of a Grantor Trust Fractional Interest Certificate with each
distribution a statement setting forth the amount of the distribution allocable
to principal on the underlying mortgage loans and to interest thereon at the
related pass-through rate. In addition, the master servicer or the trustee will
furnish, within a reasonable time after the end of each calendar year, to each
holder of a Grantor Trust Certificate who was a holder at any time during that
year, information regarding the amount of servicing compensation received by the
master servicer and subservicer (if any) and any other customary factual
information as the master servicer or the trustee deems necessary or desirable
to enable holders of Grantor Trust Certificates to prepare their tax returns and
will furnish comparable information to the IRS as and when required by law to do
so. Because the rules for accruing discount and amortizing premium with respect
to the Grantor Trust Certificates are uncertain in various respects, there is no
assurance the IRS will agree with the trust fund's information reports of these
items of income and expense. Moreover, these information reports, even if
otherwise accepted as accurate by the IRS, will in any event be accurate only as
to the initial certificateholders that bought their certificates at the
representative initial offering price used in preparing the reports.
Except as disclosed in the related prospectus supplement, the
responsibility for complying with the foregoing reporting rules will be borne by
the master servicer or the trustee.
Backup Withholding. In general, the rules described in "--General--Backup
Withholding with Respect to the Bonds" will also apply to Grantor Trust
Certificates.
Foreign Investors. In general, the discussion with respect to the Bonds in
"General--Foreign Investors in Bonds" applies to Grantor Trust Certificates
except that Grantor Trust Certificates will, except as disclosed in the related
prospectus supplement, be eligible for exemption from U.S. withholding tax,
subject to the conditions described in the discussion.
To the extent that interest on a Grantor Trust Certificate would be exempt
under Sections 871(h)(1) and 881(c) of the Code from United States withholding
tax, and the Grantor Trust Certificate is not held in connection with a
certificateholder's trade or business in the United States,
89
the Grantor Trust Certificate will not be subject to United States estate taxes
in the estate of a non- resident alien individual.
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
bonds offered under this prospectus and the prospectus supplement. 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 state and other tax
consequences of investments in the bonds offered under this prospectus and the
prospectus supplement.
ERISA CONSIDERATIONS
Sections 404 and 406 of ERISA impose fiduciary and prohibited transaction
restrictions on ERISA Plans and on various other retirement plans and
arrangements, including bank collective investment funds and insurance company
general and separate accounts in which ERISA Plans are invested. Section 4975 of
the Code imposes essentially the same prohibited transaction restrictions on Tax
Favored Plans. ERISA and the Code prohibit a broad range of transactions
involving assets of Plans and Parties in Interest, unless a statutory or
administrative exemption is available with respect to any such transaction.
Some employee benefit plans, including governmental plans (as defined in
Section 3(32) of ERISA), and, if no election has been made under Section 410(d)
of the Code, church plans (as defined in Section 3(33) of ERISA) are not subject
to the ERISA requirements. Accordingly, assets of these plans may be invested in
the bonds without regard to the ERISA considerations described below, subject to
the provisions of other applicable federal, state and local law. Any such plan
which is qualified and exempt from taxation under Sections 401(a) and 501(a) of
the Code, however, is subject to the prohibited transaction rules set forth in
Section 503 of the Code.
ERISA generally imposes on Plan fiduciaries 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. Any person who has discretionary authority or control with
respect to the management or disposition of Plan Assets and any person who
provides investment advice with respect to Plan Assets for a fee is a fiduciary
of the investing Plan. If the mortgage loans and other assets included in the
trust fund were to constitute Plan Assets, then any party exercising management
or discretionary control with respect to those Plan Assets may be deemed to be a
Plan "fiduciary," and thus subject to the fiduciary responsibility provisions of
ERISA and the prohibited transaction provisions of ERISA and Section 4975 of the
Code with respect to any investing Plan. In addition, the acquisition or holding
of bonds by or on behalf of a Plan or with Plan Assets, as well as the operation
of the trust fund, may constitute or involve a prohibited transaction under
ERISA and the Code unless a statutory or administrative exemption is available.
Further, ERISA and the Code prohibit a broad range of transactions involving
Plan Assets and persons, called Parties in Interest unless a statutory or
administrative exemption is available. Some Parties in Interest that participate
in a prohibited transaction may be subject to a penalty (or an excise tax)
imposed under Section 502(i) of ERISA or Section 4975 of the Code, unless a
statutory or administrative exemption is available with respect to any
transaction of this sort.
Some transactions involving the trust fund might be deemed to constitute
prohibited transactions under ERISA and the Code with respect to a Plan that
purchases the bonds, if the mortgage loans and other assets included in a trust
fund are deemed to be assets of the Plan. The DOL has promulgated the DOL
Regulations concerning whether or not a Plan's assets, or "Plan Assets" would be
deemed to include an interest in the underlying assets of an entity, including a
trust fund, for purposes of applying the general fiduciary responsibility
provisions of ERISA and the prohibited transaction provisions of ERISA and the
Code. Under the DOL Regulations, generally, when a Plan acquires an "equity
interest" in another entity (such as the trust fund), the underlying assets of
that entity may be considered to be Plan Assets unless an exception applies.
Exceptions contained in the
90
DOL Regulations provide that a Plan's assets will not include an undivided
interest in each asset of an entity in which the Plan makes an equity investment
if: (1) the entity is an operating company; (2) the equity investment made by
the Plan is either a "publicly-offered security" that is "widely held," both as
defined in the DOL Regulations, or a security issued by an investment company
registered under the Investment Company Act of 1940, as amended; or (3) Benefit
Plan Investors do not own 25% or more in value of any class of equity securities
issued by the entity. In addition, the DOL Regulations provide that the term
"equity interest" means any interest in an entity other than an instrument which
is treated as indebtedness under applicable local law and which has no
"substantial equity features." Under the DOL Regulations, Plan Assets will be
deemed to include an interest in the instrument evidencing the equity interest
of a Plan (such as a bond with "substantial equity features"), and, because of
the factual nature of some of the rules set forth in the DOL Regulations, Plan
Assets may be deemed to include an interest in the underlying assets of the
entity in which a Plan acquires an interest (such as the trust fund). Without
regard to whether the bonds are characterized as equity interests, the purchase,
sale and holding of bonds by or on behalf of a Plan could be considered to give
rise to a prohibited transaction if the Issuer, the trustee or any of their
respective affiliates is or becomes a Party in Interest with respect to the
Plan. Neither Plans nor persons investing Plan Assets should acquire or hold
bonds in reliance upon the availability of any exception under the DOL
Regulations.
