Prospectus Supplement
(To Prospectus dated April 29, 2004)
Equity One Mortgage Pass-Through Trust 2004-2 [LOGO]
EQUITY ONE
==========
Equity One ABS, Inc. a Popular, Inc. Company
as Depositor
Equity One, Inc. $700,000,000
as Servicer Mortgage Pass-Through Certificates, Series 2004-2
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Offered Price to Underwriting Net Proceeds
Certificates Principal Balance Pass-Through Rate (1) Public Discount to Depositor (2)
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Class AF-1 $165,600,000 LIBOR + 0.110% 100.0000% 0.2500% $165,186,000
Class AF-2 $ 34,400,000 2.829% 99.9999% 0.2500% $ 34,408,580 (3)
Class AF-3 $ 70,500,000 3.515% 99.9999% 0.2500% $ 70,564,603 (3)
Class AF-4 $ 18,400,000 4.624% 99.9999% 0.2500% $ 18,436,700 (3)
Class AF-5 $ 13,057,000 5.199% (4) 99.9999% 0.2500% $ 13,090,342 (3)
Class AF-6 $ 22,000,000 4.656% (4) 99.9999% 0.2500% $ 22,044,565 (3)
Class AV-1 $175,000,000 LIBOR + 0.240% (4) 100.0000% 0.2500% $174,562,500
Class AV-2 $ 76,443,000 LIBOR + 0.250% (4) 100.0000% 0.2500% $ 76,251,893
Class M-1 $ 58,800,000 5.192% (4) 99.9999% 0.2500% $ 58,949,751 (3)
Class M-2 $ 35,700,000 5.560% (4) 99.9999% 0.2500% $ 35,803,693 (3)
Class M-3 $ 8,050,000 5.681% (4) 99.9999% 0.2500% $ 8,074,329 (3)
Class M-4 $ 7,350,000 5.878% (4) 99.9999% 0.2500% $ 7,373,621 (3)
Class B-1 $ 7,350,000 LIBOR + 1.650% 100.0000% 0.2500% $ 7,331,625
Class B-2 $ 7,350,000 LIBOR + 2.400% 100.0000% 0.2500% $ 7,331,625
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(1) This rate may be limited by the applicable maximum rate described under the
caption "Description of the Certificates--Distribution of Interest."
(2) Before deducting expenses, payable by the depositor, estimated to be
approximately $3,692,000 in the aggregate.
(3) Includes accrued interest, if any, from April 1, 2004.
(4) This rate will increase under the circumstances described under the caption
"Description of the Certificates--Distribution of Interest."
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Before buying certificates, The certificates--
consider carefully the risk
factors beginning on page S-14 o represent an interest in a trust fund
in this document and on page 5 consisting primarily of a pool of
in the prospectus. mortgage loans divided into two groups,
Group I and Group II. Group I will
The certificates will consist of fixed rate, fully amortizing
represent interests in the and balloon, first and second lien
trust fund only and will not mortgage loans, some of which conform to
represent interests in or be agency loan balance limits and some of
obligations of any other which do not. Group II will consist of
entity. adjustable rate, fully amortizing, first
lien mortgage loans. Group II will be
This prospectus supplement may further divided into two groups, Group
be used to offer and sell the II-A and Group II-B. Group II-A will
certificates only if it is consist exclusively of mortgage loans
accompanied by the prospectus. that conform to agency loan balance
limits and Group II-B will consist of a
combination of mortgage loans, some of
which conform to agency loan balance
limits and some of which do not. The
Class AF-1, Class AF-2, Class AF-3,
Class AF-4, Class AF-5 and Class AF-6
Certificates will represent primarily an
interest in the mortgage loans in Group
I, the Class AV-1 Certificates will
represent primarily an interest in the
mortgage loans in Group II-A and the
Class AV-2 Certificates will represent
primarily an interest in the mortgage
loans in Group II-B. The Class M-1,
Class M-2, Class M-3, Class M-4, Class
B-1 and Class B-2 Certificates will
represent primarily an interest in the
mortgage loans in Group I and Group II.
o currently have no trading market.
o will have the benefit of various forms
of credit enhancement to the limited
extent described in this prospectus
supplement.
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Neither the Securities and Exchange Commission nor any state securities
commission has approved the certificates or determined that this prospectus
supplement or the accompanying prospectus is accurate or complete. Any
representation to the contrary is a criminal offense.
It is expected that delivery of the certificates will be made in book-entry form
only through the facilities of The Depository Trust Company or, upon request,
Clearstream, Luxembourg or the Euroclear System on or about May 6, 2004.
Wachovia Securities RBS Greenwich Capital
(Joint Lead Managers and Joint Book Runners)
Friedman Billings Ramsey
(Co-Manager)
April 29, 2004
Information about the certificates is presented in two separate documents
that progressively provide more detail:
o the accompanying prospectus which provides general information,
some of which may not apply to your certificates, and
o this prospectus supplement, which describes the specific terms of
your certificates.
We strongly encourage you to read both this prospectus supplement and the
prospectus in full. 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.
If the description of the terms of your certificates varies between this
prospectus supplement and the accompanying prospectus, you should rely on the
information in this prospectus supplement.
We have made cross-references to captions in this prospectus supplement and
the accompanying prospectus under which you can find further related
discussions. The table of contents that follows on the next page and the table
of contents in the accompanying prospectus indicate where these captions are
located.
We are not offering the certificates in any state where the offer is not
permitted.
We do not claim that the information in this prospectus supplement and the
accompanying prospectus is accurate as of any date other than the dates stated
on the cover of each document.
Dealers will deliver a prospectus supplement and prospectus when acting as
underwriters of the Mortgage Pass-Through Certificates, Series 2004-2, and with
respect to their unsold allotments or subscriptions. In addition, all dealers
selling the Mortgage Pass-Through Certificates, Series 2004-2 will be required
to deliver a prospectus supplement and prospectus until ninety (90) days after
the date of this prospectus supplement.
Subject to some limitations, you can get a copy of any of the documents
referred to in the accompanying prospectus under the caption "Incorporation of
Certain Documents by Reference" free of charge from the trustee. You should
direct any requests for these documents to the Corporate Trust Office of the
Trustee at Four New York Plaza, 6th Floor, New York, New York 10004, telephone:
(212) 623-5600, facsimile number: (212) 623-5930, Attention: Institutional Trust
Services/Global Debt.
This prospectus supplement and the accompanying prospectus contain
forward-looking statements relating to future economic performance or
projections and other financial items. The Private Securities Litigation Reform
Act of 1995 provides a safe harbor for forward-looking statements. In order to
comply with the terms of the safe harbor, the depositor notes that these
forward-looking statements involve known and unknown risks, uncertainties and
other important factors that could cause actual results or performance to differ
materially from these forward-looking statements. Those risks, uncertainties and
other factors include, among others, the rate and timing of prepayments on
mortgage loans, general economic and business conditions, competition, changes
in political and social conditions, regulatory initiatives and compliance with
government regulations, customer preferences and various other matters, many of
which are beyond the depositor's control. These forward-looking statements,
together with related qualifying language and assumptions, are found in the
material, including each of the tables, set forth under the captions "Risk
Factors," "Yield, Prepayment and Maturity Considerations," and "Yield and
Prepayment Considerations." Forward-looking statements are also found elsewhere
in this prospectus supplement and the accompanying prospectus, and may be
identified by, among other things, the use of forward-looking words like
"expects," "intends," "anticipates," "estimates," "believes," "may" or other
comparable words. These forward-looking statements speak only as of the date of
this prospectus supplement. The depositor expressly disclaims any obligation or
undertaking to update or revise forward-looking statements to reflect any change
in the depositor's expectations or any change in events, conditions or
circumstances on which any forward-looking statement is based.
S-2
TABLE OF CONTENTS
Prospectus Supplement
Page
Summary of Terms............................................................S-4
Risk Factors...............................................................S-14
The Mortgage Pool..........................................................S-24
Servicing of Loans.........................................................S-64
Description of the Certificates............................................S-68
Yield, Prepayment and Maturity Considerations..............................S-92
Use of Proceeds...........................................................S-114
Federal Income Tax Consequences...........................................S-114
ERISA Considerations......................................................S-116
Legal Investment..........................................................S-118
Method of Distribution....................................................S-119
Legal Matters.............................................................S-120
Ratings...................................................................S-121
Index of Defined Terms....................................................S-122
Annex I - Global Clearance, Settlement and Tax Documentation Procedures.....A-1
Annex II - Projected Principal Balances Schedule............................A-5
Prospectus
Risk Factors..................................................................5
The Trust Fund...............................................................13
Use of Proceeds..............................................................18
The Depositor................................................................18
Loan Program.................................................................18
Description of the Securities................................................24
Credit Enhancement...........................................................39
Yield and Prepayment Considerations..........................................45
The Agreements...............................................................47
Legal Aspects of the Loans...................................................60
Federal Income Tax Consequences..............................................71
Other Tax Considerations.....................................................95
ERISA Considerations.........................................................96
Legal Investment.............................................................98
Method of Distribution.......................................................99
Legal Matters...............................................................100
Financial Information.......................................................100
Rating......................................................................100
Available Information.......................................................101
Incorporation of Certain Documents by Reference.............................101
Index of Defined Terms......................................................103
S-3
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SUMMARY OF TERMS
This summary highlights selected information from this document and does
not contain all of the information that you need to consider in making your
investment decision. You should read this entire prospectus supplement and the
accompanying prospectus carefully before you decide whether to purchase
certificates.
This summary provides an overview of calculations, cash flows and other
information to aid your understanding and is qualified by the full description
of these calculations, cash flows and other information in this prospectus
supplement and the accompanying prospectus.
The Trust Fund and the Sellers
Equity One Mortgage Pass-Through Trust 2004-2 will be formed pursuant to a
pooling and servicing agreement to be dated as of March 31, 2004 by and
among Equity One ABS, Inc., a Delaware corporation, as depositor, Equity
One, Inc., a Delaware corporation, as a seller and as the servicer,
JPMorgan Chase Bank, as trustee, and the other sellers listed in the next
sentence. Equity One, Inc., a Delaware corporation, Equity One,
Incorporated, a Pennsylvania corporation, and Popular Financial Services,
LLC, a Delaware limited liability company, as sellers, will sell the
mortgage loans to Equity One ABS, Inc. Equity One ABS, Inc. will deposit
the mortgage loans in the trust fund.
The Certificates
On or about May 6, 2004, the trust fund will issue the certificates. This
document discusses the following classes of certificates: the Class AF-1,
Class AF-2, Class AF-3, Class AF-4, Class AF-5 and Class AF-6 Certificates,
the Class AV-1 and Class AV-2 Certificates, the Class M-1, Class M-2, Class
M-3 and Class M-4 Certificates, the Class B-1 and Class B-2 Certificates,
the Class X Certificates and the Class R Certificates, all of which will
represent interests in the trust fund. The Class AF-1, Class AF-2, Class
AF-3, Class AF-4, Class AF-5 and Class AF-6 Certificates are sometimes
referred to in this prospectus supplement as the Class AF Certificates. The
Class AF Certificates, the Class AV-1 Certificates and the Class AV-2
Certificates are sometimes referred to in this prospectus supplement as the
senior certificates. The Class M-1 Certificates, the Class M-2
Certificates, the Class M-3 Certificates, the Class M-4 Certificates, the
Class B-1 Certificates and the Class B-2 Certificates are sometimes
referred to in this prospectus supplement as the subordinate certificates.
The senior certificates and the subordinate certificates are sometimes
referred to in this prospectus supplement as the offered certificates. The
offered certificates are being offered to you by this prospectus supplement
and the accompanying prospectus. We are not offering the Class X
Certificates or the Class R Certificates for sale to investors. The Class R
Certificates will not have a pass-through rate.
Generally, the offered certificates will be offered for purchase in
denominations of $25,000 and integral multiples of $1 in excess thereof.
Registration of Certificates
We will issue the offered certificates in book-entry form. You will hold
your interests either through a depository in the United States or, upon
request, through one of two depositories in Europe. While the certificates
are book-entry they will be registered in the name of the nominee of the
depository in the United States.
Transfers within any depository system will be in accordance with the usual
rules and operating procedures of that system. Cross-market transfers
between two different depository systems may be effected through a
third-party bank and/or the related depositories. The limited circumstances
under which definitive certificates will replace the book-entry
certificates are described in the prospectus.
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S-4
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We refer you to "Description of the Certificates--Book-Entry Certificates,"
and Annex I in this prospectus supplement and "Description of the
Securities--Book-Entry Registration of Securities" in the prospectus for
more detail.
Trust Property
The trustee will hold the trust property for the benefit of the
certificateholders. The trust property will include:
o a pool of adjustable rate and fixed rate, fully amortizing and
balloon, first and second lien mortgage loans;
o payments on the mortgage loans received, in the case of the
initial mortgage loans, after the close of business on March 31,
2004, or, in the case of subsequent mortgage loans conveyed to
the trust fund after May 6, 2004, payments received after the
date of their origination or acquisition, sometimes referred to
in this prospectus supplement as the initial cut-off date or
subsequent cut-off date, as applicable (other than amounts
received after the applicable cut-off date in respect of
principal and interest on the related mortgage loans due on or
prior to that cut-off date);
o the deed of trust or mortgage related to each mortgage loan;
o property that once secured a mortgage loan that the trust fund
has acquired through foreclosure or deed in lieu of foreclosure;
o the benefits of the yield maintenance agreement;
o amounts on deposit in the various accounts maintained by the
servicer and the trustee for the benefit of the
certificateholders;
o rights of the depositor and the trustee under the pooling and
servicing agreement and one or more subsequent transfer
agreements pursuant to which the depositor purchased the mortgage
loans from the sellers, including the right to require the
sellers or their successors in interest to repurchase mortgage
loans for breaches of representations and warranties; and
o rights of the sellers or their successors in interest under any
hazard insurance policies covering the mortgaged properties.
The Mortgage Pool
On the closing date, the trust fund will acquire a pool of adjustable rate
and fixed rate mortgage loans, which will consist of two groups: Group I
and Group II. Group I will consist exclusively of fixed rate mortgage
loans. As of the close of business on March 31, 2004, Group I had an
aggregate principal balance of approximately $353,001,293.04. Group II will
consist exclusively of adjustable rate mortgage loans. As of the close of
business on March 31, 2004, Group II had an aggregate principal balance of
approximately $199,151,977.03. Group I will include mortgage loans secured
by first and second liens on one- to four-family dwellings and five- to
eight-family dwellings. Group II will be divided into two sub-groups, Group
II-A and Group II-B. Group II-A will include mortgage loans secured by
first liens on one- to four-family dwellings. Group II-B will include
mortgage loans secured by first liens on one- to four-family dwellings and
five- to eight-family dwellings. Group II-A will consist exclusively of
mortgage loans that conform to agency loan balance limits and Group II-B
will consist of a combination of mortgage loans, some of which conform to
agency loan balance limits and some of which do not. As of the close of
business on March 31, 2004, the mortgage loans in Group II-A had an
aggregate principal balance of approximately $138,465,685.74 and the
mortgage loans in Group II-B had an aggregate principal balance of
approximately $60,686,291.29. The mortgage loans were generally originated
or acquired in accordance with underwriting guidelines that are less
stringent than Fannie Mae and Freddie Mac guidelines.
The Class AF Certificates will represent primarily an interest in the
mortgage loans in Group I, the Class AV-1 Certificates will represent
primarily an interest in the mortgage loans in Group II-A and the Class
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S-5
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AV-2 Certificates will represent primarily an interest in the mortgage
loans in Group II-B. The Class M-1, Class M-2, Class M-3, Class M-4, Class
B-1 and Class B-2 Certificates will represent primarily an interest in the
mortgage loans in Group I and Group II.
The initial mortgage loans had the following characteristics as of the
close of business on March 31, 2004:
Group I:
o 100% fixed rate
o mortgage rate range: 5.190% to 14.900%
o weighted average mortgage rate: 7.340% (approximate)
o principal balance range: $20,219.70 to $741,131.66
o average principal balance: $141,426.80 (approximate)
o maximum original combined loan-to-value ratio: 100.00%
o minimum original combined loan-to-value ratio: 6.85%
o weighted average original combined loan-to-value ratio: 85.31%
(approximate)
o loan origination dates range from April 20, 2002 to February 19,
2004
o remaining term to stated maturity range: 55 months to 359 months
o weighted average remaining term to stated maturity (by principal
balance): 329 months (approximate)
o 96.77% residential loans, which are loans secured by one- to
four-family dwellings and 3.23% multi-family loans, which are
loans secured by five- to eight-family dwellings (by principal
balance) (approximate)
o mortgaged properties are 94.33% owner occupied, 4.76% non-owner
occupied and 0.91% second home (by principal balance)
(approximate)
o 97.22% first priority lien and 2.78% second priority lien (by
principal balance) (approximate)
Group II-A:
o 100% adjustable rate
o current mortgage rate range: 5.400% to 10.500%
o weighted average current mortgage rate: 7.060% (approximate)
o principal balance range: $29,959.53 to $399,103.85
o average principal balance: $152,495.25 (approximate)
o maximum original combined loan-to-value ratio: 100.00%
o minimum original combined loan-to-value ratio: 11.11%
o weighted average original combined loan-to-value ratio: 87.10%
(approximate)
o loan origination dates range from May 30, 2002 to February 6,
2004
o remaining term to stated maturity range: 338 months to 359 months
o weighted average remaining term to stated maturity (by principal
balance): 356 months (approximate)
o 100% residential loans (by principal balance)
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S-6
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o mortgaged properties are 96.40% owner occupied, 3.08% non-owner
occupied and 0.52% second home (by principal balance)
(approximate)
o 100% first priority lien (by principal balance)
Group II-B:
o 100% adjustable rate
o current mortgage rate range: 5.270% to 11.870%
o weighted average current mortgage rate: 7.071% (approximate)
o principal balance range: $29,081.12 to $747,196.50
o average principal balance: $203,645.27 (approximate)
o maximum original combined loan-to-value ratio: 100.00%
o minimum original combined loan-to-value ratio: 38.40%
o weighted average original combined loan-to-value ratio: 86.73%
(approximate)
o loan origination dates range from May 30, 2002 to February 2,
2004
o remaining term to stated maturity range: 338 months to 358 months
o weighted average remaining term to stated maturity (by principal
balance): 356 months (approximate)
o 100% residential loans (by principal balance)
o mortgaged properties are 94.04% owner occupied, 4.14% non-owner
occupied and 1.82% second home (by principal balance)
(approximate)
o 100% first priority lien (by principal balance)
The mortgage rate on each adjustable rate mortgage loan will adjust on each
adjustment date to equal the sum of the related index and the related
margin on that mortgage loan, subject to an initial rate cap, a periodic
rate cap and a maximum and minimum mortgage rate, as described in this
prospectus supplement.
We refer you to "The Mortgage Pool" in this prospectus supplement.
Funding Period
On the closing date, the depositor will cause an amount equal to not more
than approximately $147,846,730 to be deposited in a pre-funding account
established and maintained by the trustee for the benefit of the holders of
the offered certificates. During the funding period, which will commence on
the closing date and end no later than July 22, 2004, the applicable
amounts on deposit in the pre-funding account will be used to purchase
subsequent mortgage loans for inclusion in Group I, Group II-A and Group
II-B.
Any amounts in the pre-funding account not used during the funding period
to purchase subsequent mortgage loans, other than investment income on
those amounts, will be paid to holders of the offered certificates as a
prepayment of principal on the distribution date immediately following the
end of the funding period.
Servicer and Servicing
Equity One, Inc., a Delaware corporation, will service, manage and make
collections on the mortgage loans. In exchange for these services, Equity
One, Inc. will receive an annual servicing fee, payable
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S-7
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monthly, of 0.50% of the principal balance of each mortgage loan. The
servicer will also be entitled to other specified amounts as servicing
compensation from the trust fund.
We refer you to "Servicing of Loans--The Servicer" and "--Servicing
Compensation and Payment of Expenses" in this prospectus supplement.
Distributions to Certificateholders
General
On each distribution date, the trustee will remit payments on the offered
certificates. The distribution date will be the 25th day of each month or,
if the 25th day is not a business day, the next business day, commencing on
May 25, 2004. Distributions will be made to the persons in whose names the
certificates are registered at the close of business on the related record
date. The record date for the Class AF-1, Class AV-1, Class AV-2, Class B-1
and Class B-2 Certificates is the business day immediately preceding that
distribution date. The record date for the Class AF-2, Class AF-3, Class
AF-4, Class AF-5, Class AF-6, Class M-1, Class M-2, Class M-3 and Class M-4
Certificates is the last business day of the calendar month immediately
preceding that distribution date (or the closing date with respect to the
first distribution date).
Payments on the Class AF Certificates will be funded:
o primarily from the payments received with respect to the mortgage
loans in Group I; and
o if the pass-through rate for the Class AF-1 Certificates is
determined by the applicable maximum rate, supplemental interest
payments may be made to the Class AF-1 Certificates from amounts
released from an interest reserve fund we refer to in this
prospectus supplement as the Net WAC Cap Account.
Payments on the Class AV-1 Certificates will be funded:
o primarily from the payments received with respect to the mortgage
loans in Group II-A;
o if the amount described in the above bullet is insufficient, from
available amounts in a reserve fund that will be funded from time
to time pursuant to the terms of the yield maintenance agreement;
and
o if the pass-through rate for the Class AV-1 Certificates is
determined by the applicable maximum rate, supplemental interest
payments may be made to the Class AV-1 Certificates from amounts
released from the Net WAC Cap Account and the reserve fund funded
pursuant to the terms of the yield maintenance agreement.
Payments on the Class AV-2 Certificates will be funded:
o primarily from the payments received with respect to the mortgage
loans in Group II-B;
o if the amount described in the above bullet is insufficient, from
available amounts in a reserve fund that will be funded from time
to time pursuant to the terms of the yield maintenance agreement;
and
o if the pass-through rate for the Class AV-2 Certificates is
determined by the applicable maximum rate, supplemental interest
payments may be made to the Class AV-2 Certificates from amounts
released from the Net WAC Cap Account and the reserve fund funded
pursuant to the terms of the yield maintenance agreement.
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S-8
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Payments on the subordinate certificates will be funded:
o from the payments received with respect to the mortgage loans,
but only to the extent of funds remaining after making payments
to the senior certificates;
o with respect to the Class B-1 and Class B-2 Certificates only,
from excess cashflow remaining after making all other payments
required to be made on the applicable distribution date; and
o if the pass-through rate for the Class B-1 or Class B-2
Certificates is determined by the applicable maximum rate,
supplemental interest payments may be made to the Class B-1 or
Class B-2 Certificates, as applicable, from amounts released from
the Net WAC Cap Account.
Payments will be made on each distribution date from collections on
mortgage loans in the priorities described under the captions "Description
of the Certificates--Distributions Generally," "--Distribution of
Interest," "--Distribution of Principal," "--Allocation of Losses" and
"--Distribution of Monthly Excess Cashflow Amounts" in this prospectus
supplement.
After payment of the above amounts to the holders of offered certificates,
and other specified allocations, any remaining amounts will be distributed
on the Class X Certificates and the Class R Certificates.
We refer you to "Description of the Certificates--Distributions Generally"
in this prospectus supplement.
Distribution of Interest
On each distribution date, you will be entitled to receive interest earned
during the applicable interest accrual period on your certificate at the
rate per annum set forth or described on the cover page of this prospectus
supplement, subject to the maximum rate described under the caption
"Description of the Certificates--Distribution of Interest." If you hold
Class AV-1 Certificates, the per annum rate at which you are paid interest
will increase to one-month LIBOR plus 0.480% (subject to the applicable
maximum rate), if you hold Class AV-2 Certificates, the per annum rate at
which you are paid interest will increase to one-month LIBOR plus 0.500%
(subject to the applicable maximum rate), if you hold Class AF-5
Certificates, the per annum rate at which you are paid interest will
increase to 5.699% (subject to the applicable maximum rate), if you hold
Class AF-6 Certificates, the per annum rate at which you are paid interest
will increase to 5.156% (subject to the applicable maximum rate), if you
hold Class M-1 Certificates, the per annum rate at which you are paid
interest will increase to 5.692% (subject to the applicable maximum rate),
if you hold Class M-2 Certificates, the per annum rate at which you are
paid interest will increase to 6.060% (subject to the applicable maximum
rate), if you hold Class M-3 Certificates, the per annum rate at which you
are paid interest will increase to 6.181% (subject to the applicable
maximum rate), if you hold Class M-4 Certificates, the per annum rate at
which you are paid interest will increase to 6.378% (subject to the
applicable maximum rate) with respect to any distribution date after the
date on which the servicer has the option to purchase the mortgage loans in
the trust fund and properties acquired by the trust fund in satisfaction of
mortgage loans, if any, as described under the caption "Description of the
Certificates--Optional Termination."
The interest accrual period for the Class AF-1, Class AV-1, Class AV-2,
Class B-1 and Class B-2 Certificates will be the period commencing on the
distribution date in the prior calendar month (or on the Closing Date with
respect to the first distribution date) and ending on the day preceding
each distribution date. The interest accrual period for the Class AF-2,
Class AF-3, Class AF-4, Class AF-5, Class AF-6, Class M-1, Class M-2, Class
M-3 and Class M-4 Certificates will be the calendar month preceding each
distribution date.
You will also be entitled to receive any interest that you earned
previously but did not receive plus interest thereon. However, there are
some circumstances which could reduce the amount of interest payable to
you.
In addition, if you hold Class AF-1, Class AV-1, Class AV-2, Class B-1 or
Class B-2 Certificates and the amount of interest you are entitled to
receive on any distribution date is determined by the applicable
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S-9
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maximum rate, you may also be entitled to receive supplemental interest
payments on a subordinated basis from a portion of the funds in the Net WAC
Cap Account and, if you hold Class AV-1 or Class AV-2 Certificates and to
the extent amounts in the Net WAC Cap Account are not sufficient, from a
reserve fund into which amounts payable under the yield maintenance
agreement will be deposited. The Net WAC Cap Account will be funded on the
Closing Date with a deposit of $10,000. Subsequent deposits to the Net WAC
Cap Account will be made from distributions of excess available funds, if
any, so that the amount on deposit in the Net WAC Cap Account does not
exceed $10,000.
We refer you to "Description of the Certificates--Distributions Generally,"
"--Distribution of Interest" and "--Distribution of Monthly Excess Cashflow
Amounts" in this prospectus supplement.
Distribution of Principal
On each distribution date, the trustee will remit payments of principal on
your certificate if there is cash available for the payment on that date
and the priorities of payment in the pooling and servicing agreement
provide for a payment on your certificate on that date.
We refer you to "Description of the Certificates--Distributions Generally"
and "--Distribution of Principal" and "--Distribution of Monthly Excess
Cashflow Amounts" in this prospectus supplement for more details.
Credit Enhancement
General. Credit enhancement is intended to reduce the harm caused to
holders of certificates by shortfalls in payments received on the mortgage
loans. The credit enhancement provided for the benefit of the offered
certificates will include excess interest, overcollateralization and
subordination. The credit enhancement provided for the benefit of the Class
AV-1 and Class AV-2 Certificates also will include the reserve fund funded
by the yield maintenance agreement. The various forms of credit enhancement
on the offered certificates are described below and elsewhere in this
prospectus supplement.
Excess Interest and Overcollateralization. On the date of issuance of the
certificates, the unpaid principal balance of the initial mortgage loans
plus the amount on deposit in the pre-funding account will approximately
equal the principal balance of the offered certificates. The
overcollateralization that will serve as credit enhancement for the holders
of the offered certificates is the excess, if any, of the sum of the unpaid
principal balance of the mortgage loans and the amount, if any, on deposit
in the pre-funding account, over the principal balance of the offered
certificates. Any excess interest not used to cover interest shortfalls or
current period losses will be paid as an accelerated payment of principal
on the offered certificates until the required level of
overcollateralization is reached. Any overcollateralization will generally
be available to absorb losses on the mortgage loans. Excess interest
collections not used to cover current losses will be used to pay principal
on the offered certificates to maintain the level of overcollateralization
at the required level. The required level of overcollateralization may
increase or decrease over time. We cannot assure you that sufficient
interest will be generated by the mortgage loans to attain or maintain the
required level of overcollateralization. If the required level of
overcollateralization is permitted to decrease, the pooling and servicing
agreement permits a portion of the principal distribution amount available
for distribution to not be distributed in reduction of the principal
balance of the offered certificates.
We refer you to "Description of the Certificates--Distribution of Monthly
Excess Cashflow Amounts" in this prospectus supplement.
Subordination. On each distribution date, with the exception of certain
amounts distributable to the Class B-1 and Class B-2 Certificates from
excess cashflow after all other distributions have been made on that
distribution date, classes of offered certificates that are lower in order
of payment priority will not receive payments until the classes of offered
certificates that are higher in order of payment priority have been paid.
If there are insufficient funds on a distribution date to pay all classes
of offered certificates, the subordinate classes are the first to forego
payment. In addition, on any distribution date on which the aggregate
principal balance of the offered certificates exceeds the sum of the
aggregate principal balance of
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the mortgage loans and the amount, if any, on deposit in the pre-funding
account, the principal balance of the class of subordinate certificates
outstanding with the lowest payment priority will be reduced by the amount
of that excess.
The Reserve Fund and the Yield Maintenance Agreement. The trust fund will
include a yield maintenance agreement between Wachovia Bank, National
Association and the trustee. Payments under the yield maintenance agreement
will be deposited in a reserve fund. Payments under the yield maintenance
agreement will be made pursuant to the formula described in "Description of
the Certificates--The Reserve Fund and the Yield Maintenance Agreement."
On each distribution date, all amounts will be withdrawn from the reserve
fund and distributed in accordance with the priorities of payment described
under "Description of the Certificates-- The Reserve Fund and the Yield
Maintenance Agreement" in this prospectus supplement.
We refer you to "Description of the Certificates-- The Reserve Fund and the
Yield Maintenance Agreement" in this prospectus supplement for more
details.
Neither the offered certificates nor the underlying mortgage loans are
insured or guaranteed by any governmental agency or instrumentality, or by
any other entity.
Advances
Subject to certain exceptions, the servicer is required to make cash
advances to cover delinquent scheduled payments of principal and interest
on any mortgage loan in the trust fund if it determines that these advances
will be recoverable from subsequent collections on that mortgage loan. In
some cases, the trustee, in its capacity as successor servicer, will be
required to make an advance if the servicer fails to do so.
Advances are intended to maintain a regular flow of scheduled interest and
principal payments on the certificates and are not a form of credit
enhancement, or intended to guarantee or insure against losses.
We refer you to "Servicing of Loans--Advances" in this prospectus
supplement.
Optional Termination
The servicer may exercise an option to purchase all the mortgage loans and
any properties that the trustee acquired in satisfaction of any of the
mortgage loans when the aggregate principal balance of all mortgage loans
in the trust fund, including the mortgage loans related to properties which
the trustee has acquired, is less than 10% of the sum of the aggregate
principal balance of all mortgage loans in the trust fund as of the close
of business on March 31, 2004 and the amount on deposit in the pre-funding
account on the closing date. If the servicer exercises this option, your
certificate will be retired early and you will be entitled to:
o the outstanding principal balance of your certificate;
o any unpaid accrued interest on your certificate to the date of
optional termination at the lesser of the rate per annum
described on the cover page and the maximum rate, if applicable;
and
o any unpaid supplemental interest payments on your certificate to
the date of optional termination (with respect to the Class AF-1,
Class AV-1, Class AV-2, Class B-1 and Class B-2 Certificates).
We refer you to "Description of the Certificates--Optional Termination" in
this prospectus supplement.
Federal Income Tax Consequences
The trust fund will make elections to treat some of its assets as one or
more "real estate mortgage investment conduits," or REMICs, for federal
income tax purposes. The offered certificates (excluding any
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associated rights to receive certain payments from the Net WAC Cap Account
or reserve fund) and the Class X Certificates will constitute "regular
interests" in a REMIC and the Class R Certificates will constitute the sole
class of "residual interest" in each REMIC. Depending on their issue price
and other factors, the offered certificates may be issued with original
issue discount for federal income tax purposes.
We refer you to "Federal Income Tax Consequences" in this prospectus
supplement and in the accompanying prospectus.
ERISA Considerations
If you are a fiduciary of any pension, other employee benefit or similar
plan subject to the Employee Retirement Income Security Act of 1974, as
amended, or Section 4975 of the Internal Revenue Code of 1986, as amended,
you should review carefully with your counsel whether you are permitted to
buy or hold any of the certificates.
Subject to the considerations described under "ERISA Considerations" in
this prospectus supplement and in the accompanying prospectus, it is
expected that the offered certificates may be purchased by a pension, other
employee benefit or similar plan, so long as certain conditions are met.
Legal Investment
You should consult with your counsel to see if you are permitted to buy any
of the certificates since the legal investment rules vary depending on what
kind of entity you are and which other entities regulate you. The offered
certificates will not be "mortgage related securities" for purposes of the
Secondary Mortgage Market Enhancement Act of 1984.
We refer you to "Legal Investment" in this prospectus supplement and in the
accompanying prospectus.
Ratings
The trust will not issue the certificates unless they receive the
respective ratings set forth below from Standard & Poor's Ratings Services,
Moody's Investors Service, Inc. and Fitch Ratings:
Standard &
Class Poor's Moody's Fitch
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AF-1 AAA Aaa AAA
AF-2 AAA Aaa AAA
AF-3 AAA Aaa AAA
AF-4 AAA Aaa AAA
AF-5 AAA Aaa AAA
AF-6 AAA Aaa AAA
AV-1 AAA Aaa AAA
AV-2 AAA Aaa AAA
M-1 AA Aa2 AA
M-2 A A2 A+
M-3 A- A3 A
M-4 BBB+ Baa1 A-
B-1 BBB Baa1 BBB+
B-2 BBB- Baa2 BBB
The ratings address credit risk. When evaluating credit risk, the rating
agencies look at the likelihood of whether or not you will receive your
interest and principal payments. Credit risk does not relate to the
likelihood of prepayments on the mortgage loans. Prepayments affect the
timing of your payments and, as a result, could cause your actual return to
differ substantially from your anticipated return on your investment.
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The entitlement to any supplemental interest payments on the Class AF-1,
Class AV-1, Class AV-2, Class B-1 and Class B-2 Certificates is not rated,
and therefore the ratings of the Class AF-1, Class AV-1, Class AV-2, Class
B-1 and Class B-2 Certificates do not address the likelihood of whether
you, if you hold Class AF-1, Class AV-1, Class AV-2, Class B-1 or Class B-2
Certificates, will receive any supplemental interest payments on your
certificate.
We refer you to "Ratings" and "Risk Factors--Withdrawal or downgrading of
initial ratings will reduce the value of the offered certificates" in this
prospectus supplement.
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S-13
RISK FACTORS
o The certificates are not suitable investments for all investors.
o You should not purchase any of the certificates unless you understand and
are able to bear the prepayment, credit, liquidity and market risks
associated with these securities.
o The certificates are complex securities and it is important that you
possess, either alone or together with an investment advisor, the expertise
necessary to evaluate the information contained in this prospectus
supplement and the accompanying prospectus in the context of your financial
situation.
o In addition to the matters described elsewhere in this prospectus
supplement and the accompanying prospectus, you should carefully consider
the following risk factors before deciding to purchase a certificate. For a
discussion of additional risks pertaining to the certificates, we refer you
to "Risk Factors" in the accompanying prospectus.
You may have difficulty selling your certificates.
The certificates will not be listed on any securities exchange. As a
result, if you wish to sell your certificates, you will have to find a purchaser
that is willing to purchase your certificates. The underwriters intend to make a
secondary market for the offered certificates. The underwriters may do so by
offering to buy the offered certificates from investors that wish to sell.
However, the underwriters will not be obligated to make offers to buy the
offered certificates and may stop making offers at any time. In addition, the
prices offered, if any, may not reflect prices that other potential purchasers,
were they to be given the opportunity, would be willing to pay. There have been
times in the past where there have been very few buyers of similar asset-backed
securities, and there may be similar times in the future. As a result, you may
not be able to sell your certificates when you wish to do so or you may not be
able to obtain the price you wish to receive.
Subprime mortgage loans are subject to greater risk of delinquency and loss.
The underwriting standards of the sellers are less restrictive than those
of Fannie Mae or Freddie Mac with respect to a borrower's credit history and
other factors. A derogatory credit history or a lack of credit history will not
necessarily prevent the sellers from making a loan but may reduce the size and
the combined loan-to-value ratio of the loan the sellers will make. As a result
of these less restrictive standards, the trust fund may experience higher rates
of delinquencies, defaults and losses than if the mortgage loans were
underwritten in a more traditional manner.
Newly originated mortgage loans may be more likely to default which may cause
losses.
Defaults on mortgage loans tend to occur at higher rates during the early
years of the mortgage loans. Approximately, 98.44% of the initial mortgage loans
were originated within 12 months prior to the sale to the trust fund. As a
result, the trust may experience higher rates of default than if the mortgage
loans had been outstanding for a longer period of time.
Inclusion of delinquent mortgage loans may increase risk of loss.
Approximately 0.08% of the initial mortgage loans in Group I, approximately
0.06% of the initial mortgage loans in Group II-A and none of the initial
mortgage loans in Group II-B, each by aggregate principal balance of the initial
mortgage loans in that group as of the initial cut-off date, were 30 to 59 days
contractually delinquent (assuming 30 day months). As a result, the mortgage
pool may bear more risk than a pool of mortgage loans without any delinquencies
but with otherwise comparable characteristics. It is possible that a delinquent
mortgage loan will not ever become current or, if it does become current, that
the mortgagor may become delinquent again.
S-14
Book-entry certificates may be illiquid.
Issuance of the certificates in book-entry form may adversely affect your
ability to sell your certificates in the secondary trading market since
investors may be unwilling to purchase certificates for which they cannot obtain
physical certificates.
We refer you to "Description of the Certificates--Book-Entry Certificates"
in this prospectus supplement.
Book-entry certificates may not be able to be pledged.
Since transactions in the offered certificates can be effected only through
The Depository Trust Company, or, upon request, through Clearstream, Luxembourg,
or the Euroclear System, their participating organizations, indirect
participants and certain banks, your ability to pledge your certificate to
persons or entities that do not participate in the Euroclear System, The
Depository Trust Company or Clearstream, Luxembourg, systems may be limited due
to lack of a physical certificate representing your certificate.
We refer you to "Description of the Certificates--Book-Entry Certificates"
in this prospectus supplement.
Book-entry certificates may result in delayed receipt of distributions.
As a beneficial owner, you may experience some delay in receiving
distributions of interest and principal on your certificate since these
distributions will be:
o forwarded by the trustee to the depository;
o credited by the depository to the accounts of its participants;
and
o ultimately credited to your account by a depository participant.
We refer you to "Description of the Certificates--Book-Entry Certificates"
and Annex I in this prospectus supplement.
Liquidations could result in delays and losses.
Even if the mortgaged properties provide adequate security for the mortgage
loans, substantial delays could be encountered in connection with the
liquidation of mortgage loans that are delinquent and resulting shortfalls in
distributions on your certificate could occur. Corresponding delays in your
receipt of related proceeds could occur. Also, liquidation expenses (including
legal fees, real estate taxes, and maintenance and preservation expenses) will
be paid first, thereby reducing the proceeds payable on your certificate and
thereby reducing the security for the mortgage loans. If any of the mortgaged
properties fails to provide adequate security for the related mortgage loan, you
could experience a loss on your certificate.
We refer you to "Yield, Prepayment and Maturity Considerations--Prepayment
Considerations and Risks" in this prospectus supplement and "Yield and
Prepayment Considerations" in the accompanying prospectus.
Your yield to maturity may be reduced by prepayments.
The yield to maturity and weighted average life of your certificates will
be affected primarily by the rate and timing of prepayments on the mortgage
loans. The mortgage loans may be prepaid in whole or in part at any time, many
without penalty. The trust fund's prepayment experience may be affected by a
wide variety of factors, including general economic conditions, interest rates,
the availability of alternative financing and homeowner mobility. The servicer
and its affiliates periodically conduct telemarketing and mass mailings to their
existing customers with respect to the refinancing of existing mortgage loans.
Although these marketing efforts are not specifically directed to customers who
have mortgage loans included in a trust fund, these customers may receive the
marketing materials as part of a broader telemarketing campaign or mailing,
which may result in an increase in the rate of prepayments of mortgage loans
included in a trust fund through refinancings. In addition, substantially
S-15
all of the mortgage loans contain due-on-sale provisions, and the servicer
intends to enforce those provisions unless (1) enforcement is not permitted by
applicable law or (2) the servicer, in a manner consistent with reasonable
commercial practice, permits the purchaser of the related mortgaged property to
assume the mortgage loan. To the extent permitted by applicable law, assumption
of the mortgage loan will not release the original borrower from its obligation
under the mortgage loan. Enforcement of a due-on-sale provision would result in
repayment in full of the mortgage loan, which would be treated as a prepayment.
In addition, the weighted average life of a class of offered certificates will
be affected by any prepayment resulting from the distribution to that class of
amounts (if any) on deposit in the pre-funding account after the end of the
funding period.
The rate of prepayments on the mortgage loans will be sensitive to
prevailing interest rates. Generally, when prevailing interest rates are
increasing, prepayment rates on mortgage loans tend to decrease; a decrease in
the prepayment rates on the mortgage loans will result in a reduced rate of
return of principal to investors in the offered certificates at a time when
reinvestment at such higher prevailing rates would be desirable. Conversely,
when prevailing interest rates are declining, prepayment rates on mortgage loans
tend to increase; an increase in the prepayment rates on the mortgage loans will
result in an accelerated return of principal to investors in the offered
certificates at a time when reinvestment at comparable yields may not be
possible. Furthermore, because the mortgage rate for each adjustable-rate
mortgage loan is based on the related index set forth in the mortgage note plus
a fixed percentage amount, that rate could be higher than prevailing market
interest rates at the time of adjustment, and this may result in an increase in
the rate of prepayments on those mortgage loans after that adjustment.
In addition, the servicer may, but is not obligated to, repurchase mortgage
loans that become 91 days or more delinquent or for which the servicer has
accepted a deed in lieu of foreclosure. These purchases will have the same
effect on the holders of the offered certificates as a prepayment of those
mortgage loans.
The servicer also may, but is not obligated to, purchase all of the
mortgage loans when the aggregate principal balance of the mortgage loans is
less than 10% of the sum of the aggregate principal balance of the initial
mortgage loans as of the initial cut-off date and the amount on deposit in the
pre-funding account on the closing date, which will have the same effect on the
holders of the offered certificates as a prepayment in full of all the mortgage
loans.