The DOL has issued Exemptions to some underwriters, which generally
exempts from the application of the prohibited transaction provisions of Section
406 of ERISA, and the excise taxes imposed on those prohibited transactions
pursuant to Section 4975(a) and (b) of the Code, some transactions, among
others, relating to the servicing and operation of mortgage pools and the
initial purchase, holding and subsequent resale of mortgage-backed bonds or
other "securities" underwritten by an Underwriter, as defined below, provided
that the conditions set forth in the Exemption are satisfied. For purposes of
this Section "ERISA Considerations", the term "Underwriter" shall include (1)
the underwriter, (2) any person directly or indirectly, through one or more
intermediaries, controlling, controlled by or under common control with the
underwriter and (3) any member of the underwriting syndicate or selling group of
which a person described in (1) or (2) is a manager or co- manager with respect
to a class of securities.
The Exemption sets forth seven general conditions which must be satisfied
for the Exemption to apply. First, the acquisition of bonds by a Plan or with
Plan Assets 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
Exemption only applies to bonds evidencing rights and interests that are not
subordinated to the rights and interests evidenced by other bonds of the same
trust, unless none of the mortgage loans has a loan-to- value ratio or combined
loan-to-value ratio at the date of issuance of the bonds that exceeds 100%.
Third, the bonds at the time of acquisition by a Plan or with Plan Assets must
be rated in one of the four highest generic rating categories by an Exemption
Rating Agency. However, the bonds must be rated in one of the two highest
generic categories by an Exemption Rating Agency if the loan-to-value ratio or
combined loan-to-value ratio of any one- to four-family residential mortgage
loan or home equity loan held in the trust exceeds 100% but does not exceed 125%
at the date of issuance of the bonds, and in that case the Exemption will not
apply: (1) to any of the bonds if any mortgage loan or other asset held in the
trust (other than a one- to four-family residential mortgage loan or home equity
loan) has a loan-to-value ratio or combined loan-to-value ratio that exceeds
100% at the Closing Date or (2) to any subordinate bonds. Fourth, the trustee
cannot be an affiliate of any member of the Restricted Group other than the
underwriter. Fifth, the sum of all payments made to and retained by the
Underwriter(s) must represent not more than reasonable compensation for
underwriting the bonds; the sum of all payments made to and retained by the
company pursuant to the assignment of the assets to the related trust fund must
represent not more than the fair market value of the obligations; and the sum of
all payments made to and retained by the master servicer, the special servicer
and any subservicer must represent not more than reasonable compensation for the
person's services under the related Agreement and reimbursement of the person's
reasonable expenses in connection therewith. Sixth, the investing Plan or Plan
Asset investor must be an accredited investor as defined in Rule 501(a)(1) of
Regulation D of the Commission under the Securities Act. Seventh, for Issuers
other than certain trusts, the documents establishing the Issuer and governing
the transaction must contain certain provisions as described in the Exemption
intended to protect the assets of the Issuer from creditors of the Company. In
addition, except as otherwise specified in the accompanying prospectus
supplement, the exemptive relief
91
afforded by the Exemption may not apply to any bonds where the related trust
contains a swap, a yield maintenance agreement or a pre-funding arrangement
unless they meet certain conditions.
The Exemption also requires that the trust fund meet the following
requirements: (1) the trust fund must consist solely of assets of the type that
have been included in other investment pools; (2) bonds evidencing interests in
the other investment pools must have been rated in one of the four highest
generic categories of one of the Exemption Rating Agencies for at least one year
prior to the acquisition of bonds by or on behalf of a Plan or with Plan Assets;
and (3) bonds evidencing interests in the other investment pools must have been
purchased by investors other than Plans for at least one year prior to any
acquisition of bonds by or on behalf of a Plan or with Plan Assets.
A fiduciary of a Plan or any person investing Plan Assets to purchase a
bond must make its own determination that the conditions set forth above will be
satisfied with respect to the bond.
If the general conditions of the Exemption are satisfied, the Exemption
may provide an exemption from the restrictions imposed by Sections 406(a) and
407(a) of ERISA, and 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 or transfer of bonds in the initial
issuance of the bonds or the direct or indirect acquisition or disposition in
the secondary market of bonds by a Plan or with Plan Assets or the continued
holding of bonds acquired by a Plan or with Plan Assets pursuant to either of
the foregoing. 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 bond on behalf of an "Excluded Plan" by any person who has discretionary
authority or renders investment advice with respect to the assets of an Excluded
Plan. For purposes of the bonds, an Excluded Plan is a Plan sponsored by any
member of the Restricted Group.
If the 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 excise 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 bonds
in the initial issuance of bonds between the company or an Underwriter and a
Plan when the person who has discretionary authority or renders investment
advice with respect to the investment of Plan Assets in the securities is (a) a
mortgagor with respect to 5% or less of the fair market value of the trust fund
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 or
with Plan Assets and (3) the continued holding of securities acquired by a Plan
or with Plan Assets pursuant to either of the foregoing.
Further, if the 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 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
trust fund. The company 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 trust fund, provided that the general conditions of the Exemption are
satisfied.
The Exemption also may provide an exemption from the application of the
prohibited transaction provisions of Sections 406(a) and 407(a) of ERISA, and
the excise 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 the restrictions are deemed to
otherwise apply merely because a person is deemed to be a Party in Interest with
respect to an investing Plan by virtue of providing services to the Plan (or by
virtue of having a specified relationship to such a person) solely as a result
of the Plan's ownership of securities.