You will bear any reinvestment risks resulting from a faster or slower
incidence of prepayments of the mortgage loans.
Consider carefully the discussion under "Yield, Prepayment and Maturity
Considerations--Prepayment Considerations and Risks" in this prospectus
supplement and under "Yield and Prepayment Considerations" and "Certain Legal
Aspects of the Loans--Due-on-Sale Clauses" in the accompanying prospectus.
A substantial prepayment of the offered certificates could occur if the trust
fund has difficulty acquiring subsequent mortgage loans.
The ability of the trust fund to acquire subsequent mortgage loans depends
on the ability of the sellers to originate or acquire mortgage loans during the
funding period that meet the eligibility criteria for subsequent mortgage loans.
The ability of the sellers to originate or acquire such loans will be affected
by a number of factors including prevailing interest rates, employment levels,
and economic conditions generally. If the full amount on deposit in the
pre-funding account allocated to purchase subsequent mortgage loans cannot be
used by the end of the funding period for that purpose, amounts remaining on
deposit in the pre-funding account, other than investment income on those
amounts, will be distributed to the holders of offered certificates as a
prepayment of principal on the distribution date immediately following the end
of the funding period. No assurance can be given as to the magnitude of any
amount on deposit in the pre-funding account at the end of the funding period.
Subsequent mortgage loans may have characteristics that differ from those of the
initial mortgage loans which may reduce the yield to maturity of the offered
certificates.
Although the pooling and servicing agreement will specify certain criteria
for the subsequent mortgage loans, following the transfer of the subsequent
mortgage loans to the mortgage pool after the closing date the characteristics
of the mortgage loans may differ from the information presented in this
prospectus supplement. The
S-16
characteristics that may differ include, among others, the composition of the
mortgage loans and of the borrowers of the mortgage loans, the credit quality of
the mortgage loans, the distribution by interest rate, the distribution by
principal balance, the distribution by combined loan-to-value ratio and the
distribution by remaining term to stated maturity. We recommend that you
consider potential variances when making your investment decision concerning the
offered certificates.
Defaults and delinquent payments on the mortgage loans could affect your yield.
The yield to maturity on your certificate will be sensitive to defaults and
delinquent payments on the mortgage loans. If the actual rate of defaults on the
mortgage loans and the actual amount of losses to the trust fund upon
liquidation of the mortgage loans is greater than the amounts assumed by you in
estimating the yield to maturity on your certificate, the actual yield will be
lower than your estimate. If the trust fund experiences substantial losses, you
may experience a loss. The timing of losses to the trust fund in connection with
liquidations of mortgage loans will affect the yield to maturity on your
certificate even if the rate of defaults and severity of those losses are
consistent with your expectations. In general, the earlier a loss occurs, the
greater effect it will have on the yield to maturity. There can be no assurance
as to the delinquency, foreclosure or loss experience with respect to the
mortgage loans.
Limitations on pass-through rate of the certificates may affect your yield to
maturity.
The rate at which interest accrues on the offered certificates is subject
to a maximum rate based on the weighted average of the mortgage rates on the
mortgage loans, net of certain fees and expenses. If mortgage loans with
relatively higher mortgage rates prepay, the maximum rate on the offered
certificates will be lower than otherwise would be the case. Further, since the
pass-through rates of the Class AF-1, Class AV-1, Class AV-2, Class B-1 and
Class B-2 Certificates are based on one-month LIBOR plus a margin, increases in
one-month LIBOR that exceed increases in the weighted average mortgage rate of
the mortgage loans may cause the pass-through rate of the Class AF-1, Class
AV-1, Class AV-2, Class B-1 and Class B-2 Certificates to become subject to the
maximum rate. In this event, the value and marketability of the Class AF-1,
Class AV-1, Class AV-2, Class B-1 and Class B-2 Certificates may be temporarily
or permanently reduced.
All of the initial and subsequent Group I mortgage loans have and will have
fixed mortgage rates, and all of the initial and subsequent Group II mortgage
loans have and will have adjustable mortgage rates that are generally adjusted
semi-annually based on the related index. Consequently, the interest that
becomes due on the mortgage loans in either Group I or Group II during a due
period may be less than interest that would accrue on the Class AF-1, Class
AV-1, Class AV-2, Class B-1 and Class B-2 Certificates at the rate of one-month
LIBOR plus the applicable margin. In a rising interest rate environment, the
Class AF-1, Class AV-1, Class AV-2, Class B-1 and Class B-2 Certificates could
therefore receive interest at the applicable maximum rate for a protracted
period of time. In addition, in such a situation, there would be little or no
net monthly excess cash flow to cover losses and create additional
overcollateralization.
If the pass-through rate for Class AF-1, Class AV-1, Class AV-2, Class B-1
or Class B-2 Certificates is determined by the applicable maximum rate described
in this prospectus supplement, holders of that class will be entitled to receive
supplemental interest payments, on a pro rata basis, only to the extent of
available funds in the Net WAC Cap Account and, with respect to the Class AV-1
and Class AV-2 Certificates, amounts on deposit in the reserve fund under the
yield maintenance agreement relating to that class. Supplemental interest
payments, however, are not rated or otherwise guaranteed, are contingent on the
performance of the mortgage loans and, with respect to the Class AV-1 and Class
AV-2 Certificates, the yield maintenance agreement, and may not ever be
available. Further, payments into the reserve fund under the yield maintenance
agreement are based on a declining balance determined by making assumptions as
to the prepayment speed of the mortgage loans. A slower prepayment speed than
the one assumed under the yield maintenance agreement may result in the yield
maintenance agreement providing insufficient funds to cover those shortfalls
with respect to the Class AV-1 and Class AV-2 Certificates. It is unlikely that
the mortgage loans in the trust fund will prepay exactly in accordance with
those assumptions.
The rate at which interest accrues on the offered certificates may also be
reduced if borrowers under the mortgage loans obtain relief from payment
obligations pursuant to statutory provisions or if interest shortfalls
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resulting from borrower prepayments of mortgage loans are not covered by a
reduction of the servicer's fees for the following distribution date as provided
in the pooling and servicing agreement.
We refer you to "Servicing of Loans--Adjustment to Servicing Fee in
Connection with Certain Prepaid Loans" and "Description of the
Certificates--Distribution of Interest."
Impact of world events.
The economic impact of the United States' military operations in Iraq, as
well as the possibility of any terrorist attacks in response to these
operations, is uncertain, but could have a material effect on general economic
conditions, consumer confidence, and market liquidity. No assurance can be given
as to the effect of these events on consumer confidence and the performance of
the mortgage loans. Any adverse impact resulting from these events would be
borne by the holders of the certificates. United States military operations may
also increase the likelihood of shortfalls under the Servicemembers Civil Relief
Act, herein referred to as the Relief Act.
The Relief Act provides relief to borrowers who enter active military
service and to borrowers in reserve status who are called to active duty after
the origination of their mortgage loan. The Relief Act provides generally that
these borrowers may not be charged interest on a mortgage loan in excess of 6%
per annum during the period of the borrower's active duty. These shortfalls are
not required to be paid by the borrower at any future time, will not be advanced
by the servicer and will reduce accrued interest on each class of certificates
on a pro rata basis. In addition, the Relief Act imposes limitations that would
impair the ability of the servicer to foreclose on an affected loan during the
borrower's period of active duty status, and, under some circumstances during an
additional period thereafter.
The purchase price of the certificates and the rate, timing and severity of
realized losses on the mortgage loans may affect your yield to maturity.
In general, if the certificates are purchased at a premium and principal
distributions thereon occur at a rate faster than anticipated at the time of
purchase, the investor's actual yield to maturity will be lower than that
assumed at the time of purchase. Conversely, if the certificates are purchased
at a discount and principal distributions thereon occur at a rate slower than
that anticipated at the time of purchase, the investor's actual yield to
maturity will be lower than that originally assumed.
As a result of the absorption of realized losses on the mortgage loans by
excess interest, overcollateralization and subordination, liquidations of
defaulted mortgage loans, whether or not realized losses are incurred upon those
liquidations, will result in an earlier return of principal to the certificates
and will influence the yield on the certificates in a manner similar to the
manner in which principal prepayments on the mortgage loans will influence the
yield on the certificates. The overcollateralization provisions are intended to
result in an accelerated rate of principal distributions to holders of the
certificates at any time that the overcollateralization provided by the mortgage
pool is less than the required level.
Payment delay lowers your effective yield.
Generally, if you hold a Class AF-2, Class AF-3, Class AF-4, Class AF-5,
Class AF-6, Class M-1, Class M-2, Class M-3 or Class M-4 Certificate, payments
of principal and interest on the mortgage loans received in any calendar month
will not be passed through as payments on your certificate until the
distribution date in the following calendar month. As a result, the monthly
distributions on your certificate generally will reflect borrower payments
during the prior calendar month. The distribution date will be the 25th day of
each month (or the next succeeding business day), commencing on May 25, 2004.
Thus, the effective yield to you will be below that otherwise produced by the
pass-through rate and the price paid by you for your certificate because
distributions on your certificate in respect of any given month will not be made
until on or about the 25th day of the following month.
S-18
Balloon loans may bear higher risk of loss.
As of the close of business on March 31, 2004, approximately 5.46% and none
of the aggregate outstanding principal balance of the initial mortgage loans in
Group I and Group II, respectively, consisted of balloon loans, which generally
provide for equal monthly payments and a final monthly payment substantially
greater than the preceding monthly payments. The initial balloon loans in the
trust fund have original terms of 60 to 180 months and provide for monthly
payments based on a 300 to 360 month amortization schedule. The borrower on a
balloon loan will generally attempt to refinance a balloon loan or sell the
underlying mortgaged property on or prior to the stated maturity date in order
to avoid payment of the final balloon payment. A borrower's ability to
accomplish either of these goals will be affected by a number of factors,
including the level of available mortgage rates at the time of sale or
refinancing, the borrower's equity in the related mortgaged property, the
financial condition of the borrower, tax laws and prevailing general economic
conditions. If a borrower is unable to refinance a balloon loan prior to its
stated maturity date, the borrower may be more likely to default on the loan.
None of the sellers, the servicer, the depositor or the trustee is obligated to
refinance any mortgage loan.
The liquidation proceeds of multi-family loans may take longer to recover.
Multi-family loans are mortgage loans secured by five- to eight-family
properties. Multi-family loans represented approximately 3.23% and none of the
aggregate principal balance of the initial mortgage loans in Group I and Group
II, respectively, as of the close of business on March 31, 2004. Due to the
limited market for the type of properties securing multi-family loans, in the
event of a foreclosure, we expect that it will take longer to recover proceeds
from the liquidation of a multi-family loan than it would for a mortgage loan
secured by a one- to four-family dwelling.
Withdrawal or downgrading of initial ratings will reduce the value of the
certificates.
The ratings of the certificates will be based on, among other things, the
adequacy of the value of the mortgage loans. These ratings should not be deemed
a recommendation to purchase, hold or sell certificates, since they do not
address market price or suitability for a particular investor. There is also no
assurance that these ratings will remain in effect for any given period of time
or may not be lowered or withdrawn entirely by the rating agency if in its
judgment circumstances in the future so warrant. Any reduction or withdrawal of
a rating will have an adverse effect on the value of the certificates.
A default or downgrade of the counterparty under the yield maintenance agreement
may result in the downgrade of the certificates.
The only assets available to fund the reserve fund under the yield
maintenance agreement are payments made by the counterparty under the yield
maintenance agreement. In the event that the counterparty was to default under
the yield maintenance agreement or if the yield maintenance agreement was to
terminate for any reason, the ratings on the certificates may be downgraded. Any
such downgrade may affect the value and marketability of the certificates.
There could be delays in distributions on your certificate if the transfer of
the mortgage loans to the trust fund is not considered a sale in the event of
bankruptcy.
For purposes of the bankruptcy code and for legal purposes, the servicer,
the sellers and the depositor will treat each conveyance of mortgage loans by
the sellers to the depositor as a sale of those mortgage loans; however, for
financial reporting purposes, the sellers will treat this transaction as the
incurrence of debt by the sellers, which debt will be evidenced by the
certificates. The depositor will treat each conveyance of mortgage loans from
the depositor to the trust fund as a sale of those mortgage loans. If the
conveyance of the mortgage loans by the sellers to the depositor is treated as a
sale, those mortgage loans would not be part of the related seller's bankruptcy
estate and would not be available to that seller's creditors. In the event of
the bankruptcy or insolvency of a seller, however, the bankruptcy trustee, a
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conservator or a receiver of the seller or another person may attempt to
recharacterize the sale of the mortgage loans as a borrowing by the seller,
secured by a pledge of the mortgage loans. Similarly, if the conveyance of the
mortgage loans by the depositor to the trust fund is treated as a sale, those
mortgage loans would not be part of the depositor's bankruptcy estate and would
not be available to the depositor's creditors. In the event of the bankruptcy or
insolvency of the depositor, however, the bankruptcy trustee, a conservator or a
receiver of the depositor or another person may attempt to recharacterize the
sale of the mortgage loans as a borrowing by the depositor, secured by a pledge
of the mortgage loans. In either case, this position, if argued before or
accepted by a court, could prevent timely payments of amounts due on your
certificate and result in a reduction of payments on your certificate.
Interest payments may be insufficient to create overcollateralization.
Because the weighted average of the mortgage rates on the mortgage loans is
expected to be higher than the weighted average of the pass-through rates on the
offered certificates, the mortgage loans are expected to generate more interest
than the amount necessary to pay interest owed on the offered certificates as
well as certain fees and expenses of the trust fund. Any remaining interest will
then be used to compensate for losses that occur on the mortgage loans. After
these financial obligations of the trust fund are covered, the available excess
interest will be used to create, maintain or restore overcollateralization for
the offered certificates. We cannot assure you, however, that enough excess
interest will be generated by the mortgage loans to create, maintain or restore
the required overcollateralization level. 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, written off or
repurchased, excess interest will be reduced because the mortgage
loan will no longer be outstanding and generating interest.
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 that date to
make payments on the certificates.
Environmental conditions affecting the mortgaged properties may result in
losses.
Real property pledged as security to a lender may be subject to
environmental risks. Under the laws of some states, contamination of a property
may give rise to a lien on the property to assure the costs of clean-up. In
several states, this type of lien has priority over the lien of an existing
mortgage or owner's interest against real 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 that require remedy 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 a
prior owner. A lender also risks liability on foreclosure of the mortgaged
property.
Second liens may result in losses in foreclosure proceedings.
Mortgage loans representing approximately 2.78% and none of the aggregate
outstanding principal balance of the initial mortgage loans in Group I and Group
II, respectively, as of the close of business on March 31, 2004 are secured by
second liens on the related mortgaged properties. In most cases, the first lien
mortgage loan related to a second lien mortgage loan in the mortgage pool will
not be included in the mortgage pool.
The proceeds from any liquidation, insurance or condemnation proceedings in
connection with the underlying mortgaged property will be available to satisfy
the outstanding balance of the related second mortgage only to the extent that
the claim of the related first mortgagee has been satisfied in full, including
any related foreclosure costs. In addition, the servicer, as second mortgagee on
the loans in its portfolio, may not foreclose on the property securing a second
mortgage unless it forecloses subject to the first mortgage, in which case it
must either pay the entire amount due on the first mortgage to the first
mortgagee at or prior to the foreclosure sale or advance funds to keep the first
mortgage current in the event the borrower is in default thereunder. The
servicer may, but is under no obligation to, advance funds in these
circumstances. Unless the related first mortgage is included in the mortgage
pool, the trust fund will not have any source of funds to satisfy related first
mortgages or
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make payments due to the first mortgagees. You will bear any risk associated
with any delays in payments on the mortgage loans and any reinvestment risk
resulting from any accelerated payments on the offered certificates resulting
from losses on mortgage loans secured by second liens on the related mortgaged
properties.
Decrease in value of mortgaged property would disproportionately affect second
lienholders.
There are several factors that could adversely affect the value of
properties such that the outstanding balance of the related mortgage loan,
together with any senior financing on the properties, would equal or exceed the
value of the properties. Among the factors that could adversely affect the value
of the properties are an overall decline in the residential real estate market
in the areas in which the properties are located or a decline in the general
condition of the properties as a result of failure of borrowers to maintain
adequately the properties or of natural disasters that are not necessarily
covered by insurance, such as earthquakes and floods. Any such decline could
extinguish the value of a second interest in property before having any effect
on the related first interest therein. If such a decline occurs, the actual
rates of delinquencies, foreclosure and losses on the loans secured by second
liens could be higher than those currently experienced in the mortgage lending
industry in general. You will bear the risk of delay in distributions while a
deficiency judgment, if any, against the borrower is sought and any reinvestment
risk resulting from accelerated prepayments on the offered certificates due to
losses on second lien mortgage loans.
There are risks in holding subordinate certificates.
The protections afforded the senior certificates create risks for the
subordinate certificates. Prior to any purchase of any subordinate certificates,
you should consider the following factors that may adversely impact your yield:
o because the subordinate certificates receive interest and
principal distributions after the senior certificates receive
interest and principal distributions, there is a greater
likelihood that the subordinate certificates will not receive the
distributions to which they are entitled on any distribution
date;
o if the servicer determines not to advance a delinquent payment on
a mortgage loan because it decides that the amount of the
delinquent payment will not be recoverable from the related
mortgagor, there may be a shortfall in distributions on the
certificates that will disproportionately impact the subordinate
certificates;
o the portion of the shortfalls in the amount of interest
collections on the mortgage loans that are attributable to
prepayments in full and are not covered by the servicer, and
shortfalls in interest collections on any mortgage loans arising
from the timing of partial principal prepayments, may result in a
shortfall in distributions on the certificates that will
disproportionately impact the subordinate certificates;
o with the exception of certain amounts of principal distributable
to the Class B-1 and Class B-2 Certificates from excess cashflow
after all other distributions have been made on the related
distribution date, the subordinate certificates are not expected
to receive principal distributions until, at the earliest, the
distribution date in May 2007 (unless the certificate balances of
all of the senior certificates have been reduced to zero prior to
the May 2007 distribution date);
o losses resulting from the liquidation of defaulted mortgage loans
will reduce the level of overcollateralization, if any, for the
certificates. If there is no overcollateralization, losses will
be allocated to the subordinate certificates. An allocation of
losses to a subordinate certificate will result in a permanent
reduction in that certificate's certificate balance without a
corresponding distribution of cash to the holder. A lower
certificate balance will result in less interest accruing on the
certificate; and
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o the earlier in the life of a certificate that a loss on a
mortgage loan occurs, the greater the impact on that
certificate's yield.
We refer you to "Description of the Certificates" and "Yield, Prepayment
and Maturity Considerations."
Geographic concentration of mortgaged properties may affect payments on your
certificate.
As of the initial cut-off date:
o approximately 16.38%, 9.57%, 7.32%, 6.25%, 5.90% and 5.05% (by
aggregate outstanding principal balance) of the initial mortgage
loans are secured by properties located in the State of
California, the State of Illinois, the State of New York, the
State of Michigan, the State of Maryland and the State of Ohio,
respectively;
o approximately 0.40% (by aggregate outstanding principal balance)
of the initial mortgage loans are secured by properties located
in a single zip code, which is in Chicago, Illinois; and
o the aggregate outstanding principal balance of the initial
mortgage loans secured by properties in each other state
represents not more than approximately 5.00% of the initial
mortgage loans.
If the California, Illinois, New York, Michigan, Maryland or Ohio residential
real estate markets should experience an overall decline in property values or a
catastrophic event occurs in these areas after the dates of origination of the
mortgage loans, the rates of losses on the mortgage loans would be expected to
increase, and could increase substantially. Because of the concentration of
mortgage loans in these states, those types of problems may have a greater
effect on your certificates than if borrowers and mortgaged properties were more
spread out in different geographic areas.
Violations of consumer protection laws may result in losses.
Applicable state laws generally regulate interest rates and other charges
and require specific disclosures. In addition, other state laws, public policy
and general principles of equity relating to the protection of consumers, unfair
and deceptive practices and debt collection practices may apply to the
origination, servicing and collection of the mortgage loans.
The mortgage loans are also subject to federal laws including:
o the federal Truth in Lending Act and Regulation Z promulgated
under the Truth in Lending Act, which require particular
disclosures to the borrowers regarding the terms of the mortgage
loans;
o the Equal Credit Opportunity Act and Regulation B promulgated
under the Equal Credit Opportunity Act, 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;
o the Americans with Disabilities Act, which, among other things,
prohibits discrimination on the basis of disability in the full
and equal enjoyment of the goods, services, facilities,
privileges, advantages or accommodations of any place of public
accommodation;
o the Fair Credit Reporting Act, which regulates the use and
reporting of information related to the borrower's credit
experience; and
o the Fair Debt Collections Practices Act, which provides various
consumer protections to borrowers and imposes certain
restrictions on debt collectors in connection with the collection
of mortgage loans and other debts.
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Depending on the provisions of the applicable law and the specific facts
and circumstances involved, violations of these laws, policies and principles
may limit the ability of the servicer to collect all or part of the principal of
or interest on the mortgage loans, may entitle the borrower to a refund of
amounts previously paid and, in addition, could subject the trust fund, as owner
of the mortgage loans, to damages and administrative enforcement.
Predatory lending laws and regulations could subject the trust fund to losses.
None of the mortgage loans are subject to the federal Home Ownership and
Equity Protection Act of 1994. See "Legal Aspects of the Loans--Consumer
Protection Laws" in the prospectus.