The Exemptions extend exemptive relief to mortgage-backed and asset-backed
bonds transactions using pre-funding accounts for trusts issuing bonds. With
respect to the bonds, the Exemptions will generally allow mortgage loans
supporting payments to bondholders, and having a
92
value equal to no more than 25% of the total principal amount of the bonds being
offered by a trust fund, to be transferred to the trust fund within the
Pre-Funding Period instead of requiring that all the mortgage loans be either
identified or transferred on or before the Closing Date. In general, the relief
applies to the purchase, sale and holding of bonds which otherwise qualify for
the Exemption, provided that the following general conditions are met:
o the ratio of the amount allocated to the pre-funding account to the
total principal amount of the bonds being offered must be less than
or equal to 25%;
o all additional mortgage loans transferred to the related trust fund
after the Closing Date must meet the same terms and conditions for
eligibility as the original mortgage loans used to create the trust
fund, which terms and conditions have been approved by one of the
Exemption Rating Agencies;
o the transfer of the additional mortgage loans to the trust fund
during the Pre-Funding Period must not result in the bonds to be
covered by the Exemptions receiving a lower credit rating from an
Exemption Rating Agency upon termination of the Pre-Funding Period
than the rating that was obtained at the time of the initial
issuance of the bonds by the trust fund;
o solely as a result of the use of pre-funding, the weighted average
annual percentage interest rate for the mortgage loans included in
the related trust fund on the Closing Date and all additional
mortgage loans transferred to the related trust fund after the
Closing Date at the end of the Pre- Funding Period must not be more
than 100 basis points lower than the rate for the mortgage loans
which were transferred to the trust fund on the Closing Date;
o either:
(1) the characteristics of the additional mortgage loans
transferred to the related trust fund after the Closing Date must be
monitored by an insurer or other credit support provider which is
independent of the company; or
(2) an independent accountant retained by the company must
provide the company with a letter (with copies provided to the
Exemption Rating Agency rating the bonds, the Underwriter and the
trustee) stating whether or not the characteristics of the
additional mortgage loans transferred to the related trust fund
after the Closing Date conform to the characteristics described in
the prospectus or prospectus supplement and/or agreement. In
preparing the letter, the independent accountant must use the same
type of procedures as were applicable to the mortgage loans which
were transferred to the trust fund as of the Closing Date;
o the Pre-Funding Period must end no later than three months or 90
days after the Closing Date or earlier in some circumstances if the
pre-funding accounts falls below the minimum level specified in the
Agreement or an event of default occurs;
o amounts transferred to any pre-funding accounts and/or capitalized
interest account used in connection with the pre-funding may be
invested only in investments which are permitted by the Exemption
Rating Agencies rating the bonds and must:
(1) be direct obligations of, or obligations fully guaranteed
as to timely payment of principal and interest by, the United States
or any agency or instrumentality thereof (provided that the
obligations are backed by the full faith and credit of the United
States); or
(2) have been rated (or the obligor has been rated) in one of
the three highest generic rating categories by one of the Exemption
Rating Agencies ("ERISA Permitted Investments");
93
o the prospectus or prospectus supplement must describe the duration
of the Pre- Funding Period;
o the trustee (or any agent with which the trustee contracts to
provide trust services) must be a substantial financial institution
or trust company experienced in trust activities and familiar with
its duties, responsibilities and liabilities with ERISA. The
trustee, as legal owner of the trust fund, must enforce all the
rights created in favor of bondholders of the trust fund, including
employee benefit plans subject to ERISA.
In addition to the Exemption, a Plan fiduciary or other Plan Asset
investor should consider any available class exemptions granted by the DOL,
which may provide relief from some of the prohibited transaction provisions of
ERISA and the related excise tax provisions of the Code, including PTCE 83-1,
regarding transactions involving mortgage pool investment trusts; PTCE 84-14,
regarding transactions effected by a "qualified professional asset manager";
PTCE 90-1, regarding transactions by insurance company pooled separate accounts;
PTCE 91-38, regarding investments by bank collective investment funds; PTCE
95-60, regarding transactions by insurance company general accounts; and PTCE
96-23, regarding transactions effected by an "in-house asset manager."
Insurance companies contemplating the investment of general account assets
in the bonds should consult with their legal advisors with respect to the
applicability of Section 401(c) of ERISA. The DOL issued final regulations under
Section 401(c) which became effective on July 5, 2001.
Representation from Plans Investing in Bonds with "Substantial Equity Features"
or Non- exempt Bonds
Except as otherwise provided in the prospectus supplement, because the
exemptive relief afforded by the Exemption (or any similar exemption that might
be available) will not apply to the purchase, sale or holding of certain bonds,
such as bonds with "substantial equity features," subordinate bonds in trusts
containing mortgage loans with loan-to-value ratios in excess of 100% and any
bonds which are not rated in one of the four highest generic rating categories
by the Exemption Rating Agencies, transfers of any the bonds to a Plan, to a
trustee or other person acting on behalf of any Plan, or to any other person
investing Plan Assets to effect the acquisition will not be registered by the
trustee unless the transferee provides the company, the trustee and the master
servicer with an opinion of counsel satisfactory to the company, the trustee (or
Indenture Trustee in the case of transfer of bonds) and the master servicer,
which opinion will not be at the expense of the company, the trustee (or the
Indenture Trustee in the case of the transfer of bonds) or the master servicer,
that the purchase of the bonds by or on behalf of the Plan is permissible under
applicable law, will not constitute or result in any non-exempt prohibited
transaction under ERISA or Section 4975 of the Code and will not subject the
company, the trustee (or the indenture trustee in the case of the transfer of
bonds) or the master servicer to any obligation in addition to those undertaken
in the related Agreement.
An opinion of counsel or certification will not be required with respect
to the purchase of bonds registered with the DTC. Any purchaser of a DTC
registered bond will be deemed to have represented by the purchase that either
(a) the purchaser is not a Plan and is not purchasing the bonds on behalf of, or
with Plan Assets of, any Plan or (b) the purchase of any such bond by or on
behalf of, or with Plan Assets of, any Plan is permissible under applicable law,
will not result in any non- exempt prohibited transaction under ERISA or Section
4975 of the Code and will not subject the company, the trustee or the master
servicer to any obligation in addition to those undertaken in the related
Agreement.
Tax Exempt Investors
A Plan that is exempt from federal income taxation pursuant to Section 501
of the Code nonetheless will be subject to federal income taxation to the extent
that its income is "unrelated business taxable income" within the meaning of
Section 512 of the Code.
94
Consultation with Counsel
There can be no assurance that the Exemptions or any other DOL exemption
will apply with respect to any particular Plan that acquires the bonds or, even
if all the conditions specified therein were satisfied, that any such exemption
would apply to transactions involving the trust fund. Prospective Plan investors
should consult with their legal counsel concerning the impact of ERISA and the
Code and the potential consequences to their specific circumstances prior to
making an investment in the bonds. Neither the company, the trustees, the master
servicer nor any of their respective affiliates will make any representation to
the effect that the bonds satisfy all legal requirements with respect to the
investment therein by Plans generally or any particular Plan or to the effect
that the bonds are an appropriate investment for Plans generally or any
particular Plan.
Before purchasing a bond, a fiduciary of a Plan or other Plan Asset
Investor should itself confirm that (a) all the specific and general conditions
set forth in the Exemption, one of the class exemptions or Section 401(c) of
ERISA would be satisfied and (b) in the case of a bond purchased under the
Exemption, the bond constitutes a "certificate" for purposes of the Exemption.
In addition to making its own determination as to the availability of the
exemptive relief provided in the Exemption, one of the class exemptions or
Section 401(c) of ERISA, the Plan fiduciary should consider its general
fiduciary obligations under ERISA in determining whether to purchase the bonds
on behalf of a Plan.
LEGAL INVESTMENT MATTERS
Each class of bonds offered by this prospectus and by the related
prospectus supplement will be rated at the date of issuance in one of the four
highest rating categories by at least one Rating Agency. If so specified in the
related prospectus supplement, each such class that is rated in one of the two
highest rating categories by at least one Rating Agency will constitute
"mortgage related securities" for purposes of SMMEA, and, as such, will be legal
investments for persons, trusts, corporations, partnerships, associations,
business trusts and business entities (including depository institutions, life
insurance companies and pension funds) created pursuant to or existing under the
laws of the United States or of any State 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
the entities. Under SMMEA, if a State enacted legislation on or prior to October
3, 1991 specifically limiting the legal investment authority of any such
entities with respect to "mortgage related securities," such securities will
constitute legal investments for entities subject to the legislation only to the
extent provided therein. Some States have enacted legislation which overrides
the preemption provisions of SMMEA. SMMEA provides, however, that in no event
will the enactment of any such legislation affect the validity of any
contractual commitment to purchase, hold or invest in "mortgage related
securities," or require the sale or other disposition of the securities, so long
as the contractual commitment was made or the securities acquired prior to the
enactment of the legislation.
SMMEA also amended the legal investment authority of federally-chartered
depository institutions as follows: federal savings and loan associations and
federal savings banks may invest in, sell or otherwise deal with "mortgage
related securities" without limitation as to the percentage of their assets
represented thereby, federal credit unions may invest in the securities, and
national banks may purchase the securities for their own account without regard
to the limitations generally applicable to investment securities set forth in 12
U.S.C. 24 (Seventh), subject in each case to such regulations as the applicable
federal regulatory authority may prescribe.
The Federal Financial Institutions Examination Council has issued a
supervisory policy statement applicable to all depository institutions, setting
forth guidelines for and significant restrictions on investments in "high-risk
mortgage securities." The policy statement has been adopted by the Federal
Reserve Board, the Office of the Comptroller of the Currency, the FDIC and the
OTS with an effective date of February 10, 1992. The policy statement generally
indicates that a mortgage derivative product will be deemed to be high risk if
it exhibits greater price volatility than a standard fixed rate thirty-year
mortgage security. According to the policy statement, prior to purchase, a
depository institution will be required to determine whether a mortgage
derivative product that it is considering acquiring is high-risk, and if so that
the proposed acquisition would reduce the
95
institution's overall interest rate risk. Reliance on analysis and documentation
obtained from a securities dealer or other outside party without internal
analysis by the institution would be unacceptable. There can be no assurance as
to which classes of offered bonds will be treated as high- risk under the policy
statement.
The predecessor to the OTS issued a bulletin, entitled, "Mortgage
Derivative Products and Mortgage Swaps", which is applicable to thrift
institutions regulated by the OTS. The bulletin established guidelines for the
investment by savings institutions in certain "high-risk" mortgage derivative
securities and limitations on the use of the securities by insolvent,
undercapitalized or otherwise "troubled" institutions. According to the
bulletin, such "high-risk" mortgage derivative securities include securities
having specified characteristics, which may include some classes of offered
bonds. In addition, the National Credit Union Administration has issued
regulations governing federal credit union investments which prohibit investment
in specified types of securities, which may include some classes of offered
bonds. Similar policy statements have been issued by regulators having
jurisdiction over other types of depository institutions.
Any class of bonds that is not rated in one of the two highest rating
categories by at least one Rating Agency, and any other class of bonds specified
in the related prospectus supplement, will not constitute "mortgage related
securities" for purposes of SMMEA. Prospective investors in these classes of
bonds, in particular, should consider the matters discussed in the following
paragraph.
There may be other restrictions on the ability of investors either to
purchase some classes of offered bonds or to purchase any class of offered bonds
representing more than a specified percentage of the investors' assets. The
company will make no representations as to the proper characterization of any
class of offered bonds for legal investment or other purposes, or as to the
ability of particular investors to purchase any class of bonds under applicable
legal investment restrictions. These uncertainties may adversely affect the
liquidity of any class of bonds. Accordingly, all investors whose investment
activities are subject to legal investment laws and regulations, regulatory
capital requirements or review by regulatory authorities should consult with
their own legal advisors in determining whether and to what extent the offered
bonds of any class thereof 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 the investor.
USE OF PROCEEDS
Substantially all of the net proceeds to be received from the sale of
bonds will be applied by the company to finance the purchase of, or to repay
short-term loans incurred to finance the purchase of, the mortgage loans and/or
mortgage securities in the respective mortgage pools and to pay other expenses.
The company expects that it will make additional sales of bonds similar to the
offered bonds from time to time, but the timing and amount of any such
additional offerings will be dependent upon a number of factors, including the
volume of mortgage loans purchased by the company, prevailing interest rates,
availability of funds and general market conditions.
METHODS OF DISTRIBUTION
The bonds offered by this prospectus and by the related prospectus
supplements will be offered in series through one or more of the methods
described below. The prospectus supplement prepared for each series will
describe the method of offering being utilized for that series and will state
the net proceeds to the company from the sale.
The company intends that offered bonds will be offered through the
following methods from time to time and that offerings may be made concurrently
through more than one of these methods or that an offering of the offered bonds
of a particular series may be made through a combination of two or more of these
methods. The methods are as follows:
o By negotiated firm commitment or best efforts underwriting and
public re-offering by underwriters;
96
o By placements by the company with institutional investors through
dealers; and
o By direct placements by the company with institutional investors.
If underwriters are used in a sale of any offered bonds (other than in
connection with an underwriting on a best efforts basis), the bonds will be
acquired by the underwriters for their own account and may be resold from time
to time in one or more transactions, including negotiated transactions, at fixed
public offering prices or at varying prices to be determined at the time of sale
or at the time of commitment therefor. The underwriters may be broker-dealers
affiliated with the company whose identities and relationships to the company
will be as set forth in the related prospectus supplement. The managing
underwriter or underwriters with respect to the offer and sale of the offered
bonds of a particular series will be set forth on the cover of the prospectus
supplement relating to the series and the members of the underwriting syndicate,
if any, will be named in the prospectus supplement.