In addition to the Home Ownership and Equity Protection Act of 1994,
however, a number of legislative proposals have been introduced at both the
federal and state level that are designed to discourage predatory lending
practices. Some states have enacted, or may enact, laws or regulations that
prohibit inclusion of some provisions in mortgage loans that have mortgage rates
or origination costs in excess of prescribed levels, and require that borrowers
be given certain disclosures prior to the consummation of those mortgage loans.
In some cases, state law may impose requirements and restrictions greater than
those in the Home Ownership and Equity Protection Act of 1994. The sellers'
failure to comply with these laws could subject the trust fund, and other
assignees of the mortgage loans, to monetary penalties and could result in the
borrowers rescinding mortgage loans against either the trust or subsequent
holders of the mortgage loans. Lawsuits have been brought in various states
making claims against assignees of high cost loans for violations of state law.
Named defendants in these cases include numerous participants within the
secondary mortgage market, including some securitization trust funds.
In the event the sellers are not able to repurchase or replace defective
mortgage loans, you may suffer losses on your certificates.
The sellers will make various representations and warranties related to the
mortgage loans. If a seller fails to cure a material breach of its
representations and warranties with respect to any mortgage loan in a timely
manner, that seller will be required to repurchase or replace the defective
loan. In the event that the seller is not able to repurchase or replace any
defective mortgage loans at the date that action is required, for financial or
other reasons, you may suffer losses on your certificates. The inability of the
sellers to repurchase or replace defective mortgage loans would likely cause the
mortgage loans to experience higher rates of delinquencies, defaults and losses.
As a result, shortfalls in the distributions due on your certificates could
occur.
The assignment of certain of the mortgages in the name of MERS (R) may result in
delays and additional costs in commencing, prosecuting and completing
foreclosure proceedings.
The assignment of certain of the mortgages in the name of Mortgage
Electronic Registration Systems, Inc., or MERS(R), is a new practice in the
mortgage lending industry. The sellers expect that the servicer will be able to
commence foreclosure proceedings on the mortgaged properties, when necessary and
appropriate; however, public recording officers and others may have limited, if
any, experience with lenders seeking to foreclose mortgages, assignments of
which are registered with MERS(R). 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 certificateholders
and increase the amount of realized losses on the mortgage loans.
The offered certificates are not suitable investments for all investors.
The offered certificates are not suitable investments for any investor that
requires a regular or predictable schedule of payments or payment on a specific
date. The offered certificates are complex investments that should be considered
only by investors who, either alone or with their financial, tax and legal
advisors, have the expertise to analyze the prepayment, credit, reinvestment,
default and market risks, the tax consequences of an investment, and the
interaction of these factors.
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THE MORTGAGE POOL
General
Unless otherwise indicated, information presented herein under "The
Mortgage Pool" expressed as percentages (other than rates of interest) are
approximate percentages based on the Stated Principal Balances of the Initial
Loans (as defined below) as of the Initial Cut-off Date (as defined below).
Equity One ABS, Inc. (the "Depositor") will purchase the initial Loans (the
"Initial Loans") from Equity One, Inc., a Delaware corporation, Equity One,
Incorporated, a Pennsylvania corporation, and Popular Financial Services, LLC, a
Delaware limited liability company (each a "Seller" and, collectively, the
"Sellers"), pursuant to the Pooling and Servicing Agreement (the "Pooling and
Servicing Agreement") dated as of March 31, 2004 (the "Initial Cut-off Date")
among the Sellers, Equity One, Inc. (the "Servicer"), the Depositor and JPMorgan
Chase Bank (the "Trustee"). The Sellers will treat this transaction as a sale
under applicable law, however, for financial reporting purposes the Sellers will
treat this transaction as the incurrence of debt by the Sellers, which debt will
be evidenced by the Certificates. The Depositor will then convey the Initial
Loans, without recourse, to the Trustee for the benefit of the holders of the
Mortgage Pass-Through Certificates, Series 2004-2 (the "Certificates"). In
addition, the Pre-Funded Amount (as defined below) will be deposited in the
Pre-Funding Account (as defined below) on the Closing Date (as defined below).
The mortgage pool will consist of adjustable rate and fixed rate mortgage
loans divided into two groups: Group I and Group II. Group I will consist of
fixed rate mortgage loans (the "Group I Loans") and Group II will consist of
adjustable rate mortgage loans (the "Group II Loans" and, collectively with the
Group I Loans, the "Loans"). Group I will include mortgage loans secured by
first and second liens on one- to four-family dwellings (each, a "Residential
Loan") and five- to eight-family dwellings (each, a "Multi-family Loan"). Group
II will be further divided into two sub-groups, Group II-A and Group II-B. Group
II-A will include only Residential Loans secured by first liens. Group II-B will
include Residential Loans and Multi-family Loans secured by first liens. Group
II-A will consist exclusively of mortgage loans that conform to agency loan
balance limits ("Group II-A Loans") and Group II-B will consist of a combination
of mortgage loans, some of which conform to agency loan balance limits and some
of which do not ("Group II-B Loans"). The Initial Loans in Group I, Group II-A
and Group II-B are referred to in this prospectus supplement as the "Initial
Group I Loans," the "Initial Group II-A Loans" and the "Initial Group II-B
Loans," respectively. The Initial Group II-A Loans and the Initial Group II-B
Loans are referred to collectively in this prospectus supplement as the "Initial
Group II Loans." The Initial Loans were generally originated or acquired in
accordance with underwriting guidelines that are less stringent than Fannie Mae
and Freddie Mac guidelines.
Residential Loans represent approximately 96.77% of the Initial Group I
Loans, 100% of the Initial Group II-A Loans and 100% of the Initial Group II-B
Loans. Multi-family Loans represent approximately 3.23% of the Initial Group I
Loans, none of the Initial Group II-A Loans and none of the Initial Group II-B
Loans. All of the Loans are or will be evidenced by promissory notes (the
"Mortgage Notes").
The Certificates will consist of the Class AF-1, Class AF-2, Class AF-3,
Class AF-4, Class AF-5 and Class AF-6 Certificates (collectively, the "Class AF
Certificates"), the Class AV-1 and Class AV-2 Certificates (together with the
Class AF Certificates, the "Senior Certificates"), the Class M-1, Class M-2,
Class M-3 and Class M-4 Certificates, the Class B-1 and Class B-2 Certificates
(together with the Class M-1, Class M-2, Class M-3, Class M-4 and Class B-1
Certificates, the "Subordinate Certificates"), the Class X Certificates and the
Class R Certificates. We are offering the Senior Certificates and the
Subordinate Certificates (collectively, the "Offered Certificates") pursuant to
this prospectus supplement; we are not offering the Class X Certificates or the
Class R Certificates for sale to investors.
Under the Pooling and Servicing Agreement, the Sellers will make
representations, warranties and covenants to the Depositor relating to, among
other things, the due execution and enforceability of the Pooling and Servicing
Agreement and characteristics of the Loans. Subject to the limitations described
below under "--Sale of the Loans," the Sellers will be obligated to repurchase
or substitute a similar mortgage loan for any Loan as to which there exists
deficient documentation or an uncured material breach of any representation,
warranty or covenant. The Sellers will represent and warrant to the Depositor in
the Pooling and Servicing Agreement that they selected the
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Loans from among the outstanding loans in their portfolios as to which the
representations and warranties set forth in the Pooling and Servicing Agreement
can be made and that they did not make this selection in a manner that would
adversely affect the interests of the certificateholders. See "Loan
Program--Representations by Sellers; Repurchases" in the accompanying
prospectus. Under the Pooling and Servicing Agreement, the Depositor will convey
all its right, title and interest in and to the Sellers' representations,
warranties and covenants, including the Sellers' repurchase obligation, to the
Trustee for the benefit of the certificateholders. The Depositor will make no
representations or warranties with respect to the Loans and will have no
obligation to repurchase or substitute Loans with deficient documentation or
which are otherwise defective. The Sellers are selling the Loans without
recourse and will have no obligation with respect to the Certificates in their
capacity as Sellers other than the repurchase obligation described above. The
obligations of Equity One, Inc., as Servicer, with respect to the Certificates
are limited to the Servicer's contractual servicing obligations under the
Pooling and Servicing Agreement.
Each Loan transferred to the trust fund will be identified on the loan
schedule delivered to the Trustee pursuant to the Pooling and Servicing
Agreement or applicable Subsequent Transfer Agreement. The loan schedule will
include information such as the principal balance of each Loan as of the
applicable Cut-off Date, its mortgage rate as well as other information. A copy
of the Pooling and Servicing Agreement and each Subsequent Transfer Agreement
will be available, on request, from the Trustee.
Information with respect to the Initial Loans expected to be included in
the mortgage pool is set forth below. Prior to May 6, 2004 (the "Closing Date"),
Initial Loans may be removed from the mortgage pool and other Loans may be
substituted therefor. The Depositor believes that the information set forth
herein under "The Mortgage Pool" with respect to the mortgage pool as presently
constituted is representative of the characteristics of the mortgage pool and
each loan group as they will be constituted at the Closing Date, although some
characteristics of the Initial Loans in the mortgage pool may vary. Information
regarding FICO scores is presented for informational purposes only.
"Stated Principal Balance" means as to any Loan and Due Date, the unpaid
principal balance of that Loan as of that Due Date, as specified in the
amortization schedule at the time relating thereto, before any adjustment to
that amortization schedule by reason of any moratorium or similar waiver or
grace period, after giving effect to any previous partial prepayments and
Liquidation Proceeds allocable to principal, other than with respect to any
Liquidated Loan, received and to the payment of principal due on that Due Date
and irrespective of any delinquency in payment by the related borrower.
As of any Distribution Date,
o the "Group I Principal Balance" equals the aggregate of the
Stated Principal Balances of the Group I Loans,
o the "Group II Principal Balance" equals the aggregate of the
Stated Principal Balances of the Group II Loans,
o the "Group II-A Principal Balance" equals the aggregate of the
Stated Principal Balances of the Group II-A Loans,
o the "Group II-B Principal Balance" equals the aggregate of the
Stated Principal Balances of the Group II-B Loans, and
o the "Pool Principal Balance" with respect to any Distribution
Date equals the sum of the Group I Principal Balance and the
Group II Principal Balance.
As of the close of business on the Initial Cut-off Date,
o the aggregate of the Stated Principal Balances of the Initial
Group I Loans was $353,001,293.04 (the "Initial Cut-off Date
Group I Principal Balance"),
o the aggregate of the Stated Principal Balances of the Initial
Group II Loans was $199,151,977.03 (the "Initial Cut-off Date
Group II Principal Balance"),
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o the aggregate of the Stated Principal Balances of the Initial
Group II-A Loans was $138,465,685.74 (the "Initial Cut-off Date
Group II-A Principal Balance"),
o the aggregate of the Stated Principal Balances of the Initial
Group II-B Loans was $60,686,291.29 (the "Initial Cut-off Date
Group II-B Principal Balance"), and
o the sum of the Initial Cut-off Date Group I Principal Balance and
the Initial Cut-off Date Group II Principal Balance was
$552,153,270.07 (the "Initial Cut-off Date Pool Principal
Balance").
Initial Loans with balloon payments ("Balloon Loans") provide for payment
based on the amortization of the amount financed over a series of substantially
equal monthly payments over approximately 60 to 180 months, with a significantly
greater payment due at the stated maturity. As of the Initial Cut-off Date,
approximately 5.46% of the Initial Group I Loans and none of the Initial Group
II Loans were Balloon Loans. Balloon Loans may involve a greater degree of risk
than loans which are fully amortizing because the ability of a borrower to make
a balloon payment typically will depend upon the ability of the borrower to
either timely refinance the loan or sell the related mortgaged property.
All of the Initial Loans provide for payments due on a set day, but not
necessarily the first day, of each month (the "Due Date"). The Initial Loans to
be included in the mortgage pool were originated or acquired by the Sellers
substantially in accordance with the Sellers' underwriting criteria for mortgage
loans, described herein under "The Mortgage Pool--Underwriting Standards" and
under "Loan Program" in the prospectus.
Scheduled monthly payments made by the borrowers on the Initial Loans
("Scheduled Payments") either earlier or later than the scheduled Due Dates
thereof will not affect the amortization schedule or the relative application of
those payments to principal and interest. All of the Initial Loans provide for
the actuarial accrual of interest. All of the Initial Loans provide for a grace
period of 15 days for monthly payments, as required by applicable law. All of
the Initial Loans may be prepaid in full or in part at any time, approximately
10.66% of the Initial Group I Loans, approximately 17.51% of the Initial Group
II-A Loans and approximately 28.84% of the Initial Group II-B Loans without
penalty.
Each Initial Group I Loan was originated on or after April 20, 2002, each
Initial Group II-A Loan was originated on or after May 30, 2002 and each Initial
Group II-B Loan was originated on or after May 30, 2002.
The latest stated maturity date of any Initial Group I Loan is March 1,
2034, of any Initial Group II-A Loan is March 1, 2034 and of any Initial Group
II-B Loan is February 1, 2034. The earliest stated maturity date of any Initial
Group I Loan is November 12, 2008, of any Initial Group II-A Loan is June 4,
2032 and of any Initial Group II-B Loan is June 1, 2032.
As of the Initial Cut-off Date, approximately 0.08%, 0.06% and none of the
Initial Group I Loans, Initial Group II-A Loans and Initial Group II-B Loans,
respectively, were 30 to 59 days contractually past due (assuming 30 day months)
and none of the Initial Loans were greater than 59 days contractually past due
(assuming 30 day months).
No Initial Loan had a Combined Loan-to-Value Ratio at origination of more
than 100.00%. The weighted average Combined Loan-to-Value Ratio of the Initial
Group I Loans at origination was approximately 85.31%, of the Initial Group II-A
Loans at origination was approximately 87.10% and of the Initial Group II-B
Loans at origination was approximately 86.73%.
The weighted average of the FICO scores (issued by the Fair Isaac Credit
Bureau with a higher score generally signifying a better credit history)
obtained by the Sellers at origination for each borrower on the Initial Group I
Loans, Initial Group II-A Loans and Initial Group II-B Loans were approximately
638, 636 and 637, respectively.
The "Combined Loan-to-Value Ratio" of a Loan is the fraction, expressed as
a percentage,
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o the numerator of which is the sum of
o the principal balance of that Loan at the date of
origination, plus
o the outstanding principal balance, at the date of
origination of the Loan, of any senior mortgage loan(s), and
o the denominator of which is the Collateral Value of the related
mortgaged property.
The "Collateral Value" of a mortgaged property, other than with respect to
Loans that were used to refinance an existing mortgage loan (each, a "Refinance
Loan"), is the lesser of
o the appraised value based on an appraisal obtained by the
originator from an independent fee appraiser at the time of the
origination of the related Loan, and
o if the Loan was originated either in connection with the
acquisition of the mortgaged property by the borrower or within
one year after acquisition of the mortgaged property by the
borrower, the purchase price paid by the borrower for the
mortgaged property.
In the case of Refinance Loans, the Collateral Value is the appraised value of
the mortgaged property based on the appraisal obtained at the time of
refinancing.
Under the Pooling and Servicing Agreement, the Sellers will make
representations, warranties and covenants to the Depositor relating to, among
other things, the due execution and enforceability of the Pooling and Servicing
Agreement and characteristics of the Loans, including, without limitation, the
following representations and warranties:
o each Loan at the time it was made complied in all material
respects with applicable local, state, and federal laws,
including, but not limited to, all applicable predatory and
abusive lending laws;
o none of the Loans are classified and/or defined as a "high cost
home," "covered" (excluding home loans defined as "covered home
loans" pursuant to the New Jersey Home Ownership Security Act of
2002), "high risk home," or "predatory" loan under any applicable
federal, state or local law (or are similarly classified and/or
defined using different terminology under a law imposing
heightened regulatory scrutiny or additional legal liability for
residential mortgage loans having high interest rates, points
and/or fees);
o none of the Loans are subject to the Home Ownership & Equity
Protection Act of 1994;
o none of the Loans originated on or after October 1, 2002 and
before March 7, 2003 are secured by property located in the State
of Georgia, and none of the Loans originated on or after March 7,
2003 is a "high cost home loan" as defined under the Georgia Fair
Lending Act;
o no Group II-A Loan originated on or after October 1, 2002 has a
prepayment penalty longer than three years after the date of its
origination and no Group II-A Loan originated before October 1,
2002 has a prepayment penalty longer than five years after the
date of its origination;
o no proceeds from any Group II-A Loan were used to finance
single-premium credit insurance policies; and
o with respect to the Group II-A Loans, the Servicer has fully
furnished (and, on a going forward basis, will fully furnish), in
accordance with the Fair Credit Reporting Act and its
implementing regulations, accurate and complete information
(i.e., favorable and unfavorable)
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on its borrower credit files to Equifax, Experian, and Trans
Union Credit Information Company (three of the credit
repositories), on a monthly basis (during the period in which the
Servicer serviced the Group II-A Loans).
Mortgage Rate Adjustment of the Group II Loans
All of the Initial Group II Loans have adjustable mortgage rates. All of
the Initial Group II Loans provide for semi-annual adjustment of the related
mortgage rate based on Six-Month LIBOR (as defined below), as specified in the
related Mortgage Note, and for corresponding adjustments to the monthly payment
due thereon, in each case on each adjustment date applicable thereto (each, an
"Adjustment Date"). However, the first such adjustment for approximately 88.59%
and 11.41% of the Initial Group II-A Loans (by principal balance) and
approximately 94.00% and 6.00% of the Initial Group II-B Loans (by principal
balance) will occur after an initial period of two or three years, respectively,
following origination. On each Adjustment Date for each Initial Group II Loan,
the mortgage rate thereon will be adjusted to equal the sum of Six-Month LIBOR
and a fixed percentage amount (the "Margin"). The mortgage rate on each Initial
Group II Loan will not increase or decrease by more than a specified percentage
(the "Initial Rate Cap") on the first Adjustment Date for that Initial Group II
Loan. In addition, the mortgage rate will not increase or decrease by more than
a specified percentage (the "Periodic Rate Cap") on each subsequent Adjustment
Date.
The mortgage rate on an Initial Group II Loan may not exceed the maximum
rate set forth in the related Mortgage Note (the "Maximum Mortgage Rate"), or,
with the exception of Initial Group II Loans subject to the Servicemembers Civil
Relief Act, be less than the minimum rate set forth on the related Mortgage Note
(the "Minimum Mortgage Rate"). The Maximum Mortgage Rates on the Initial Group
II-A Loans range from 10.050% to 18.500%, with a weighted average Maximum
Mortgage Rate as of the Initial Cut-off Date of approximately 13.515%. The
Maximum Mortgage Rates on the Initial Group II-B Loans range from 10.250% to
16.870%, with a weighted average Maximum Mortgage Rate as of the Initial Cut-off
Date of approximately 13.341%. The Minimum Mortgage Rates on the Initial Group
II-A Loans range from 5.400% to 10.500%, with a weighted average Minimum
Mortgage Rate as of the Initial Cut-off Date of approximately 7.059%. The
Minimum Mortgage Rates on the Initial Group II-B Loans range from 5.270% to
11.870%, with a weighted average Minimum Mortgage Rate as of the Initial Cut-off
Date of approximately 7.070%.
Effective with the first monthly payment due on each Initial Group II Loan
after each related Adjustment Date, the monthly payment amount is adjusted to an
amount that will fully amortize the outstanding principal balance of the related
Initial Group II Loan over its remaining term, and pay interest at the adjusted
mortgage rate. None of the Initial Group II Loans permits the related mortgagor
to convert the adjustable mortgage rate thereon to a fixed mortgage rate.
The interest rate index for all of the Initial Group II Loans is a per
annum rate equal to the average of interbank offered rates for six-month U.S.
dollar-denominated deposits in the London market based on quotations of major
banks ("Six-Month LIBOR") as published in The Wall Street Journal and as most
recently available on the first business day of the month prior to each
Adjustment Date.
The following section, "Mortgage Pool Tables," sets forth in tabular format
information, as of the Initial Cut-off Date, relating to all Initial Loans in
the aggregate as well as the Initial Loans in each of Group I, Group II-A and
Group II-B separately. The sum of the columns in the tables below may not equal
the total indicated due to rounding.
S-28
Mortgage Pool Tables
Aggregate Pool of Initial Loans
Mortgage Rates (1)
------------------
Percent of
Number of Aggregate Aggregate
Mortgage Rate (%) Initial Loans Principal Balance Principal Balance
- ----------------------------------------- --------------------- -------------------- --------------------------
5.001 to 5.500 6 $1,358,156.37 0.25%
5.501 to 6.000 124 22,938,489.58 4.15
6.001 to 6.500 438 80,810,847.25 14.64
6.501 to 7.000 942 157,381,333.44 28.50
7.001 to 7.500 830 126,891,419.08 22.98
7.501 to 8.000 748 108,546,169.88 19.66
8.001 to 8.500 202 24,610,476.44 4.46
8.501 to 9.000 153 15,040,655.60 2.72
9.001 to 9.500 76 5,195,866.47 0.94
9.501 to 10.000 87 4,989,302.59 0.90
10.001 to 10.500 30 1,587,562.13 0.29
10.501 to 11.000 26 1,250,524.18 0.23
11.001 to 11.500 10 440,000.37 0.08
11.501 to 12.000 16 651,563.63 0.12
12.001 to 12.500 7 213,929.18 0.04
12.501 to 13.000 3 144,097.65 0.03
13.001 to 13.500 3 81,320.67 0.01
14.501 to 15.000 1 21,555.56 0.00
- ----------------------------------------- --------------------- -------------------- --------------------------
Total 3,702 $552,153,270.07 100.00%
===================== ==================== ==========================
- ----------
(1) As of the Initial Cut-off Date, the weighted average mortgage rate of the
Initial Loans was approximately 7.240%.
Lien Position
-------------
Percent of
Number of Aggregate Aggregate
Lien Position Initial Loans Principal Balance Principal Balance
- ---------------------------------------- ------------------- ------------------- --------------------------
First Lien 3,486 $542,343,302.65 98.22%
Second Lien 216 9,809,967.42 1.78
- ---------------------------------------- ------------------- ------------------- --------------------------
Total 3,702 $552,153,270.07 100.00%
=================== =================== ==========================
S-29
Combined Loan-to-Value Ratios (1)
---------------------------------
Percent of
Combined Number of Aggregate Aggregate
Loan-to-Value Ratio (%) Initial Loans Principal Balance Principal Balance
- ----------------------------------------- --------------------- --------------------- ---------------------------
5.01 to 10.00 1 $24,938.83 0.00%
10.01 to 15.00 3 166,925.89 0.03
15.01 to 20.00 6 417,547.93 0.08
20.01 to 25.00 6 402,822.13 0.07
25.01 to 30.00 7 485,724.12 0.09
30.01 to 35.00 12 1,154,477.75 0.21
35.01 to 40.00 20 2,215,962.70 0.40
40.01 to 45.00 15 2,069,250.30 0.37
45.01 to 50.00 28 4,284,920.31 0.78
50.01 to 55.00 48 6,636,487.02 1.20
55.01 to 60.00 59 7,323,169.33 1.33
60.01 to 65.00 90 12,723,140.32 2.30
65.01 to 70.00 126 18,991,767.49 3.44
70.01 to 75.00 205 32,720,977.39 5.93
75.01 to 80.00 543 87,193,770.19 15.79
80.01 to 85.00 428 66,654,635.74 12.07
85.01 to 90.00 710 112,486,334.81 20.37
90.01 to 95.00 473 69,088,614.17 12.51
95.01 to 100.00 922 127,111,803.65 23.02
- ----------------------------------------- --------------------- --------------------- ---------------------------
Total 3,702 $552,153,270.07 100.00%
===================== ===================== ===========================
- ----------
(1) At time of origination. As of the Initial Cut-off Date, the weighted
average combined loan-to-value ratio of the Initial Loans was approximately
85.92%.
FICO Scores (1)
---------------
Percent of
Number of Aggregate Aggregate
FICO Score Initial Loans Principal Balance Principal Balance
- ----------------------------------------- --------------------- -------------------- --------------------------
501 to 525 26 $3,146,413.10 0.57%
526 to 550 181 23,045,590.72 4.17
551 to 575 249 34,010,102.56 6.16
576 to 600 448 63,054,867.01 11.42
601 to 625 715 103,718,967.52 18.78
626 to 650 804 119,768,049.98 21.69
651 to 675 597 92,302,308.85 16.72
676 to 700 323 52,345,303.99 9.48
701 to 725 167 28,941,554.05 5.24
726 to 750 106 18,557,304.52 3.36
751 to 775 64 10,033,409.13 1.82
776 to 800 20 3,100,790.24 0.56
801 to 825 2 128,608.40 0.02
- ----------------------------------------- --------------------- -------------------- --------------------------
Total 3,702 $552,153,270.07 100.00%
===================== ==================== ==========================
- ----------
(1) FICO scores listed represent the FICO score obtained by the Sellers at
origination for each borrower on the Initial Loans. As of the Initial
Cut-off Date, the weighted average FICO score at origination of the Initial
Loans was approximately 637.
S-30
Initial Cut-off Date Principal Balances (1)
-------------------------------------------
Percent of
Initial Cut-off Date Number of Aggregate Aggregate
Principal Balance ($) Initial Loans Principal Balance Principal Balance
- ----------------------------------------- -------------------- --------------------- --------------------------
0.01 to 50,000.00 218 $8,070,399.45 1.46%
50,000.01 to 100,000.00 978 76,157,664.43 13.79
100,000.01 to 150,000.00 1,059 132,173,081.49 23.94
150,000.01 to 200,000.00 664 114,797,165.82 20.79
200,000.01 to 250,000.00 341 76,233,658.03 13.81
250,000.01 to 300,000.00 218 59,393,985.86 10.76
300,000.01 to 350,000.00 115 37,012,748.51 6.70
350,000.01 to 400,000.00 67 25,450,858.08 4.61
400,000.01 to 450,000.00 11 4,611,702.96 0.84
450,000.01 to 500,000.00 7 3,298,707.28 0.60
500,000.01 to 550,000.00 6 3,145,238.40 0.57
550,000.01 to 600,000.00 5 2,868,811.44 0.52
600,000.01 to 650,000.00 4 2,492,693.80 0.45
650,000.01 to 700,000.00 2 1,326,930.04 0.24
700,000.01 to 750,000.00 7 5,119,624.48 0.93
- ----------------------------------------- -------------------- --------------------- --------------------------
Total 3,702 $552,153,270.07 100.00%
==================== ===================== ==========================
- ----------
(1) As of the Initial Cut-off Date, the average principal balance of the
Initial Loans was approximately $149,149.99.
Remaining Terms to Maturity (1)
-------------------------------
Percent of
Remaining Term Number of Aggregate Principal Aggregate
to Maturity (Months) Initial Loans Balance Principal Balance
- ----------------------------------------- -------------------- --------------------- --------------------------
49 to 60 7 $1,461,738.49 0.26%
109 to 120 53 9,896,306.89 1.79
157 to 168 13 994,913.14 0.18
169 to 180 268 23,436,967.63 4.24
217 to 228 4 159,981.84 0.03
229 to 240 182 17,824,884.74 3.23
289 to 300 9 967,680.96 0.18
337 to 348 31 4,688,600.58 0.85
349 to 360 3,135 492,722,195.80 89.24
- ----------------------------------------- -------------------- --------------------- --------------------------
Total 3,702 $552,153,270.07 100.00%
==================== ===================== ==========================
- ----------
(1) As of the Initial Cut-off Date, the weighted average remaining term to
maturity of the Initial Loans was approximately 339 months.
S-31
Prepayment Charge Original Period
---------------------------------
Percent of
Prepayment Charge Number of Initial Aggregate Principal Aggregate
Original Period (Months) Loans Balance Principal Balance
- ---------------------------------------- ------------------- ------------------- --------------------------
No Prepayment Charge 531 $79,372,518.87 14.38%
12 297 60,069,909.84 10.88
24 876 135,348,548.29 24.51
30 4 902,677.65 0.16
36 1,439 203,231,407.33 36.81
48 1 109,012.48 0.02
60 554 73,119,195.61 13.24
- ---------------------------------------- ------------------- ------------------- --------------------------
Total 3,702 $552,153,270.07 100.00%
=================== =================== ==========================
Occupancy Types (1)
-------------------
Percent of
Number of Aggregate Aggregate
Occupancy Type Initial Loans Principal Balance Principal Balance
- ----------------------------------------- --------------------- -------------------- --------------------------
Owner Occupied 3,513 $523,550,109.17 94.82%
Non Owner Occupied 167 23,564,894.67 4.27
Second Home 22 5,038,266.23 0.91
- ----------------------------------------- --------------------- -------------------- --------------------------
Total 3,702 $552,153,270.07 100.00%
===================== ==================== ==========================
- ----------
(1) Based on representations of the related borrowers at the time of
origination.
Credit Grades (1)
-----------------
Percent of
Number of Aggregate Aggregate
Credit Grade Initial Loans Principal Balance Principal Balance
- ----------------------------------------- --------------------- -------------------- --------------------------
A 3,028 $462,679,702.89 83.80%
B 437 59,041,026.08 10.69
C 237 30,432,541.10 5.51
- ----------------------------------------- --------------------- -------------------- --------------------------
Total 3,702 $552,153,270.07 100.00%
===================== ==================== ==========================
- ----------
(1) See "Specific Underwriting Criteria; Underwriting Programs" in the
prospectus for a description of the Sellers' underwriting programs.
S-32
Documentation Types (1)
-----------------------
Percent of
Number of Aggregate Aggregate
Documentation Type Initial Loans Principal Balance Principal Balance
- ----------------------------------------- --------------------- -------------------- --------------------------
Full Doc 3,119 $446,702,953.43 80.90%
SI 451 80,356,974.26 14.55
AIV 62 15,839,972.39 2.87
Lite Doc 70 9,253,369.99 1.68
- ----------------------------------------- --------------------- -------------------- --------------------------
Total 3,702 $552,153,270.07 100.00%
===================== ==================== ==========================
- ----------
(1) See "Specific Underwriting Criteria; Underwriting Programs" in the
prospectus for a description of the Sellers' documentation programs.
Loan Purpose
------------
Percent of
Number of Aggregate Aggregate
Loan Purpose Initial Loans Principal Balance Principal Balance
- ---------------------------------------- --------------------- --------------------- -----------------------------
Cash Out Refinance 2,693 $402,849,590.20 72.96%
Purchase 609 89,526,213.02 16.21
Rate/Term Refinance 400 59,777,466.85 10.83
- ---------------------------------------- --------------------- --------------------- -----------------------------
Total 3,702 $552,153,270.07 100.00%
===================== ===================== =============================
Property Type
-------------
Percent of
Number of Aggregate Aggregate
Property Type Initial Loans Principal Balance Principal Balance
- ---------------------------------------- --------------------- --------------------- -----------------------------
Single Family 3,225 $473,086,510.16 85.68%
Duplex 199 34,818,408.85 6.31
Condo 149 20,668,252.59 3.74
Triplex 42 7,550,472.55 1.37
6 Family/Units 29 6,127,843.07 1.11
5 Family/Units 16 3,235,011.46 0.59
Townhouse 12 1,973,813.64 0.36
Row Home 16 1,728,785.09 0.31
8 Family/Units 5 1,453,702.80 0.26
Quadruplex 5 918,940.83 0.17
7 Family/Units 4 591,529.03 0.11
- ---------------------------------------- --------------------- --------------------- -----------------------------
Total 3,702 $552,153,270.07 100.00%
===================== ===================== =============================
S-33
Product Type
------------
Percent of
Product Number of Initial Aggregate Principal Aggregate
Type Loans Balance Principal Balance
- ---------------------------------------- ------------------- ------------------- ---------------------------
2/28 6 Mo LIBOR ARM 1,087 $179,709,866.19 32.55%
3/27 6 Mo LIBOR ARM 119 19,442,110.84 3.52
Fixed Rate 10 Year 9 479,786.03 0.09
Fixed Rate 15 Year 150 16,048,765.27 2.91
Fixed Rate 20 Year 186 17,984,866.58 3.26
Fixed Rate 25 Year 9 967,680.96 0.18
Fixed Rate 30 Year 1,960 298,258,819.35 54.02
Balloon 5 Year 7 1,461,738.49 0.26
Balloon 10 Year 44 9,416,520.86 1.71
Balloon 15 Year 131 8,383,115.50 1.52
- ---------------------------------------- ------------------- ------------------- ---------------------------
Total 3,702 $552,153,270.07 100.00%
=================== =================== ===========================
S-34
Geographic Distribution of Mortgaged Properties (1)
---------------------------------------------------
Percent of
Number of Aggregate Aggregate
Geographic Location Initial Loans Principal Balance Principal Balance
- ----------------------------------------- --------------------- --------------------- ---------------------------
California 483 $90,462,311.00 16.38%
Illinois 329 52,818,075.67 9.57
New York 191 40,440,751.02 7.32
Michigan 241 34,525,519.10 6.25
Maryland 202 32,599,561.03 5.90
Ohio 238 27,910,667.82 5.05
Virginia 154 25,271,615.78 4.58
Pennsylvania 206 24,304,431.12 4.40
Florida 187 22,486,842.89 4.07
North Carolina 116 17,883,740.88 3.24
Missouri 134 15,663,084.02 2.84
Wisconsin 112 15,271,282.01 2.77
New Jersey 77 15,019,071.64 2.72
Massachusetts 77 13,979,137.34 2.53
Indiana 106 11,325,381.54 2.05
Arizona 77 11,033,889.62 2.00
South Carolina 82 10,518,083.68 1.90
Tennessee 86 10,487,783.50 1.90
Connecticut 63 9,075,222.92 1.64
Georgia 64 9,005,210.61 1.63
Minnesota 48 7,664,096.82 1.39
Kansas 52 7,044,569.05 1.28
Kentucky 59 6,445,587.71 1.17
Colorado 37 5,782,879.39 1.05
Rhode Island 30 5,136,606.62 0.93
Nevada 30 3,916,384.66 0.71
Washington 31 3,877,486.15 0.70
South Dakota 25 3,284,873.06 0.59
Oregon 23 2,808,100.02 0.51
Texas 17 2,207,073.66 0.40
Utah 19 2,010,128.46 0.36
New Mexico 15 1,840,225.74 0.33
Iowa 18 1,761,179.68 0.32
Delaware 14 1,575,216.67 0.29
Nebraska 13 1,201,500.76 0.22
Idaho 9 1,102,978.40 0.20
Oklahoma 11 1,036,917.36 0.19
New Hampshire 6 991,830.01 0.18
Maine 6 960,562.36 0.17
North Dakota 5 645,328.43 0.12
Montana 6 562,052.16 0.10
Wyoming 2 161,211.99 0.03
Alabama 1 54,817.72 0.01
- ----------------------------------------- --------------------- --------------------- ---------------------------
Total 3,702 $552,153,270.07 100.00%
===================== ===================== ===========================
- ----------
(1) No more than approximately 0.40% of the Initial Loans by principal balance
are secured by mortgaged properties located in any one postal zip code
area.
S-35
Initial Group I Loans (Fixed Rate Loans)
Mortgage Rates (1)
------------------
Aggregate Percent of Aggregate
Number of Initial Initial Group I Initial Group I
Mortgage Rate (%) Group I Loans Principal Balance Principal Balance
- ---------------------------- ---------------------------- ------------------------ ---------------------------
5.001 to 5.500 3 $395,576.07 0.11%
5.501 to 6.000 47 8,441,441.94 2.39
6.001 to 6.500 184 35,172,097.13 9.96
6.501 to 7.000 655 107,040,984.28 30.32
7.001 to 7.500 583 87,473,458.47 24.78
7.501 to 8.000 541 75,506,412.36 21.39
8.001 to 8.500 141 16,857,861.23 4.78
8.501 to 9.000 108 9,865,851.19 2.79
9.001 to 9.500 63 3,868,103.75 1.10
9.501 to 10.000 80 4,407,183.28 1.25
10.001 to 10.500 26 1,198,413.22 0.34
10.501 to 11.000 26 1,250,524.18 0.35
11.001 to 11.500 10 440,000.37 0.12
11.501 to 12.000 15 622,482.51 0.18
12.001 to 12.500 7 213,929.18 0.06
12.501 to 13.000 3 144,097.65 0.04
13.001 to 13.500 3 81,320.67 0.02
14.501 to 15.000 1 21,555.56 0.01
- ---------------------------- ---------------------------- ------------------------ ---------------------------
Total 2,496 $353,001,293.04 100.00%
============================ ======================== ===========================
- ----------
(1) As of the Initial Cut-off Date, the weighted average mortgage rate of the
Initial Group I Loans was approximately 7.340%.
Lien Position
-------------
Aggregate Percent of Aggregate
Number of Initial Group Initial Group I Initial Group I
Lien Position I Loans Principal Balance Principal Balance
- --------------------------- -------------------------- ----------------------- ---------------------------
First Lien 2,280 $343,191,325.62 97.22%
Second Lien 216 9,809,967.42 2.78
- --------------------------- -------------------------- ----------------------- ---------------------------
Total 2,496 $353,001,293.04 100.00%
========================== ======================= ===========================
S-36
Combined Loan-to-Value Ratios (1)
---------------------------------
Aggregate Percent of Aggregate
Combined Number of Initial Group Initial Group I Initial Group I
Loan-to-Value Ratio (%) I Loans Principal Balance Principal Balance
- ------------------------------- ------------------------- ------------------------- ---------------------------
5.01 to 10.00 1 $24,938.83 0.01%
10.01 to 15.00 2 67,176.90 0.02
15.01 to 20.00 4 277,462.69 0.08
20.01 to 25.00 6 402,822.13 0.11
25.01 to 30.00 7 485,724.12 0.14
30.01 to 35.00 10 966,583.94 0.27
35.01 to 40.00 16 1,573,804.79 0.45
40.01 to 45.00 11 1,529,532.03 0.43
45.01 to 50.00 19 3,015,852.58 0.85
50.01 to 55.00 39 5,414,672.89 1.53
55.01 to 60.00 46 5,535,608.81 1.57
60.01 to 65.00 72 9,831,569.66 2.79
65.01 to 70.00 102 14,152,817.31 4.01
70.01 to 75.00 140 20,020,817.97 5.67
75.01 to 80.00 339 53,402,669.29 15.13
80.01 to 85.00 284 41,114,713.68 11.65
85.01 to 90.00 457 70,857,132.00 20.07
90.01 to 95.00 337 46,884,843.49 13.28
95.01 to 100.00 604 77,442,549.93 21.94
- ------------------------------- ------------------------- ------------------------- ---------------------------
Total 2,496 $353,001,293.04 100.00%
========================= ========================= ===========================
- ----------
(1) At time of origination. As of the Initial Cut-off Date, the weighted
average combined loan-to-value ratio of the Initial Group I Loans was
approximately 85.31%
FICO Scores (1)
---------------
Aggregate Percent of Aggregate
Number of Initial Initial Group I Initial Group I
FICO Score Group I Loans Principal Balance Principal Balance
- ------------------------------- ------------------------- ------------------------- ---------------------------
501 to 525 15 $1,589,017.53 0.45%
526 to 550 99 11,963,269.37 3.39
551 to 575 169 23,333,327.30 6.61
576 to 600 303 39,675,889.56 11.24
601 to 625 497 68,059,106.66 19.28
626 to 650 558 76,373,230.83 21.64
651 to 675 409 59,698,399.47 16.91
676 to 700 202 32,892,840.94 9.32
701 to 725 115 18,555,165.77 5.26
726 to 750 70 11,752,215.51 3.33
751 to 775 44 6,845,615.25 1.94
776 to 800 13 2,134,606.45 0.60
801 to 825 2 128,608.40 0.04
- ------------------------------- ------------------------- ------------------------- ---------------------------
Total 2,496 $353,001,293.04 100.00%
========================= ========================= ===========================
- ----------
(1) FICO scores listed represent the FICO score obtained by the Sellers at
origination for each borrower on the Initial Group I Loans. As of the
Initial Cut-off Date, the weighted average FICO score at origination of the
Initial Group I Loans was approximately 638.
S-37
Initial Cut-off Date Principal Balances (1)
-------------------------------------------
Aggregate Percent of Aggregate
Initial Cut-off Date Number of Initial Initial Group I Initial Group I
Principal Balance ($) Group I Loans Principal Balance Principal Balance
- ------------------------------- ------------------------- ------------------------- ---------------------------
0.01 to 50,000.00 209 $7,713,798.36 2.19%
50,000.01 to 100,000.00 697 53,724,043.50 15.22
100,000.01 to 150,000.00 700 87,050,057.57 24.66
150,000.01 to 200,000.00 413 71,487,547.23 20.25
200,000.01 to 250,000.00 209 46,644,124.98 13.21
250,000.01 to 300,000.00 138 37,615,350.07 10.66
300,000.01 to 350,000.00 65 20,966,565.01 5.94
350,000.01 to 400,000.00 43 16,315,535.72 4.62
400,000.01 to 450,000.00 5 2,069,058.91 0.59
450,000.01 to 500,000.00 5 2,341,240.41 0.66
500,000.01 to 550,000.00 5 2,620,184.77 0.74
550,000.01 to 600,000.00 2 1,148,269.93 0.33
600,000.01 to 650,000.00 3 1,845,009.02 0.52
700,000.01 to 750,000.00 2 1,460,507.56 0.41
- ------------------------------- ------------------------- ------------------------- ---------------------------
Total 2,496 $353,001,293.04 100.00%
========================= ========================= ===========================
- ----------
(1) As of the Initial Cut-off Date, the average principal balance of the
Initial Group I Loans was approximately $141,426.80.
Remaining Terms to Maturity (1)
-------------------------------
Aggregate Percent of Aggregate
Remaining Term Number of Initial Initial Group I Initial Group I
to Maturity (Months) Group I Loans Principal Balance Principal Balance
- ------------------------------- ------------------------- ------------------------- ---------------------------
49 to 60 7 $1,461,738.49 0.41%
109 to 120 53 9,896,306.89 2.80
157 to 168 13 994,913.14 0.28
169 to 180 268 23,436,967.63 6.64
217 to 228 4 159,981.84 0.05
229 to 240 182 17,824,884.74 5.05
289 to 300 9 967,680.96 0.27
337 to 348 14 2,249,592.88 0.64
349 to 360 1,946 296,009,226.47 83.85
- ------------------------------- ------------------------- ------------------------- ---------------------------
Total 2,496 $353,001,293.04 100.00%
========================= ========================= ===========================
- ----------
(1) As of the Initial Cut-off Date, the weighted average remaining term to
maturity of the Initial Group I Loans was approximately 329 months.