In connection with the sale of the offered bonds, underwriters may receive
compensation from the company or from purchasers of the bonds in the form of
discounts, concessions or commissions. Underwriters and dealers participating in
the distribution of the offered bonds may be deemed to be underwriters in
connection with the bonds, and any discounts or commissions received by them
from the company and any profit on the resale of offered bonds by them may be
deemed to be underwriting discounts and commissions under the Securities Act.
It is anticipated that the underwriting agreement pertaining to the sale
of offered bonds of any series will provide that the obligations of the
underwriters will be subject to conditions precedent, that the underwriters will
be obligated to purchase all such bonds if any are purchased (other than in
connection with an underwriting on a best efforts basis) and that, in limited
circumstances, the company will indemnify the several underwriters and the
underwriters will indemnify the company against specified civil liabilities,
including liabilities under the Securities Act or will contribute to payments
required to be made in respect thereof.
The prospectus supplement with respect to any series offered by placements
through dealers will contain information regarding the nature of the offering
and any agreements to be entered into between the company and purchasers of
offered bonds of the series.
The company anticipates that the bonds offered by this prospectus and the
prospectus supplement will be sold primarily to institutional investors or
sophisticated non-institutional investors. Purchasers of offered bonds,
including dealers, may, depending on the facts and circumstances of the
purchases, be deemed to be "underwriters" within the meaning of the Securities
Act in connection with reoffers and sales by them of the bonds. Holders of
offered bonds should consult with their legal advisors in this regard prior to
any such reoffer or sale.
LEGAL MATTERS
Legal matters, including federal income tax matters, in connection with
the bonds of each series will be passed upon for the company by Thacher Proffitt
& Wood, New York, New York. With respect to each series of bonds, a copy of this
opinion will be filed with the Commission on Form 8-K within 15 days after the
Closing Date.
FINANCIAL INFORMATION
With respect to each series of bonds, a new trust fund will be formed, 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 bonds. Accordingly,
no financial statements with respect to any trust fund related to a series of
bonds will be included in this prospectus or in the related prospectus
supplement.
With respect to each series of bonds, where the issuer is a statutory
business trust or a limited liability company, financial statements will be
filed as required by the Exchange Act. Each such issuer will suspend filing the
reports if and when the reports are no longer required under the Exchange Act.
97
RATINGS
It is a condition to the issuance of any class of offered bonds 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 Rating Agency.
Ratings on collateralized asset-backed bonds address the likelihood of
receipt by the holders thereof of all collections on the underlying mortgage
assets to which the holders are entitled. These ratings address the structural,
legal and issuer-related aspects associated with the bonds, the nature of the
underlying mortgage assets and the credit quality of the guarantor, if any.
Ratings on collateralized asset- backed bonds do not represent any assessment of
the likelihood of principal prepayments by borrowers or of the degree by which
the prepayments might differ from those originally anticipated. As a result,
bondholders might suffer a lower than anticipated yield, and, in addition,
holders of stripped interest bonds in extreme cases might fail to recoup their
initial investments.
A bond rating is not a recommendation to buy, sell or hold bonds and may
be subject to revision or withdrawal at any time by the assigning rating
organization.
AVAILABLE INFORMATION
The company is subject to the informational requirements of the Exchange
Act and in accordance therewith files reports and other information with the
Commission. Reports and other information filed by the company can be inspected
and copied at the public reference facilities maintained by the Commission at
450 Fifth Street, N.W., Washington, D.C. 20549, and its Regional Offices located
as follows: Chicago Regional Office, 500 West Madison, 14th Floor, Chicago,
Illinois 60661; New York Regional Office, 233 Broadway, New York, New York
10279. Copies of the material can also be obtained from the Public Reference
Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates and electronically through the Commission's Electronic Data
Gathering, Analysis and Retrieval system at the Commission's Web site
(http://www.sec.gov). The company does not intend to send any financial reports
to bondholders.
This prospectus does not contain all of the information set forth in the
registration statement (of which this prospectus forms a part) and exhibits
thereto which the company has filed with the Commission under the Securities Act
and to which reference is hereby made.
REPORTS TO BONDHOLDERS
The master servicer or another designated person will be required to
provide periodic unaudited reports concerning each trust fund to all registered
holders of offered bonds of the related series with respect to each trust fund
as are required under the Exchange Act and the Commission's related rules and
regulations. See "Description of the Bonds--Reports to Bondholders."
INCORPORATION OF INFORMATION BY REFERENCE
There are incorporated in this prospectus and in the related prospectus
supplement by reference all documents and reports filed or caused to be filed by
the company with respect to a trust fund pursuant to Sections 13(a), 13(c), 14
or 15(d) of the Exchange Act, prior to the termination of the offering of the
offered bonds of the related series. The company will provide or cause to be
provided without charge to each person to whom this prospectus is delivered in
connection with the offering of one or more classes of offered bonds, upon
written or oral request of the person, a copy of any or all the reports
incorporated in this prospectus by reference, in each case to the extent the
reports relate to one or more of such classes of the offered bonds, other than
the exhibits to the documents, unless the exhibits are specifically incorporated
by reference in the documents. Requests should be directed in writing to IMH
Assets Corp., 1401 Dove Street, Newport Beach, California 92660, and its
telephone number is (949) 475-3700. The company has determined that its
financial statements will not be material to the offering of any offered bonds.
98
GLOSSARY
Accrual Bond -- A bond with respect to which some or all of its accrued
interest will not be distributed but rather will be added to the principal
balance thereof on each distribution date for the period described in the
related prospectus supplement.
Affiliated Seller-- Impac Mortgage Holdings, Inc., the parent of the
company, and their respective affiliates.
Agreement -- An owner trust agreement, servicing agreement or indenture.
ARM Loan -- A mortgage loan with an adjustable interest rate.
Bankruptcy Code -- Title 11 of the United States Code, as amended from
time to time.
Bankruptcy Loss -- A Realized Loss attributable to certain actions which
may be taken by a bankruptcy court in connection with a mortgage loan, including
a reduction by a bankruptcy court of the principal balance of or the mortgage
rate on a mortgage loan or an extension of its maturity.
Beneficial Owner -- A person acquiring an interest in any DTC Registered
Bond.