S-38
Occupancy Types (1)
-------------------
Aggregate Percent of Aggregate
Number of Initial Initial Group I Initial Group I
Occupancy Type Group I Loans Principal Balance Principal Balance
- ------------------------------- ------------------------- ------------------------- ---------------------------
Owner Occupied 2,369 $333,002,153.85 94.33%
Non Owner Occupied 114 16,791,446.88 4.76
Second Home 13 3,207,692.31 0.91
- ------------------------------- ------------------------- ------------------------- ---------------------------
Total 2,496 $353,001,293.04 100.00%
========================= ========================= ===========================
- ----------
(1) Based on representations of the related borrowers at the time of
origination.
Credit Grades (1)
-----------------
Aggregate Percent of Aggregate
Number of Initial Initial Group I Initial Group I
Credit Grade Group I Loans Principal Balance Principal Balance
- ------------------------------- ------------------------- ------------------------- ---------------------------
A 2,068 $297,286,675.37 84.22%
B 290 38,156,821.47 10.81
C 138 17,557,796.20 4.97
- ------------------------------- ------------------------- ------------------------- ---------------------------
Total 2,496 $353,001,293.04 100.00%
========================= ========================= ===========================
- ----------
(1) See "Specific Underwriting Criteria; Underwriting Programs" in the
prospectus for a description of the Sellers' underwriting programs.
Documentation Types (1)
-----------------------
Aggregate Percent of Aggregate
Number of Initial Initial Group I Initial Group I
Documentation Type Group I Loans Principal Balance Principal Balance
- ------------------------------- ------------------------- ------------------------- ---------------------------
Full Doc 2,119 $290,911,253.00 82.41%
SI 293 48,619,666.99 13.77
AIV 31 6,835,919.52 1.94
Lite Doc 53 6,634,453.53 1.88
- ------------------------------- ------------------------- ------------------------- ---------------------------
Total 2,496 $353,001,293.04 100.00%
========================= ========================= ===========================
- ----------
(1) See "Specific Underwriting Criteria; Underwriting Programs" in the
prospectus for a description of the Sellers' documentation programs.
Loan Purpose
------------
Aggregate Percent of Aggregate
Number of Initial Initial Group I Initial Group I
Loan Purpose Group I Loans Principal Balance Principal Balance
- ------------------------------- --------------------------- -------------------------- ------------------------------
Cashout Refinance 1,954 $276,579,836.97 78.35%
Purchase 312 42,033,806.83 11.91
Rate/Term Refinance 230 34,387,649.24 9.74
- ------------------------------- --------------------------- -------------------------- ------------------------------
Total 2,496 $353,001,293.04 100.00%
=========================== ========================== ==============================
S-39
Prepayment Charge Original Period
---------------------------------
Aggregate Percent of Aggregate
Prepayment Charge Original Number of Initial Group Initial Group I Initial Group I
Period (Months) I Loans Principal Balance Principal Balance
- ------------------------------- ------------------------ ----------------------- ---------------------------
No Prepayment Charge 285 $37,625,748.93 10.66%
12 223 43,794,048.93 12.41
24 197 25,538,609.15 7.23
30 4 902,677.65 0.26
36 1,256 175,193,963.86 49.63
48 1 109,012.48 0.03
60 530 69,837,232.04 19.78
- ------------------------------- ------------------------ ----------------------- ---------------------------
Total 2,496 $353,001,293.04 100.00%
======================== ======================= ===========================
Property Type
-------------
Aggregate Percent of Aggregate
Number of Initial Group Initial Group I Initial Group I
Property Type I Loans Principal Balance Principal Balance
- ------------------------------- --------------------------- --------------------------- -----------------------------
Single Family 2,190 $302,782,987.80 85.77%
Duplex 124 21,288,234.27 6.03
Condo 87 10,878,406.87 3.08
6 Family/Units 29 6,127,843.07 1.74
Triplex 27 4,961,779.76 1.41
5 Family/Units 16 3,235,011.46 0.92
8 Family/Units 5 1,453,702.80 0.41
Row Home 8 817,008.00 0.23
7 Family/Units 4 591,529.03 0.17
Townhouse 3 462,041.35 0.13
Quadruplex 3 402,748.63 0.11
- ------------------------------- --------------------------- --------------------------- -----------------------------
Total 2,496 $353,001,293.04 100.00%
=========================== =========================== =============================
Product Type
------------
Aggregate Percent of Aggregate
Number of Initial Group Initial Group I Initial Group I
Product Type I Loans Principal Balance Principal Balance
- ------------------------------- ------------------------ ------------------------ ---------------------------
Fixed Rate 10 Year 9 $479,786.03 0.14%
Fixed Rate 15 Year 150 16,048,765.27 4.55
Fixed Rate 20 Year 186 17,984,866.58 5.09
Fixed Rate 25 Year 9 967,680.96 0.27
Fixed Rate 30 Year 1,960 298,258,819.35 84.49
Balloon 5 Year 7 1,461,738.49 0.41
Balloon 10 Year 44 9,416,520.86 2.67
Balloon 15 Year 131 8,383,115.50 2.37
- ------------------------------- ------------------------ ------------------------ ---------------------------
Total 2,496 $353,001,293.04 100.00%
======================== ======================== ===========================
S-40
Geographic Distribution of Mortgaged Properties (1)
---------------------------------------------------
Aggregate Percent of Aggregate
Number of Initial Initial Group I Initial Group I
Geographic Location Group I Loans Principal Balance Principal Balance
- ------------------------------- ------------------------- ------------------------- ---------------------------
California 291 $47,568,337.72 13.48%
New York 165 34,439,818.40 9.76
Illinois 180 28,773,346.34 8.15
Maryland 172 26,978,804.13 7.64
Ohio 190 21,757,374.66 6.16
Pennsylvania 166 19,016,029.94 5.39
Virginia 118 18,650,993.38 5.28
Florida 124 14,078,079.11 3.99
North Carolina 85 12,054,375.68 3.41
Massachusetts 65 11,589,915.68 3.28
Michigan 82 10,979,697.34 3.11
New Jersey 46 8,568,435.99 2.43
South Carolina 74 8,332,113.86 2.36
Tennessee 65 8,054,013.75 2.28
Indiana 72 7,758,933.39 2.20
Missouri 72 7,770,361.04 2.20
Connecticut 50 7,262,971.86 2.06
Georgia 53 7,073,705.34 2.00
Minnesota 34 5,417,206.12 1.53
Arizona 41 5,345,895.02 1.51
Wisconsin 45 5,232,264.86 1.48
Rhode Island 26 4,298,277.77 1.22
Kentucky 39 4,219,613.13 1.20
Colorado 27 3,893,314.16 1.10
Kansas 32 3,837,614.99 1.09
Washington 24 2,495,026.49 0.71
Nevada 20 2,379,732.95 0.67
Oregon 18 2,225,567.69 0.63
Texas 14 1,812,122.15 0.51
Utah 17 1,722,322.24 0.49
New Mexico 14 1,700,808.83 0.48
Iowa 17 1,491,741.19 0.42
Oklahoma 11 1,036,917.36 0.29
South Dakota 10 1,011,640.12 0.29
Delaware 8 973,944.35 0.28
Nebraska 8 724,776.85 0.21
Idaho 6 723,221.19 0.20
New Hampshire 4 648,996.80 0.18
Maine 4 517,999.28 0.15
North Dakota 3 297,401.60 0.08
Montana 3 238,775.11 0.07
Wyoming 1 48,805.18 0.01
- ------------------------------- ------------------------- ------------------------- ---------------------------
Total 2,496 $353,001,293.04 100.00%
========================= ========================= ===========================
- ----------
(1) No more than approximately 0.41% of the Initial Group I Loans by principal
balance are secured by mortgaged properties located in any one postal zip
code area.
S-41
Initial Group II-A Loans (Adjustable Rate Conforming Loans)
Current Mortgage Rates (1)
--------------------------
Aggregate Percent of Aggregate
Number of Initial Initial Group II-A Initial Group II-A
Mortgage Rate (%) Group II-A Loans Principal Balance Principal Balance
- ------------------------------- ------------------------- ------------------------- ---------------------------
5.001 to 5.500 2 $216,031.22 0.16%
5.501 to 6.000 62 10,674,513.87 7.71
6.001 to 6.500 192 30,390,355.73 21.95
6.501 to 7.000 223 36,457,726.78 26.33
7.001 to 7.500 187 27,397,507.56 19.79
7.501 to 8.000 156 23,610,499.71 17.05
8.001 to 8.500 45 5,768,902.91 4.17
8.501 to 9.000 29 2,865,176.87 2.07
9.001 to 9.500 7 644,473.19 0.47
9.501 to 10.000 4 333,626.61 0.24
10.001 to 10.500 1 106,871.29 0.08
- ------------------------------- ------------------------- ------------------------- ---------------------------
Total 908 $138,465,685.74 100.00%
========================= ========================= ===========================
- ----------
(1) As of the Initial Cut-off Date, the weighted average current mortgage rate
of the Initial Group II-A Loans was approximately 7.060%.
Lien Position
-------------
Aggregate Percent of Aggregate
Number of Initial Initial Group II-A Initial Group II-A
Lien Position Group II-A Loans Principal Balance Principal Balance
- ------------------------------- ---------------------- ------------------------- --------------------------
First Lien 908 $138,465,685.74 100.00%
- ------------------------------- ---------------------- ------------------------- --------------------------
Total 908 $138,465,685.74 100.00%
====================== ========================= ==========================
S-42
Combined Loan-to-Value Ratios (1)
---------------------------------
Aggregate Percent of Aggregate
Combined Number of Initial Initial Group II-A Initial Group II-A
Loan-to-Value Ratio (%) Group II-A Loans Principal Balance Principal Balance
- ------------------------------- ------------------------- ------------------------- ---------------------------
10.01 to 15.00 1 $99,748.99 0.07%
15.01 to 20.00 2 140,085.24 0.10
30.01 to 35.00 2 187,893.81 0.14
35.01 to 40.00 3 269,038.48 0.19
40.01 to 45.00 3 450,561.99 0.33
45.01 to 50.00 6 497,679.55 0.36
50.01 to 55.00 8 1,080,883.09 0.78
55.01 to 60.00 9 1,353,669.80 0.98
60.01 to 65.00 16 2,363,855.50 1.71
65.01 to 70.00 19 3,190,828.06 2.30
70.01 to 75.00 51 8,496,820.78 6.14
75.01 to 80.00 155 23,783,965.99 17.18
80.01 to 85.00 125 19,475,384.41 14.07
85.01 to 90.00 169 24,926,922.92 18.00
90.01 to 95.00 95 14,847,433.43 10.72
95.01 to 100.00 244 37,300,913.70 26.94
- ------------------------------- ------------------------- ------------------------- ---------------------------
Total 908 $138,465,685.74 100.00%
========================= ========================= ===========================
- ----------
(1) At time of origination. As of the Initial Cut-off Date, the weighted
average combined loan-to-value ratio of the Initial Group II-A Loans was
approximately 87.10%.
FICO Scores (1)
---------------
Aggregate Percent of Aggregate
Number of Initial Initial Group II-A Initial Group II-A
FICO Score Group II-A Loans Principal Balance Principal Balance
- ------------------------------- ------------------------ ------------------------- ---------------------------
501 to 525 10 $1,528,314.45 1.10%
526 to 550 75 10,110,890.26 7.30
551 to 575 61 8,293,543.45 5.99
576 to 600 93 13,490,186.61 9.74
601 to 625 155 23,025,136.14 16.63
626 to 650 186 29,212,819.73 21.10
651 to 675 142 21,981,614.88 15.88
676 to 700 97 15,682,479.74 11.33
701 to 725 39 6,612,236.75 4.78
726 to 750 29 5,112,260.79 3.69
751 to 775 16 2,732,464.34 1.97
776 to 800 5 683,738.60 0.49
- ------------------------------- ------------------------ ------------------------- ---------------------------
Total 908 $138,465,685.74 100.00%
======================== ========================= ===========================
- ----------
(1) FICO scores listed represent the FICO score obtained by the Sellers at
origination for each borrower on the Initial Group II-A Loans. As of the
Initial Cut-off Date, the weighted average FICO score at origination of the
Initial Group II-A Loans was approximately 636.
S-43
Initial Cut-off Date Principal Balances (1)
-------------------------------------------
Aggregate Percent of Aggregate
Initial Cut-off Date Number of Initial Initial Group II-A Initial Group II-A
Principal Balance ($) Group II-A Loans Principal Balance Principal Balance
- ------------------------------- ------------------------ ------------------------- ---------------------------
0.01 to 50,000.00 4 $179,600.49 0.13%
50,000.01 to 100,000.00 226 18,066,813.16 13.05
100,000.01 to 150,000.00 276 34,668,447.29 25.04
150,000.01 to 200,000.00 206 35,623,677.20 25.73
200,000.01 to 250,000.00 102 22,850,396.95 16.50
250,000.01 to 300,000.00 63 17,194,565.76 12.42
300,000.01 to 350,000.00 29 9,122,314.26 6.59
350,000.01 to 400,000.00 2 759,870.63 0.55
- ------------------------------- ------------------------ ------------------------- ---------------------------
Total 908 $138,465,685.74 100.00%
======================== ========================= ===========================
- ----------
(1) As of the Initial Cut-off Date, the average principal balance of the
Initial Group II-A Loans was approximately $152,495.25.
Remaining Terms to Maturity (1)
-------------------------------
Aggregate Percent of Aggregate
Remaining Term Number of Initial Initial Group II-A Initial Group II-A
to Maturity (Months) Group II-A Loans Principal Balance Principal Balance
- -------------------------------- ------------------------ ------------------------- ---------------------------
337 to 348 13 $1,766,014.39 1.28%
349 to 360 895 136,699,671.35 98.72
- -------------------------------- ------------------------ ------------------------- ---------------------------
Total 908 $138,465,685.74 100.00%
======================== ========================= ===========================
- ----------
(1) As of the Initial Cut-off Date, the weighted average remaining term to
maturity of the Initial Group II-A Loans was approximately 356 months.
Occupancy Types (1)
-------------------
Aggregate Percent of Aggregate
Number of Initial Initial Group II-A Initial Group II-A
Occupancy Type Group II-A Loans Principal Balance Principal Balance
- ------------------------------- ------------------------- ------------------------- ---------------------------
Owner Occupied 869 $133,481,080.77 96.40%
Non Owner Occupied 33 4,260,082.35 3.08
Second Home 6 724,522.62 0.52
- ------------------------------- ------------------------- ------------------------- ---------------------------
Total 908 $138,465,685.74 100.00%
========================= ========================= ===========================
- ----------
(1) Based on representations of the related borrowers at the time of
origination.
S-44
Credit Grades (1)
-----------------
Aggregate Percent of Aggregate
Number of Initial Initial Group II-A Initial Group II-A
Credit Grade Group II-A Loans Principal Balance Principal Balance
- -------------------------------- ------------------------ ------------------------- ---------------------------
A 718 $113,089,331.58 81.67%
B 106 14,322,564.11 10.34
C 84 11,053,790.05 7.98
- -------------------------------- ------------------------ ------------------------- ---------------------------
Total 908 $138,465,685.74 100.00%
======================== ========================= ===========================
- ----------
(1) See "Specific Underwriting Criteria; Underwriting Programs" in the
prospectus for a description of the Sellers' underwriting programs.
Documentation Types (1)
-----------------------
Aggregate Percent of Aggregate
Number of Initial Initial Group II-A Initial Group II-A
Documentation Type Group II-A Loans Principal Balance Principal Balance
- ------------------------------- ------------------------ ------------------------- ---------------------------
Full Doc 776 $114,769,512.97 82.89%
SI 111 20,657,369.85 14.92
AIV 14 1,814,807.11 1.31
Lite Doc 7 1,223,995.81 0.88
- ------------------------------- ------------------------ ------------------------- ---------------------------
Total 908 $138,465,685.74 100.00%
======================== ========================= ===========================
- ----------
(1) See "Specific Underwriting Criteria; Underwriting Programs" in the
prospectus for a description of the Sellers' documentation programs.
Loan Purpose
------------
Aggregate Percent of Aggregate
Number of Initial Initial Group II-A Initial Group II-A
Loan Purpose Group II-A Loans Principal Balance Principal Balance
- ------------------------------- --------------------------- -------------------------- ------------------------------
Cashout Refinance 579 $89,849,350.91 64.89%
Purchase 184 29,074,576.78 21.00
Rate/Term Refinance 145 19,541,758.05 14.11
- ------------------------------- --------------------------- -------------------------- ------------------------------
Total 908 $138,465,685.74 100.00%
=========================== ========================== ==============================
Prepayment Charge Original Period
---------------------------------
Aggregate Percent of Aggregate
Prepayment Charge Original Number of Initial Initial Group II-A Initial Group II-A
Period (Months) Group II-A Loans Principal Balance Principal Balance
- ------------------------------- ---------------------- ------------------------- ---------------------------
No Prepayment Charge 172 $24,244,953.11 17.51%
12 55 11,541,748.97 8.34
24 530 80,616,289.94 58.22
36 151 22,062,693.72 15.93
- ------------------------------- ---------------------- ------------------------- ---------------------------
Total 908 $138,465,685.74 100.00%
====================== ========================= ===========================
S-45
Property Type
-------------
Aggregate Percent of Aggregate
Number of Initial Group Initial Group II-A Initial Group II-A
Property Type II-A Loans Principal Balance Principal Balance
- ------------------------------- --------------------------- --------------------------- -----------------------------
Single Family 774 $116,293,977.68 83.99%
Duplex 63 11,526,112.56 8.32
Condo 46 6,458,274.72 4.66
Triplex 12 2,164,572.90 1.56
Townhouse 8 1,412,566.35 1.02
Quadruplex 1 336,379.94 0.24
Row Home 4 273,801.59 0.20
- ------------------------------- --------------------------- --------------------------- -----------------------------
Total 908 $138,465,685.74 100.00%
=========================== =========================== =============================
Product Type
------------
Aggregate Percent of Aggregate
Number of Initial Initial Group II-A Initial Group II-A
Product Type Group II-A Loans Principal Balance Principal Balance
- ------------------------------- ---------------------- ------------------------- ------------------------------
2/28 6 Mo LIBOR ARM 807 $122,663,194.38 88.59%
3/27 6 Mo LIBOR ARM 101 15,802,491.36 11.41
- ------------------------------- ---------------------- ------------------------- ------------------------------
Total 908 $138,465,685.74 100.00%
====================== ========================= ==============================
S-46
Geographic Distribution of Mortgaged Properties (1)
---------------------------------------------------
Aggregate Percent of Aggregate
Number of Initial Initial Group II-A Initial Group II-A
Geographic Location Group II-A Loans Principal Balance Principal Balance
- ----------------------------- ----------------------- ----------------------- ---------------------------
California 146 $31,037,954.38 22.42%
Illinois 127 19,776,573.26 14.28
Michigan 116 16,300,843.12 11.77
Missouri 53 6,508,370.76 4.70
Florida 47 5,825,706.75 4.21
Wisconsin 44 5,598,978.57 4.04
Maryland 27 5,042,258.46 3.64
New York 22 4,823,344.66 3.48
Arizona 31 4,768,236.74 3.44
Virginia 27 3,663,841.55 2.65
Ohio 29 3,474,506.02 2.51
Pennsylvania 30 3,396,310.66 2.45
Indiana 30 3,102,434.22 2.24
North Carolina 20 2,609,931.78 1.88
New Jersey 15 2,560,148.02 1.85
Massachusetts 10 1,953,055.99 1.41
Kentucky 16 1,828,453.12 1.32
Minnesota 11 1,695,278.94 1.22
Tennessee 14 1,543,486.06 1.11
Georgia 9 1,491,301.83 1.08
Kansas 12 1,457,340.42 1.05
Connecticut 10 1,440,417.36 1.04
Colorado 7 1,344,138.64 0.97
Nevada 8 1,219,187.97 0.88
South Dakota 9 881,404.16 0.64
Washington 5 841,995.19 0.61
Rhode Island 3 570,727.87 0.41
Oregon 4 494,586.32 0.36
Delaware 4 451,485.65 0.33
Maine 2 442,563.08 0.32
Nebraska 4 443,210.69 0.32
Texas 3 394,951.51 0.29
South Carolina 3 281,052.43 0.20
Iowa 1 269,438.49 0.19
Montana 2 230,464.30 0.17
Utah 1 161,072.08 0.12
New Mexico 1 139,416.91 0.10
North Dakota 1 104,284.73 0.08
Wyoming 1 112,406.81 0.08
New Hampshire 1 99,748.99 0.07
Alabama 1 54,817.72 0.04
Idaho 1 29,959.53 0.02
- ----------------------------- ----------------------- ----------------------- ---------------------------
Total 908 $138,465,685.74 100.00%
======================= ======================= ===========================
- ----------
(1) No more than approximately 0.81% of the Initial Group II-A Loans by
principal balance are secured by mortgaged properties located in any one
postal zip code area.
S-47
Minimum Mortgage Rates (1)
--------------------------
Aggregate Percent of Aggregate
Minimum Number of Initial Initial Group II-A Initial Group II-A
Mortgage Rate (%) Group II-A Loans Principal Balance Principal Balance
- ------------------------------- ------------------------ ------------------------- ---------------------------
5.001 to 5.500 2 $216,031.22 0.16%
5.501 to 6.000 63 10,821,059.07 7.81
6.001 to 6.500 194 30,760,372.71 22.22
6.501 to 7.000 220 35,941,164.60 25.96
7.001 to 7.500 187 27,397,507.56 19.79
7.501 to 8.000 156 23,610,499.71 17.05
8.001 to 8.500 45 5,768,902.91 4.17
8.501 to 9.000 29 2,865,176.87 2.07
9.001 to 9.500 7 644,473.19 0.47
9.501 to 10.000 4 333,626.61 0.24
10.001 to 10.500 1 106,871.29 0.08
- ------------------------------- ------------------------ ------------------------- ---------------------------
Total 908 $138,465,685.74 100.00%
======================== ========================= ===========================
- ----------
(1) As of the Initial Cut-off Date, the weighted average Minimum Mortgage Rate
of the Initial Group II-A Loans was approximately 7.059%.
Maximum Mortgage Rates (1)
--------------------------
Aggregate Percent of Aggregate
Maximum Number of Initial Initial Group II-A Initial Group II-A
Mortgage Rate (%) Group II-A Loans Principal Balance Principal Balance
- ------------------------------- ------------------------ ------------------------- ---------------------------
10.001 to 10.500 8 $948,362.48 0.68%
10.501 to 11.000 3 740,195.63 0.53
11.001 to 11.500 6 881,650.84 0.64
11.501 to 12.000 26 4,995,416.31 3.61
12.001 to 12.500 55 9,720,534.37 7.02
12.501 to 13.000 159 25,381,187.67 18.33
13.001 to 13.500 238 34,558,365.66 24.96
13.501 to 14.000 191 29,940,420.49 21.62
14.001 to 14.500 103 15,705,985.38 11.34
14.501 to 15.000 77 10,672,961.43 7.71
15.001 to 15.500 22 2,766,976.84 2.00
15.501 to 16.000 14 1,407,005.47 1.02
16.001 to 16.500 2 122,508.86 0.09
16.501 to 17.000 2 417,915.93 0.30
17.001 to 17.500 1 106,871.29 0.08
18.001 to 18.500 1 99,327.09 0.07
- ------------------------------- ------------------------ ------------------------- ---------------------------
Total 908 $138,465,685.74 100.00%
======================== ========================= ===========================
- ----------
(1) As of the Initial Cut-off Date, the weighted average Maximum Mortgage Rate
of the Initial Group II-A Loans was approximately 13.515%.
S-48
Initial Rate Caps
-----------------
Aggregate Percent of Aggregate
Number of Initial Initial Group II-A Initial Group II-A
Initial Rate Cap (%) Group II-A Loans Principal Balance Principal Balance
- ------------------------------- ------------------------ ------------------------- ---------------------------
1.000 5 $1,126,534.56 0.81%
1.500 116 19,462,432.03 14.06
2.000 2 363,304.24 0.26
3.000 785 117,513,414.91 84.87
- ------------------------------- ------------------------ ------------------------- ---------------------------
Total 908 $138,465,685.74 100.00%
======================== ========================= ===========================
Periodic Rate Caps
------------------
Aggregate Percent of Aggregate
Number of Initial Initial Group II-A Initial Group II-A
Periodic Rate Cap (%) Group II-A Loans Principal Balance Principal Balance
- ------------------------------- ------------------------ ------------------------- ---------------------------
1.000 662 $101,948,510.74 73.63%
1.500 246 36,517,175.00 26.37
- ------------------------------- ------------------------ ------------------------- ---------------------------
Total 908 $138,465,685.74 100.00%
======================== ========================= ===========================
Gross Margins (1)
-----------------
Aggregate Percent of Aggregate
Number of Initial Initial Group II-A Initial Group II-A
Gross Margin (%) Group II-A Loans Principal Balance Principal Balance
- ------------------------------- ------------------------ ------------------------- ---------------------------
4.501 to 5.000 21 $3,866,675.61 2.79%
5.001 to 5.500 99 16,316,876.41 11.78
5.501 to 6.000 32 5,897,706.45 4.26
6.001 to 6.500 236 35,759,435.15 25.83
6.501 to 7.000 160 26,392,824.50 19.06
7.001 to 7.500 219 31,874,396.20 23.02
7.501 to 8.000 71 9,161,918.94 6.62
8.001 to 8.500 45 5,697,304.56 4.11
8.501 to 9.000 21 3,235,130.58 2.34
9.001 to 9.500 3 203,198.90 0.15
9.501 to 10.000 1 60,218.44 0.04
- ------------------------------- ------------------------ ------------------------- ---------------------------
Total 908 $138,465,685.74 100.00%
======================== ========================= ===========================
- ----------
(1) As of the Initial Cut-off Date, the weighted average gross margin of the
Initial Group II-A Loans was approximately 6.709%.
S-49
Months to Next Adjustment Date (1)
----------------------------------
Aggregate Percent of Aggregate
Months to Number of Initial Initial Group II-A Initial Group II-A
Next Adjustment Date Group II-A Loans Principal Balance Principal Balance
- ------------------------------- ------------------------ ------------------------- ---------------------------
1 to 12 13 $1,766,014.39 1.28%
13 to 24 794 120,897,179.99 87.31
25 to 36 101 15,802,491.36 11.41
- ------------------------------- ------------------------ ------------------------- ---------------------------
Total 908 $138,465,685.74 100.00%
======================== ========================= ===========================
- ----------
(1) As of the Initial Cut-off Date, the weighted average number of months to
the next adjustment date for the Initial Group II-A Loans was approximately
21 months.
S-50
Initial Group II-B Loans (Adjustable Rate Conforming and Non-Conforming
Loans)
Mortgage Rates (1)
------------------
Aggregate Percent of Aggregate
Number of Initial Initial Group II-B Initial Group II-B
Mortgage Rate (%) Group II-B Loans Principal Balance Principal Balance
- -------------------------------- ------------------------ ------------------------- ---------------------------
5.001 to 5.500 1 $746,549.08 1.23%
5.501 to 6.000 15 3,822,533.77 6.30
6.001 to 6.500 62 15,248,394.39 25.13
6.501 to 7.000 64 13,882,622.38 22.88
7.001 to 7.500 60 12,020,453.05 19.81
7.501 to 8.000 51 9,429,257.81 15.54
8.001 to 8.500 16 1,983,712.30 3.27
8.501 to 9.000 16 2,309,627.54 3.81
9.001 to 9.500 6 683,289.53 1.13
9.501 to 10.000 3 248,492.70 0.41
10.001 to 10.500 3 282,277.62 0.47
11.501 to 12.000 1 29,081.12 0.05
- -------------------------------- ------------------------ ------------------------- ---------------------------
Total 298 $60,686,291.29 100.00%
======================== ========================= ===========================
- ----------
(1) As of the Initial Cut-off Date, the weighted average mortgage rate of the
Initial Group II-B Loans was approximately 7.071%.
Lien Position
-------------
Aggregate Percent of Aggregate
Number of Initial Initial Group II-B Initial Group II-B
Lien Position Group II-B Loans Principal Balance Principal Balance
- ------------------------------- ------------------------ ----------------------- --------------------------
First Lien 298 $60,686,291.29 100.00%
- ------------------------------- ------------------------ ----------------------- --------------------------
Total 298 $60,686,291.29 100.00%
======================== ======================= ==========================
S-51
Combined Loan-to-Value Ratios (1)
---------------------------------
Aggregate Percent of Aggregate
Combined Number of Initial Initial Group II-B Initial Group II-B
Loan-to-Value Ratio (%) Group II-B Loans Principal Balance Principal Balance
- ------------------------------- ------------------------ ------------------------- ---------------------------
35.01 to 40.00 1 $373,119.43 0.61%
40.01 to 45.00 1 89,156.28 0.15
45.01 to 50.00 3 771,388.18 1.27
50.01 to 55.00 1 140,931.04 0.23
55.01 to 60.00 4 433,890.72 0.71
60.01 to 65.00 2 527,715.16 0.87
65.01 to 70.00 5 1,648,122.12 2.72
70.01 to 75.00 14 4,203,338.64 6.93
75.01 to 80.00 49 10,007,134.91 16.49
80.01 to 85.00 19 6,064,537.65 9.99
85.01 to 90.00 84 16,702,279.89 27.52
90.01 to 95.00 41 7,356,337.25 12.12
95.01 to 100.00 74 12,368,340.02 20.38
- ------------------------------- ------------------------ ------------------------- ---------------------------
Total 298 $60,686,291.29 100.00%
======================== ========================= ===========================
- ----------
(1) At time of origination. As of the Initial Cut-off Date, the weighted
average combined loan-to-value ratio of the Initial Group II-B Loans was
approximately 86.73%.
FICO Scores (1)
---------------
Aggregate Percent of Aggregate
Number of Initial Initial Group II-B Initial Group II-B
FICO Score Group II-B Loans Principal Balance Principal Balance
- ------------------------------- ------------------------ ------------------------- ---------------------------
501 to 525 1 $29,081.12 0.05%
526 to 550 7 971,431.09 1.60
551 to 575 19 2,383,231.81 3.93
576 to 600 52 9,888,790.84 16.29
601 to 625 63 12,634,724.72 20.82
626 to 650 60 14,181,999.42 23.37
651 to 675 46 10,622,294.50 17.50
676 to 700 24 3,769,983.31 6.21
701 to 725 13 3,774,151.53 6.22
726 to 750 7 1,692,828.22 2.79
751 to 775 4 455,329.54 0.75
776 to 800 2 282,445.19 0.47
- ------------------------------- ------------------------ ------------------------- ---------------------------
Total 298 $60,686,291.29 100.00%
======================== ========================= ===========================
- ----------
(1) FICO scores listed represent the FICO score obtained by the Sellers at
origination for each borrower on the Initial Group II-B Loans. As of the
Initial Cut-off Date, the weighted average FICO score at origination of the
Initial Group II-B Loans was approximately 636.
52
Initial Cut-off Date Principal Balances (1)
-------------------------------------------
Aggregate Percent of Aggregate
Initial Cut-off Date Number of Initial Initial Group II-B Initial Group II-B
Principal Balance ($) Group II-B Loans Principal Balance Principal Balance
- -------------------------------- ------------------------ ------------------------- ---------------------------
0.01 to 50,000.00 5 $177,000.60 0.29%
50,000.01 to 100,000.00 55 4,366,807.77 7.20
100,000.01 to 150,000.00 83 10,454,576.63 17.23
150,000.01 to 200,000.00 45 7,685,941.39 12.67
200,000.01 to 250,000.00 30 6,739,136.10 11.10
250,000.01 to 300,000.00 17 4,584,070.03 7.55
300,000.01 to 350,000.00 21 6,923,869.24 11.41
350,000.01 to 400,000.00 22 8,375,451.73 13.80
400,000.01 to 450,000.00 6 2,542,644.05 4.19
450,000.01 to 500,000.00 2 957,466.87 1.58
500,000.01 to 550,000.00 1 525,053.63 0.87
550,000.01 to 600,000.00 3 1,720,541.51 2.84
600,000.01 to 650,000.00 1 647,684.78 1.07
650,000.01 to 700,000.00 2 1,326,930.04 2.19
700,000.01 to 750,000.00 5 3,659,116.92 6.03
- -------------------------------- ------------------------ ------------------------- ---------------------------
Total 298 $60,686,291.29 100.00%
======================== ========================= ===========================
- ----------
(1) As of the Initial Cut-off Date, the average principal balance of the
Initial Group II-B Loans was approximately $203,645.27.
Remaining Terms to Maturity (1)
-------------------------------
Aggregate Percent of Aggregate
Remaining Term Number of Initial Initial Group II-B Initial Group II-B
to Maturity (Months) Group II-B Loans Principal Balance Principal Balance
- ------------------------------- ------------------------ ------------------------- ---------------------------
337 to 348 4 $672,993.31 1.11%
349 to 360 294 60,013,297.98 98.89
- ------------------------------- ------------------------ ------------------------- ---------------------------
Total 298 $60,686,291.29 100.00%
======================== ========================= ===========================
- ----------
(1) As of the Initial Cut-off Date, the weighted average remaining term to
maturity of the Initial Group II-B Loans was approximately 356 months.
Occupancy Types (1)
-------------------
Aggregate Percent of Aggregate
Number of Initial Initial Group II-B Initial Group II-B
Occupancy Type Group II-B Loans Principal Balance Principal Balance
- ------------------------------- ------------------------ ------------------------- ---------------------------
Owner Occupied 275 $57,066,874.55 94.04%
Non Owner Occupied 20 2,513,365.44 4.14
Second Home 3 1,106,051.30 1.82
- ------------------------------- ------------------------ ------------------------- ---------------------------
Total 298 $60,686,291.29 100.00%
======================== ========================= ===========================
- ----------
(1) Based on representations of the related borrowers at the time of
origination.
S-53
Credit Grades (1)
-----------------
Aggregate Percent of Aggregate
Number of Initial Initial Group II-B Initial Group II-B
Credit Grade Group II-B Loans Principal Balance Principal Balance
- ------------------------------- ------------------------ ------------------------- ---------------------------
A 242 $52,303,695.94 86.19%
B 41 6,561,640.50 10.81
C 15 1,820,954.85 3.00
- ------------------------------- ------------------------ ------------------------- ---------------------------
Total 298 $60,686,291.29 100.00%
======================== ========================= ===========================
- ----------
(1) See "Specific Underwriting Criteria; Underwriting Programs" in the
prospectus for a description of the Sellers' underwriting programs.
Documentation Types (1)
-----------------------
Aggregate Percent of Aggregate
Number of Initial Initial Group II-B Initial Group II-B
Documentation Type Group II-B Loans Principal Balance Principal Balance
- ------------------------------- ------------------------ ------------------------- ---------------------------
Full Doc 224 $41,022,187.46 67.60%
SI 47 11,079,937.42 18.26
AIV 17 7,189,245.76 11.85
Lite Doc 10 1,394,920.65 2.30
- ------------------------------- ------------------------ ------------------------- ---------------------------
Total 298 $60,686,291.29 100.00%
======================== ========================= ===========================
- ----------
(1) See "Specific Underwriting Criteria; Underwriting Programs" in the
prospectus for a description of the Sellers' documentation programs.
Loan Purpose
------------
Aggregate Percent of Aggregate
Number of Initial Initial Group II-B Initial Group II-B
Loan Purpose Group II-B Loans Principal Balance Principal Balance
- ------------------------------- --------------------------- -------------------------- ------------------------------
Cashout Refinance 160 $36,420,402.32 60.01%
Purchase 113 18,417,829.41 30.35
Rate/Term Refinance 25 5,848,059.56 9.64
- ------------------------------- --------------------------- -------------------------- ------------------------------
Total 298 $60,686,291.29 100.00%
=========================== ========================== ==============================
Prepayment Charge Original Period
---------------------------------
Aggregate Percent of Aggregate
Prepayment Charge Original Number of Initial Initial Group II-B Initial Group II-B Principal
Period (Months) Group II-B Loans Principal Balance Balance
- ------------------------------- ------------------------ ----------------------- ------------------------------
No Prepayment Charge 74 $17,501,816.83 28.84%
12 19 4,734,111.94 7.80
24 149 29,193,649.20 48.11
36 32 5,974,749.75 9.85
60 24 3,281,963.57 5.41
- ------------------------------- ------------------------ ----------------------- ------------------------------
Total 298 $60,686,291.29 100.00%
======================== ======================= ==============================
S-54
Property Type
-------------
Aggregate Percent of Aggregate
Number of Initial Group Initial Group II-B Initial Group II-B
Property Type II-B Loans Principal Balance Principal Balance
- ------------------------------- -------------------------- --------------------------- ----------------------------
Single Family 261 $54,009,544.68 89.00%
Condo 16 3,331,571.00 5.49
Duplex 12 2,004,062.02 3.30
Row Home 4 637,975.50 1.05
Triplex 3 424,119.89 0.70
Quadruplex 1 179,812.26 0.30
Townhouse 1 99,205.94 0.16
- ------------------------------- -------------------------- --------------------------- ----------------------------
Total 298 $60,686,291.29 100.00%
========================== =========================== ============================
Product Type
------------
Aggregate Percent of Aggregate
Number of Initial Initial Group II-B Initial Group II-B
Product Type Group II-B Loans Principal Balance Principal Balance
- ------------------------------- ------------------------ -------------------------- -------------------------
2/28 6 Mo LIBOR ARM 280 $57,046,671.81 94.00%
3/27 6 Mo LIBOR ARM 18 3,639,619.48 6.00
- ------------------------------- ------------------------ -------------------------- -------------------------
Total 298 $60,686,291.29 100.00%
======================== ========================== =========================
S-55
Geographic Distribution of Mortgaged Properties (1)
---------------------------------------------------
Aggregate Percent of Aggregate
Number of Initial Initial Group II-B Initial Group II-B
Geographic Location Group II-B Loans Principal Balance Principal Balance
- ------------------------------- ------------------------- ------------------------- --------------------------
California 46 $11,856,018.90 19.54%
Michigan 43 7,244,978.64 11.94
Wisconsin 23 4,440,038.58 7.32
Illinois 22 4,268,156.07 7.03
New Jersey 16 3,890,487.63 6.41
North Carolina 11 3,219,433.42 5.31
Virginia 9 2,956,780.85 4.87
Ohio 19 2,678,787.14 4.41
Florida 16 2,583,057.03 4.26
South Carolina 5 1,904,917.39 3.14
Pennsylvania 10 1,892,090.52 3.12
Kansas 8 1,749,613.64 2.88
South Dakota 6 1,391,828.78 2.29
Missouri 9 1,384,352.22 2.28
New York 4 1,177,587.96 1.94
Arizona 5 919,757.86 1.52
Tennessee 7 890,283.69 1.47
Maryland 3 578,498.44 0.95
Minnesota 3 551,611.76 0.91
Colorado 3 545,426.59 0.90
Washington 2 540,464.47 0.89
Indiana 4 464,013.93 0.76
Georgia 2 440,203.44 0.73
Massachusetts 2 436,165.67 0.72
Kentucky 4 397,521.46 0.66
Connecticut 3 371,833.70 0.61
Idaho 2 349,797.68 0.58
Nevada 2 317,463.74 0.52
Rhode Island 1 267,600.98 0.44
New Hampshire 1 243,084.22 0.40
North Dakota 1 243,642.10 0.40
Delaware 2 149,786.67 0.25
Utah 1 126,734.14 0.21
Montana 1 92,812.75 0.15
Oregon 1 87,946.01 0.14
Nebraska 1 33,513.22 0.06
- ------------------------------- ------------------------- ------------------------- --------------------------
Total 298 $60,686,291.29 100.00%
========================= ========================= ==========================
- ----------
(1) No more than approximately 1.51% of the Initial Group II-B Loans by
principal balance are secured by mortgaged properties located in any one
postal zip code area.
S-56
Minimum Mortgage Rates (1)
--------------------------
Aggregate Percent of Aggregate
Minimum Number of Initial Initial Group II-B Initial Group II-B
Mortgage Rate (%) Group II-B Loans Principal Balance Principal Balance
- ------------------------------- ------------------------ ------------------------- ---------------------------
5.001 to 5.500 1 $746,549.08 1.23%
5.501 to 6.000 16 3,955,382.90 6.52
6.001 to 6.500 63 15,350,702.49 25.30
6.501 to 7.000 62 13,647,465.15 22.49
7.001 to 7.500 60 12,020,453.05 19.81
7.501 to 8.000 51 9,429,257.81 15.54
8.001 to 8.500 16 1,983,712.30 3.27
8.501 to 9.000 16 2,309,627.54 3.81
9.001 to 9.500 6 683,289.53 1.13
9.501 to 10.000 3 248,492.70 0.41
10.001 to 10.500 3 282,277.62 0.47
11.501 to 12.000 1 29,081.12 0.05
- ------------------------------- ------------------------ ------------------------- ---------------------------
Total 298 $60,686,291.29 100.00%
======================== ========================= ===========================
- ----------
(1) As of the Initial Cut-off Date, the weighted average Minimum Mortgage Rate
of the Initial Group II-B Loans was approximately 7.070%.
Maximum Mortgage Rates (1)
--------------------------
Aggregate Percent of Aggregate
Maximum Number of Initial Initial Group II-B Initial Group II-B
Mortgage Rate (%) Group II-B Loans Principal Balance Principal Balance
- ------------------------------- ------------------------ ------------------------- ---------------------------
10.001 to 10.500 2 $455,849.19 0.75%
10.501 to 11.000 2 453,063.24 0.75
11.001 to 11.500 4 638,518.71 1.05
11.501 to 12.000 8 3,265,476.09 5.38
12.001 to 12.500 26 8,264,068.96 13.62
12.501 to 13.000 51 10,261,093.82 16.91
13.001 to 13.500 74 14,464,466.33 23.83
13.501 to 14.000 57 10,950,612.89 18.04
14.001 to 14.500 31 5,289,591.12 8.72
14.501 to 15.000 30 5,078,294.30 8.37
15.001 to 15.500 6 683,289.53 1.13
15.501 to 16.000 3 570,608.37 0.94
16.001 to 16.500 3 282,277.62 0.47
16.501 to 17.000 1 29,081.12 0.05
- ------------------------------- ------------------------ ------------------------- ---------------------------
Total 298 $60,686,291.29 100.00%
======================== ========================= ===========================
- ----------
(1) As of the Initial Cut-off Date, the weighted average Maximum Mortgage Rate
of the Initial Group II-B Loans was approximately 13.341%.