Benefit Plan Investors -- Plans, as well as any "employee benefit plan"
(as defined in Section 3(3) or ERISA) which is not subject to Title I of ERISA,
such as governmental plans (as defined in Section 3(32) of ERISA) and church
plans (as defined in Section 3(33) of ERISA) which have not made an election
under Section 410(d) of the Code, and any entity whose underlying assets include
Plan Assets by reason of a Plan's investment in the entity.
Buydown Account -- With respect to a buydown mortgage loan, the custodial
account where the Buydown Funds are placed.
Buydown Funds -- With respect a buydown mortgage loan, the amount
contributed by the seller of the mortgaged property or another source and placed
in the Buydown Account.
Buydown Period -- The period during which funds on a buydown mortgage loan
are made up for from the Buydown Account.
CERCLA -- The federal Comprehensive Environmental Response, Compensation
and Liability Act, as amended.
Closing Date -- With respect to any series of bonds, the date on which the
bonds are issued.
Code-- The Internal Revenue Code of 1986.
Commission-- The Securities and Exchange Commission.
Committee Report -- The Conference Committee Report accompanying the Tax
Reform Act of 1986.
Conservation Act -- The Asset Conservation, Lender Liability and Deposit
Insurance Act of 1996.
Contract -- Manufactured housing conditional sales contracts and
installment loan agreements each secured by a Manufactured Home.
Cooperative -- With respect to a cooperative mortgage loan, the
corporation that owns the related apartment building.
Crime Control Act-- The Comprehensive Crime Control Act of 1984.
99
Defaulted Mortgage Loss -- A Realized Loss other than a Special Hazard
Loss, Extraordinary Loss or other losses resulting from damage to a mortgaged
property, Bankruptcy Loss or Fraud Loss.
Deferred Interest -- If an adjustment to the mortgage rate on a mortgage
loan has caused the amount of accrued interest on the mortgage loan in any month
to exceed the scheduled monthly payment on the mortgage loan, the resulting
amount of interest that has accrued but is not then payable;
Deleted Mortgage Loan -- A mortgage loan which has been removed from the
related trust fund.
Designated Seller Transaction -- A series of bonds where the related
mortgage loans are provided either directly or indirectly to the company by one
or more Sellers identified in the related prospectus supplement.
Determination Date -- The close of business on the date on which the
amount of each distribution to bondholders will be determined, which shall be
stated in each prospectus supplement.
DIDMC -- The Depository Institutions Deregulation and Monetary Control Act
of 1980.
DOL-- The U.S. Department of Labor.
DOL Regulations-- Regulations by the DOL promulgated at 29
C.F.R.ss.2510.3-101.
DTC Registered Bond -- Any bond initially issued through the book-entry
facilities of the DTC.
Due Period -- The period between distribution dates.
Eligible Account -- An account maintained with a federal or state
chartered depository institution (i) the short-term obligations of which are
rated by each of the Rating Agencies in its highest rating at the time of any
deposit therein, or (ii) insured by the FDIC (to the limits established by the
FDIC), the uninsured deposits in which account are otherwise secured such that,
as evidenced by an opinion of counsel (obtained by and at the expense of the
person requesting that the account be held pursuant to this clause (ii))
delivered to the trustee prior to the establishment of the account, the
bondholders will have a claim with respect to the funds in the account and a
perfected first priority security interest against any collateral (which shall
be limited to Permitted Instruments) securing the funds that is superior to
claims of any other depositors or general creditors of the depository
institution with which the account is maintained or (iii) a trust account or
accounts maintained with a federal or state chartered depository institution or
trust company with trust powers acting in its fiduciary capacity or (iv) an
account or accounts of a depository institution acceptable to the Rating
Agencies (as evidenced in writing by the Rating Agencies that use of any such
account as the Payment Account will not have an adverse effect on the
then-current ratings assigned to the classes of the bonds then rated by the
Rating Agencies). Eligible Accounts may or may not bear interest.
Equity Certificates -- With respect to any series of bonds, the
certificate or certificates representing a beneficial ownership interest in the
related issuer.
ERISA -- The Employee Retirement Income Security Act of 1974, as amended.
ERISA Plans -- Employee pension and welfare benefit plans subject to
ERISA.
Exchange Act -- The Securities Exchange Act of 1934, as amended.
Exemption-- An individual prohibited transactions exemption issued by the
DOL to an underwriter, as amended by PTE 97-34, 62 Fed. Reg. 39021 (July 21,
1997), and PTE 2000-58, 65 Fed. Reg. 67765 (November 13, 2000).
100
Exemption Rating Agency-- Standard & Poor's, a division of The McGraw-Hill
Companies, Inc., Moody's Investors Service, Inc., or Fitch, Inc.
Extraordinary Loss -- Any Realized Loss occasioned by war, civil
insurrection, certain governmental actions, nuclear reaction and certain other
risks.
Fraud Loss -- A Realized Loss incurred on a defaulted mortgage loan as to
which there was fraud in the origination of the mortgage loan.
FTC Rule -- The so-called "Holder-in-Due-Course" Rule of the Federal Trade
Commission.
Garn-St Germain Act -- The Garn-St Germain Depository Institutions Act of
1982.
Global Bonds -- The globally offered bonds of the classes specified in the
related prospectus supplement.
Grantor Trust Certificate -- A certificate representing an interest in a
Grantor Trust Fund.
Grantor Trust Fractional Interest Certificate -- A Grantor Trust
Certificate representing an undivided equitable ownership interest in the
principal of the mortgage loans constituting the related Grantor Trust Fund,
together with interest on the Grantor Trust Certificates at a pass-through rate.
Grantor Trust Strip Certificate -- A certificate representing ownership of
all or a portion of the difference between interest paid on the mortgage loans
constituting the related Grantor Trust Fund (net of normal administration fees
and any retained interest of the company) and interest paid to the holders of
Grantor Trust Fractional Interest Certificates issued with respect to the
Grantor Trust Fund. A Grantor Trust Strip Certificate may also evidence a
nominal ownership interest in the principal of the mortgage loans constituting
the related Grantor Trust Fund.
Grantor Trust Fund -- A trust fund which qualifies as a "grantor trust"
within the meaning of Subpart E, part I of subchapter J of the Code.
High Cost Loans -- Mortgage loans subject to the Homeownership Act, which
amended TILA to provide new requirements applicable to loans that exceed certain
interest rate and/or points and fees thresholds.
High LTV Loans -- Mortgage loans with loan-to-value ratios in excess of
80% and as high as 150% and which are not be insured by a Primary Insurance
Policy.
Housing Act-- The National Housing Act of 1934, as amended.
Index -- With respect to an ARM Loan, the related index, which will be
specified in the related prospectus supplement and may include one of the
following indexes: (1) the weekly average yield on U.S. Treasury securities
adjusted to a constant maturity of either six months or one year, (2) the weekly
auction average investment yield of U.S. Treasury bills of six months, (3) the
daily Bank Prime Loan rate made available by the Federal Reserve Board, (4) the
cost of funds of member institutions for the Federal Home Loan Bank of San
Francisco, (5) the interbank offered rates for U.S. dollar deposits in the
London market, each calculated as of a date prior to each scheduled interest
rate adjustment date which will be specified in the related prospectus
supplement or (6) any other index described in the related prospectus
supplement.
Insurance Proceeds -- Proceeds received under any hazard, title, primary
mortgage, FHA or other insurance policy that provides coverage with respect to a
particular mortgaged property or the related mortgage loan (other than proceeds
applied to the restoration of the property or released to the related borrower
in accordance with the customary servicing practices of the master servicer (or,
if applicable, a special servicer) and/or the terms and conditions of the
related mortgage.
101
Intermediary -- An institution that is not a participant in the DTC but
clears through or maintains a custodial relationship with a participant.
IRS -- The Internal Revenue Service.
Issuer -- The Delaware business trust or other trust, created pursuant to
the owner trust agreement, that issues the bonds.
Liquidation Proceeds -- (1) All amounts, other than Insurance Proceeds
received and retained in connection with the liquidation of defaulted mortgage
loans or property acquired in respect thereof, by foreclosure or otherwise,
together with the net operating income (less reasonable reserves for future
expenses) derived from the operation of any mortgaged properties acquired by the
trust fund through foreclosure or otherwise and (2) all proceeds of any mortgage
loan or mortgage security purchased (or, in the case of a substitution, amounts
representing a principal adjustment) by the master servicer, the company, a
Seller or any other person pursuant to the terms of the related servicing
agreement as described under "The Mortgage Pools--Representations by Sellers,"
"Servicing of Mortgage Loans--Realization Upon and Sale of Defaulted Mortgage
Loans," "--Assignment of Trust Fund Assets" above and "The
Agreements--Termination."
Loan-to-Value Ratio -- With respect to any mortgage loan, the ratio of the
original outstanding principal amount of the mortgage loan and, with respect to
any second lien mortgage loan, the outstanding principal amount of any related
first lien as of the date of origination of such mortgage loan, to (i) the
appraised value of the related mortgaged property at origination with respect to
a refinanced mortgage loan, and (ii) the lesser of the appraised value of the
related mortgaged property at origination or the purchase price of the related
mortgaged property with respect to all other mortgage loans.
Manufactured Home -- Manufactured homes within the meaning of 42 United
States Code, Section 5402(6), which defines a "manufactured home" as "a
structure, transportable in one or more sections, which in the traveling mode,
is eight body feet or more in width or forty body feet or more in length, or,
when erected on site, is three hundred twenty or more square feet, and which is
built on a permanent chassis and designed to be used as a dwelling with or
without a permanent foundation when connected to the required utilities, and
includes the plumbing, heating, air conditioning, and electrical systems
contained therein; except that the term shall include any structure which meets
all the requirements of this paragraph except the size requirements and with
respect to which the manufacturer voluntarily files a certification required by
the Secretary of Housing and Urban Development and complies with the standards
established under this chapter."
Net Mortgage Rate -- With respect to a mortgage loan, the mortgage rate
net of the per annum rate or rates applicable to the calculation of servicing
and administrative fees and any retained interest of the company.
Nonrecoverable Advance -- An advance which, in the good faith judgment of
the master servicer, will not be recoverable from recoveries on the related
mortgage loan or another specifically identified source.
Note Margin -- With respect to an ARM Loan, the fixed percentage set forth
in the related mortgage note, which when added to the related Index, provides
the mortgage rate for the ARM Loan.
OID -- Original issue discount, within the meaning of the OID Regulations.
OID Regulations -- The rules governing original issue discount that are
set forth in Sections 1271- 1273 and 1275 of the Code and in the related
Treasury regulations.
OTS -- The Office of Thrift Supervision.
Parity Act-- The Alternative Mortgage Transaction Parity Act of 1982.
102
Parties in Interest -- With respect to a Plan, persons who have specified
relationships to the Plans, either "Parties in Interest" within the meaning of
ERISA or "Disqualified Persons" within the meaning of the Code.
Payment Account -- One or more separate accounts for the collection of
payments on the related mortgage loans and/or mortgage securities constituting
the related trust fund.
Percentage Interest -- With respect to a bond of a particular class, the
percentage obtained by dividing the initial principal balance or notional amount
of the bond by the aggregate initial amount or notional balance of all the bonds
of the class.
Permitted Investments -- United States government securities and other
investment grade obligations specified in the related servicing agreement and
indenture.
Plan Assets -- "Plan assets" of a Plan within the meaning of the DOL
Regulations.
Plans-- ERISA Plans and Tax Favored Plans.
Prepayment Assumption -- With respect to a bond, the prepayment assumption
used in pricing the initial offering of that bond.
Prepayment Interest Shortfall -- With respect to any mortgage loan with a
prepayment in part or in full the excess, if any, of interest accrued and
otherwise payable on the related mortgage loan over the interest charged to the
borrower (net of servicing and administrative fees and any retained interest of
the company).
Primary Insurance Covered Loss -- With respect to a mortgage loan covered
by a Primary Insurance Policy, the amount of the related loss covered pursuant
to the terms of the Primary Insurance Policy, which will generally consist of
the unpaid principal amount of the mortgage loan and accrued and unpaid interest
on the mortgage loan and reimbursement of specific expenses, less (1) rents or
other payments collected or received by the insured (other than the proceeds of
hazard insurance) that are derived from the related mortgaged property, (2)
hazard insurance proceeds in excess of the amount required to restore the
related mortgaged property and which have not been applied to the payment of the
mortgage loan, (3) amounts expended but not approved by the primary insurer, (4)
claim payments previously made on the mortgage loan and (5) unpaid premiums and
other specific amounts.
Primary Insurance Policy -- A primary mortgage guaranty insurance policy.
Primary Insurer -- An issuer of a Primary Insurance Policy.
PTCE-- Prohibited Transaction Class Exemption.
Qualified Substitute Mortgage Loan -- A mortgage loan substituted for a
Deleted Mortgage Loan, meeting the requirements described under "The Mortgage
Pools-- Representations by Sellers" in this prospectus.
Rating Agency -- A "nationally recognized statistical rating organization"
within the meaning of Section 3(a)(41) of the Exchange Act.
Realized Loss -- Any loss on a mortgage loan attributable to the
mortgagor's failure to make any payment of principal or interest as required
under the mortgage note.
Record Date -- The close of business on the last business day of the month
preceding the month in which the applicable distribution date occurs.
Relief Act -- The Soldiers' and Sailors' Civil Relief Act of 1940, as
amended.
103
REO Mortgage Loan -- A mortgage loan where title to the related mortgaged
property has been obtained by the trustee or to its nominee on behalf of
bondholders of the related series.
Restricted Group -- The group consisting of the Underwriter, the company,
the master servicer, the special servicer, any subservicer and any obligor with
respect to assets included in the trust fund constituting more than 5% of the
aggregate unamortized principal balance of the assets in the trust fund as of
the date of initial issuance of the bonds.
RICO-- The Racketeer Influenced and Corrupt Organizations statute.
Securities Act -- The Securities Act of 1933, as amended.
Seller -- The seller of the mortgage loans or mortgage securities included
in a trust fund to the company with respect a series of bonds, who shall be an
Affiliated Seller or an Unaffiliated Seller.
Single Family Property -- An attached or detached one-family dwelling
unit, two- to four- family dwelling unit, condominium, townhouse, row house,
individual unit in a planned-unit development and other individual dwelling
units.
SMMEA-- The Secondary Mortgage Market Enhancement Act of 1984.
Special Hazard Loss -- (1) losses due to direct physical damage to a
mortgaged property other than any loss of a type covered by a hazard insurance
policy or a flood insurance policy, if applicable, and (2) losses from partial
damage caused by reason of the application of the co-insurance clauses contained
in hazard insurance policies.
Strip Bond -- A bond which will be entitled to (1) principal
distributions, with disproportionate, nominal or no interest distributions or
(2) interest distributions, with disproportionate, nominal or no principal
distributions.
Tax Favored Plans -- Tax-qualified retirement plans described in Section
401(a) of the Code and on individual retirement accounts described in Section
408 of the Code.
TILA -- The Federal Truth-in-Lending Act
Title V -- Title V of the Depository Institutions Deregulation and
Monetary Control Act of 1980, enacted in March 1980.
Title VIII -- Title VIII of the Garn-St Germain Act.
Unaffiliated Sellers -- Banks, savings and loan associations, mortgage
bankers, mortgage brokers, investment banking firms, the Resolution Trust
Corporation, the FDIC and other mortgage loan originators or sellers not
affiliated with the company.
United States Person -- A citizen or resident of the United States, a
corporation or partnership (including an entity treated as a corporation or
partnership for federal income tax purposes) created or organized in, or under
the laws of, the United States or any state thereof or the District of Columbia
(except, in the case of a partnership, to the extent provided in regulations),
or an estate whose income is subject to United States federal income tax
regardless of its source, or a trust if a court within the United States is able
to exercise primary supervision over the administration of the trust and one or
more United States persons have the authority to control all substantial
decisions of the trust. To the extent prescribed in regulations by the Secretary
of the Treasury, which have not yet been issued, a trust which was in existence
on August 20, 1996 (other than a trust treated as owned by the grantor under
subpart E of part I of subchapter J of chapter 1 of the Code), and which was
treated as a United States person on August 20, 1996 may elect to continue to be
treated as a United States person notwithstanding the previous sentence.
104
Value -- With respect to a mortgaged property securing a single family,
multifamily, commercial or mixed-use loan, the lesser of (x) the appraised value
determined in an appraisal obtained at origination of the mortgage loan, if any,
or, if the related mortgaged property has been appraised subsequent to
origination, the value determined in the subsequent appraisal and (y) the sales
price for the related mortgaged property (except in circumstances in which there
has been a subsequent appraisal). However, in the case of refinanced, modified
or converted single family, multifamily, commercial or mixed-use loans, the
"Value" of the related mortgaged property will be equal to the lesser of (x) the
appraised value of the related mortgaged property determined at origination or
in an appraisal, if any, obtained at the time of refinancing, modification or
conversion and (y) the sales price of the related mortgaged property or, if the
mortgage loan is not a rate and term refinance mortgage loan and if the
mortgaged property was owned for a relatively short period of time prior to
refinancing, modification or conversion, the sum of the sales price of the
related mortgaged property plus the added value of any improvements. With
respect to a new Manufactured Home, the "Value" is no greater than the sum of a
fixed percentage of the list price of the unit actually billed by the
manufacturer to the dealer (exclusive of freight to the dealer site), including
"accessories" identified in the invoice, plus the actual cost of any accessories
purchased from the dealer, a delivery and set-up allowance, depending on the
size of the unit, and the cost of state and local taxes, filing fees and up to
three years prepaid hazard insurance premiums. With respect to a used
Manufactured Home, the "Value" is the least of the sale price, the appraised
value, and the National Automobile Dealer's Association book value plus prepaid
taxes and hazard insurance premiums. The appraised value of a Manufactured Home
is based upon the age and condition of the manufactured housing unit and the
quality and condition of the mobile home park in which it is situated, if
applicable.
105
[THIS PAGE INTENTIONALLY LEFT BLANK]
[THIS PAGE INTENTIONALLY LEFT BLANK]
[THIS PAGE INTENTIONALLY LEFT BLANK]
[THIS PAGE INTENTIONALLY LEFT BLANK]
IMH Assets Corp.
Company
$1,000,000,000
Impac CMB Trust Series 2003-10
Collateralized Asset-Backed Bonds, Series 2003-10
Impac CMB Grantor Trust 2003-10-1 through 6
Collateralized Asset-Backed Grantor Trust Certificates, Series 2003-10
PROSPECTUS SUPPLEMENT
COUNTRYWIDE SECURITIES CORPORATION
Merrill Lynch & Co.
Underwriters
You should rely only on the information contained or incorporated by reference
in this prospectus supplement and the accompanying prospectus. We have not
authorized anyone to provide you with different information.
We are not offering the bonds and grantor trust certificates offered hereby in
any state where the offer is not permitted.
Dealers will be required to deliver a prospectus supplement and prospectus when
acting as underwriters of the bonds and grantor trust certificates offered
hereby and with respect to their unsold allotments or subscriptions. In
addition, all dealers selling the bonds and grantor trust certificates, whether
or not participating in this offering, may be required to deliver a prospectus
supplement and prospectus until 90 days after the date hereof.