S-57
Initial Rate Caps
-----------------
Aggregate Percent of Aggregate
Number of Initial Initial Group II-B Initial Group II-B
Initial Rate Cap (%) Group II-B Loans Principal Balance Principal Balance
- ------------------------------- ------------------------ ------------------------- ---------------------------
1.000 2 $508,260.70 0.84%
1.500 38 8,891,571.08 14.65
2.000 1 39,415.16 0.06
3.000 257 51,247,044.35 84.45
- ------------------------------- ------------------------ ------------------------- ---------------------------
Total 298 $60,686,291.29 100.00%
======================== ========================= ===========================
Periodic Rate Caps
------------------
Aggregate Percent of Aggregate
Number of Initial Initial Group II-B Initial Group II-B
Periodic Rate Cap (%) Group II-B Loans Principal Balance Principal Balance
- ------------------------------- ------------------------ ------------------------- ---------------------------
1.000 166 $30,449,377.48 50.18%
1.500 132 30,236,913.81 49.82
- ------------------------------- ------------------------ ------------------------- ---------------------------
Total 298 $60,686,291.29 100.00%
======================== ========================= ===========================
Gross Margins (1)
-----------------
Aggregate Percent of Aggregate
Number of Initial Initial Group II-B Initial Group II-B
Gross Margin (%) Group II-B Loans Principal Balance Principal Balance
- ------------------------------- ------------------------ ------------------------- ---------------------------
4.501 to 5.000 7 $1,564,502.40 2.58%
5.001 to 5.500 29 6,935,583.04 11.43
5.501 to 6.000 7 2,073,553.71 3.42
6.001 to 6.500 123 27,402,075.18 45.15
6.501 to 7.000 43 7,741,297.05 12.76
7.001 to 7.500 51 8,070,358.01 13.30
7.501 to 8.000 17 3,180,425.68 5.24
8.001 to 8.500 15 2,728,179.13 4.50
8.501 to 9.000 4 818,352.80 1.35
9.001 to 9.500 2 171,964.29 0.28
- ------------------------------- ------------------------ ------------------------- ---------------------------
Total 298 $60,686,291.29 100.00%
======================== ========================= ===========================
- ----------
(1) As of the Initial Cut-off Date, the weighted average gross margin of the
Initial Group II-B Loans was approximately 6.609%.
S-58
Months to Next Adjustment Date (1)
----------------------------------
Aggregate Percent of Aggregate
Months to Number of Initial Initial Group II-B Initial Group II-B
Next Adjustment Date Group II-B Loans Principal Balance Principal Balance
- ------------------------------- ------------------------ ------------------------- ---------------------------
1 to 12 4 $672,993.31 1.11%
13 to 24 276 56,373,678.50 92.89
25 to 36 18 3,639,619.48 6.00
- ------------------------------- ------------------------ ------------------------- ---------------------------
Total 298 $60,686,291.29 100.00%
======================== ========================= ===========================
- ----------
(1) As of the Initial Cut-off Date, the weighted average number of months to
the next adjustment date for the Initial Group II-B Loans was approximately
20 months.
Sale of the Loans
Pursuant to the Pooling and Servicing Agreement, the Depositor on the
Closing Date will convey without recourse to the Trustee in trust for the
benefit of the certificateholders all right, title and interest of the Depositor
in and to each Initial Loan and all right, title and interest in and to all
other assets included in the trust fund as of the Closing Date, including all
principal and interest received on or with respect to the Initial Loans after
the Initial Cut-off Date, exclusive of principal and interest due on or prior to
the Initial Cut-off Date.
In connection with the conveyance of each of the Initial Loans and the
Subsequent Loans (as defined below) and pursuant to the requirements of the
Pooling and Servicing Agreement and any Subsequent Transfer Agreement (as
defined below), the Depositor or the Seller(s), as the case may be, will deliver
or cause to be delivered to the Trustee, or a custodian for the Trustee, among
other things,
o the Mortgage Note (and any modification or amendment thereto)
endorsed to the Trustee without recourse,
o the original instrument creating a first or second lien on the
related mortgaged property (the "Mortgage") with evidence of
recording, if any, indicated thereon,
o the title policy with respect to the related mortgaged property
(except for any title policies not returned from the title agent,
which will be delivered to the Trustee as soon as the same are
available to the Depositor),
o if applicable, all recorded intervening assignments of the
Mortgage, if any, and any riders or modifications to the Mortgage
Note and Mortgage (except for any documents not returned from the
public recording office, which will be delivered to the Trustee
as soon as the same are available to the Depositor), and
o an original recorded assignment of the Mortgage to the Trustee,
if any, once returned from the public recording office (the items
listed in this bullet and the four bullets above are collectively
referred to as the "Mortgage File").
Notwithstanding the foregoing, in lieu of providing certain of the
documents described in the above bullets, the Depositor may at its discretion
provide evidence that the related Mortgage is held through the MERS (R) system.
Certain Mortgages were or may be, at the sole discretion of the Servicer,
originally recorded in the name of MERS (R), solely as nominee for the
applicable Seller, and its successors and assigns; furthermore, subsequent
assignments of those Mortgages were or may be, at the sole discretion of the
Servicer, registered electronically through the MERS (R) system. For certain
other Loans, (i) the Mortgage was recorded in the name of the Seller, (ii)
record ownership was later assigned to MERS (R), solely as nominee for that
Seller, and (iii) subsequent assignments of the Mortgage were or may be, at the
sole discretion of the Servicer, registered electronically through the MERS (R)
system. For each of these Loans, MERS (R) serves as mortgagee of record on the
Mortgage solely as a nominee in an administrative capacity on behalf of the
Trustee, and does not have any beneficial interest in the Loan.
S-59
The Trustee will review certain documents contained in each Mortgage File
within the time periods specified in the Pooling and Servicing Agreement. If any
of such documents are found to be missing or defective in any material respect
and the related Seller does not cure the defect within the applicable cure
period, as provided in the Pooling and Servicing Agreement, that Seller will be
obligated to either repurchase the related Loan from the trust fund or remove
the Loan (a "Deleted Loan") from the trust fund and substitute in its place
another mortgage loan (a "Replacement Loan"). However, substitution is permitted
only within two years of the Closing Date and may not be made unless an opinion
of counsel is provided to the Trustee to the effect that the substitution will
not disqualify any REMIC or result in a prohibited transaction tax under the
Internal Revenue Code of 1986, as amended (the "Code").
Any Replacement Loan generally will, on the date of substitution, among
other characteristics set forth in the Pooling and Servicing Agreement,
o have a Stated Principal Balance not in excess of, and not more
than 10% less than, the Stated Principal Balance of the Deleted
Loan (the Stated Principal Balances to be measured as of the
respective Due Dates in the month of substitution, and the amount
of any shortfall to be deposited by the related Seller in the
Certificate Account and held for distribution to the
certificateholders on the related Distribution Date (a
"Substitution Adjustment Amount")),
o have the same interest rate convention, fixed or adjustable, as
the Deleted Loan,
o have a mortgage rate not lower than, and not more than 1% per
annum higher than, that of the Deleted Loan,
o have a Combined Loan-to-Value Ratio not higher than that of the
Deleted Loan,
o have a debt-to-income ratio no higher than that of the Deleted
Loan,
o have been originated pursuant to the same underwriting standards
as the Deleted Loan,
o have a remaining term to maturity not greater than (and not more
than one year less than) that of the Deleted Loan, and
o comply with all of the representations and warranties set forth
in the Pooling and Servicing Agreement or Subsequent Transfer
Agreement, as applicable, as of the date of substitution.
This cure, repurchase or substitution obligation constitutes the sole remedy
available to certificateholders or the Trustee for omission of, or a material
defect in, a Loan document.
Pre-Funding
On the Closing Date, the excess of the aggregate Class Certificate Balance
of the Offered Certificates over the Initial Cut-off Date Pool Principal
Balance, which is not expected to exceed $147,846,730 (the "Pre-Funded Amount"),
will be deposited in a pre-funding account (the "Pre-Funding Account")
established and maintained by the Trustee for the benefit of the holders of the
Offered Certificates. Any investment income earned from amounts in the
Pre-Funding Account shall be paid to the Depositor, and will not be available
for payments on the Certificates. During the period from the Closing Date to no
later than July 22, 2004 (the "Funding Period"), the trust fund is expected to
use
o approximately $95,555,055 of the Pre-Funded Amount to purchase
from the Sellers or their successors fixed rate, fully amortizing
and balloon, first and second lien mortgage loans, some of which
conform to agency loan balance limits and some of which do not,
for inclusion in Group I (the "Group I Subsequent Loans"),
o approximately $36,534,946 of the Pre-Funded Amount to purchase
from the Sellers or their successors adjustable rate, fully
amortizing, first lien mortgage loans that conform to agency loan
balance limits, for inclusion in Group II-A (the "Group II-A
Subsequent Loans"), and
o approximately $15,756,729 of the Pre-Funded Amount to purchase
from the Sellers or their successors adjustable rate, fully
amortizing, first lien mortgage loans, some of which conform
S-60
to agency loan balance limits and some of which do not, for
inclusion in Group II-B (the "Group II-B Subsequent Loans").
The Group I Subsequent Loans, Group II-A Subsequent Loans and
Group II-B Subsequent Loans are collectively referred to in this
prospectus supplement as the "Subsequent Loans." All of the
Subsequent Loans will have been originated or purchased by the
Sellers or their successors in interest. The purchase price for
each Subsequent Loan will equal the principal balance of the
Subsequent Loan as of the cut-off date specified in the
Subsequent Transfer Agreement (the related "Subsequent Cut-off
Date") and will be paid from the Pre-Funding Account.
Accordingly, the purchase of Subsequent Loans will decrease the
amount on deposit in the Pre-Funding Account and increase the
Pool Principal Balance and the Group I Principal Balance, Group
II-A Principal Balance and Group II-B Principal Balance, as
applicable.
Amounts on deposit in the Pre-Funding Account will be invested in Permitted
Investments. The Pre-Funding Account will not be an asset of any REMIC.
Pursuant to the Pooling and Servicing Agreement and a Subsequent Transfer
Agreement (a "Subsequent Transfer Agreement") to be executed by the applicable
Seller(s) and the Trustee, the conveyance of Subsequent Loans may be made on any
business day during the Funding Period (a "Subsequent Transfer Date"), subject
to the fulfillment of certain conditions in the Pooling and Servicing Agreement,
including that:
o none of the Group I Subsequent Loans may:
o be more than 59 days contractually delinquent (assuming 30
day months) as of the related Subsequent Cut-off Date;
o have an original term to maturity in excess of 360 months;
o have a current mortgage rate less than 5.000%;
o have a principal balance as of the related Subsequent
Cut-off Date in excess of $750,000;
o have a Combined Loan-to-Value Ratio in excess of 100%;
o have an adjustable rate;
o none of the Group II-A Subsequent Loans may:
o be more than 59 days contractually delinquent (assuming 30
day months) as of the related Subsequent Cut-off Date;
o have an original term to maturity in excess of 360 months;
o have a current mortgage rate less than 5.000%;
o have an initial fixed rate period greater than 36 months;
o have a principal balance as of the related Subsequent
Cut-off Date in excess of $750,000;
o have a Combined Loan-to-Value Ratio in excess of 100%;
o be a Multi-family Loan;
o be secured by a second or any junior lien on the related
mortgaged property;
o have a margin of less than 2.000%;
S-61
o have an original principal balance that exceeds agency loan
balance limits;
o none of the Group II-B Subsequent Loans may:
o be more than 59 days contractually delinquent (assuming 30
day months) as of the related Subsequent Cut-off Date;
o have an original term to maturity in excess of 360 months;
o have a current mortgage rate less than 5.00%;
o have an initial fixed rate period greater than 36 months;
o have a principal balance as of the related Subsequent
Cut-off Date in excess of $750,000;
o have a Combined Loan-to-Value Ratio in excess of 100%;
o be secured by a second or any junior lien on the related
mortgaged property;
o have a margin of less than 2.000%;
o the Subsequent Loans conveyed on the Subsequent Transfer Date
satisfy the same representations and warranties in the Pooling
and Servicing Agreement applicable to the Initial Loans from the
same loan group (except representations and warranties pertaining
to specific statistical characteristics of the Initial Loans from
the same loan group);
o the Subsequent Loans conveyed on the Subsequent Transfer Date
were selected in a manner reasonably believed not to be adverse
to the interests of the certificateholders;
o the Trustee receives an opinion of counsel to the effect that the
conveyance of the Subsequent Loans conveyed on the Subsequent
Transfer Date will not (1) result in the imposition of the tax on
"prohibited transactions" on the trust fund or contributions
after the Startup Date, as defined in Sections 860F(a)(2) and
860G(d) of the Code, respectively, or (2) cause the trust fund to
fail to qualify as a REMIC at any time that any Certificates are
outstanding;
o the Trustee receives opinions of counsel to the effect that the
conveyance of the Subsequent Loans conveyed on the Subsequent
Transfer Date from the Seller(s) to the Depositor and from the
Depositor to the trust fund will be characterized as true sales
and not loans secured by the Subsequent Loans;
o the conveyance of the Subsequent Loans on the Subsequent Transfer
Date will not result in a reduction or withdrawal of any ratings
assigned to the Offered Certificates; and
o the Rating Agencies have consented to the conveyance of the
Subsequent Loans to the trust fund.
Pursuant to the Subsequent Transfer Agreement, on the Subsequent Transfer Date
each of the applicable Seller(s) will provide the Trustee with an officer's
certificate stating that all conditions precedent to the transfer of the
Subsequent Loans have been satisfied.
S-62
Following the addition of the Subsequent Loans, the Loans (including the
Subsequent Loans, if any) will have the following characteristics (calculated as
of the Initial Cut-Off Date for the Initial Loans and as of the Subsequent
Cut-Off Date for the Subsequent Loans):
First liens: Not less than 97%
Full documentation: Not less than 79%
Grade A Credits: Not less than 80%
30-59 days contractually delinquent
(assuming 30 day months): Not more than 0.50%
Largest state concentration: Not more than 17%
Weighted average current mortgage rate: Not less than 7.200%
Weighted average margin of the Group II-A Loans: Not less than 6.550%
Weighted average margin of the Group II-B Loans: Not less than 6.550%
Weighted average Combined Loan-to-Value Ratio: Not more than 86.50%
Weighted average FICO score: Not less than 631
Multi-family Loan: Not more than 2.10%
Cash-out refinance: Not more than 74%
Investor non-owner: Not more than 5%
Balloon Loans: Not more than 4%
Loans with prepayment charges: Not less than 80%
Underwriting Standards
The following is a description of the underwriting procedures customarily
employed by the Sellers with respect to mortgage loans.
Each Seller produces its mortgage loans through its retail origination
network of loan officers and managers. Each Seller may also produce mortgage
loans through a wholesale network of mortgage brokers and other entities located
throughout the United States. Prior to the funding of any mortgage loan, each
Seller underwrites the related mortgage loan in accordance with the underwriting
standards that have been established by the Servicer and are consistent with
those utilized by mortgage lenders generally during the period of origination
for similar types of loans (the "Equity One Standards"). All Loans to be
included in the mortgage pool have been or will be underwritten by Equity One's
Central Credit office in accordance with the Equity One Standards.
Through its bulk purchase program, each Seller also purchases mortgage
loans that have been originated and closed by other lenders. The Sellers
purchase these mortgage loans in blocks that generally range from $1,000,000 to
$20,000,000. Prior to funding any bulk purchase, each loan package is
underwritten in accordance with the Equity One Standards. Bulk purchased loans
represent approximately 84.43%, 89.33% and 65.36% of the Initial Group I Loans,
Initial Group II-A Loans and Initial Group II-B Loans, respectively, as of the
Initial Cut-off Date.
The Equity One Standards are primarily intended to evaluate the value and
adequacy of the mortgaged property as collateral for the proposed mortgage loan,
but also take into consideration the borrower's credit standing and repayment
ability. The Equity One Standards typically differ from, and, with respect to a
substantial number of the Loans, are generally less stringent than, the
underwriting standards established by Fannie Mae and Freddie Mac, primarily with
respect to original principal balances, mortgagor income, credit history,
required documentation, mortgage rates, and property types. To the extent the
Equity One Standards are different from the underwriting standards of Fannie Mae
or Freddie Mac, the performance of the Loans thereunder may reflect higher
delinquency rates and credit losses.
Mortgage loans are originated or purchased under the Equity One Standards
through underwriting programs designated as Grade A Credits, Grade B Credits or
Grade C Credits. See "Loan Program--Specific Underwriting Criteria; Underwriting
Programs" and "Loan Program--Summary of Underwriting Requirements by Program" in
the prospectus.
These underwriting programs and their underwriting criteria may change from
time to time. In addition, on a case-by-case basis, loans may be made to
borrowers not strictly qualifying under the specific criteria of an
S-63
underwriting program. Deviations from the specific criteria of an underwriting
program are permitted to reflect compensating factors such as local economic
trends, real estate valuations and other credit factors specific to each loan
application and/or each portfolio acquired, but the Equity One Standards do not
include any specific formula or assign any specific weight to compensating
factors for purposes of these determinations. We expect that some of the Loans
in each of Group I and Group II will have been originated based on those types
of underwriting exceptions. Overall, the Sellers' goal is to maintain the
integrity of these underwriting programs while simultaneously providing lending
officers and corresponding networks with the flexibility to consider the
specific circumstances of each loan.
Under the Equity One Standards, Sellers must use the Full Doc, the Lite
Doc, the SI or the AIV loan documentation program to verify a borrower's income.
The Lite Doc, SI and AIV loan documentation programs are all forms of
"non-income verifiable" or "NIV" programs. See "Loan Program--Specific
Underwriting Criteria; Underwriting Programs" in the prospectus.
As of the Initial Cut-off Date, approximately 82.41%, 82.89% and 67.60% of
the Initial Group I Loans, Initial Group II-A Loans and Initial Group II-B
Loans, respectively, have been underwritten pursuant to the Full Doc program and
approximately 17.59%, 17.11% and 32.40% of the Initial Group I Loans, Initial
Group II-A Loans and Initial Group II-B Loans, respectively, have been
underwritten pursuant to either the Lite Doc, SI or AIV programs.
The Equity One Standards require an independent appraisal that conforms to
Fannie Mae standards of each mortgaged property securing each mortgage loan in
excess of $15,000. All Initial Loans in the mortgage pool have independent
appraisals on the related mortgaged properties. Each appraisal includes a market
data analysis based on recent sales of comparable homes in the area and, where
deemed appropriate, replacement cost analysis based on the current cost of
constructing a similar home. Every independent appraisal is reviewed by a
representative of the related Seller before the mortgage loan is funded, except
appraisals relating to mortgages acquired through bulk purchases. The maximum
loan amount varies depending upon a borrower's credit grade. Variations in
maximum loan amount limits are permitted based on compensating factors. Maximum
loan amounts for mortgage loans underwritten pursuant to the SI or AIV programs
generally do not exceed $500,000.
Other than with respect to Initial Loans that had an original principal
balance of $50,000 or less and were secured by second liens, title insurance has
been obtained on all Initial Loans in the mortgage pool. To the best of the
Servicer's knowledge, the improvements on each mortgaged property securing an
Initial Loan in the mortgage pool are covered by hazard insurance with extended
coverage in an amount at least equal to the lesser of (1) the principal balance
of the Initial Loan, and (2) the maximum insurable value of the improvements on
the mortgaged property.
SERVICING OF LOANS
General
The Servicer will service the Loans in accordance with the terms set forth
in the Pooling and Servicing Agreement. The Servicer may perform any of its
obligations under the Pooling and Servicing Agreement through one or more
sub-servicers. Notwithstanding any sub-servicing arrangement, the Servicer will
remain liable for its servicing duties and obligations under the Pooling and
Servicing Agreement as if the Servicer alone were servicing the Loans. As of the
Closing Date, the Servicer does not intend to service the Loans with
sub-servicing arrangements.
The Sellers have provided the information set forth in the following
sections through and including the section captioned "Foreclosure, Delinquency
and Loss Experience."
The Servicer
Equity One, Inc. ("Equity One"), a Delaware corporation and a wholly-owned
operating subsidiary of Popular North America, Inc., a Delaware corporation,
will act as the Servicer of the Loans pursuant to the Pooling and Servicing
Agreement. Equity One is engaged primarily in the mortgage banking and consumer
lending business, and in that capacity, originates, purchases, sells and
services mortgage and consumer loans. Equity One is
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a Fannie Mae and Freddie Mac approved lender. It originates loans through a
retail branch system and through loan brokers and correspondents nationwide.
Equity One's loans are principally
o first- and second-lien, fixed or adjustable rate mortgage loans
secured by
o one- to four-family dwellings or
o multi-family properties and structures which include both
residential dwelling units and space used for retail,
professional or other commercial uses, and
o secured or unsecured consumer loans.
As of March 31, 2004, Equity One and its subsidiaries provided servicing
for approximately 71,571 mortgage loans (including mortgage loans serviced for
third parties) having an aggregate net unpaid principal balance of approximately
$7,037,491,839.
The principal executive offices of Equity One are located at 301 Lippincott
Drive, Marlton, NJ 08053. Its telephone number is (800) 461-8643. Equity One
conducts operations from its headquarters in Marlton and, through subsidiaries,
from offices throughout the nation.
Loan Servicing
Equity One services substantially all of the mortgage loans originated or
acquired by the Sellers, and also services mortgage loans for third parties like
the trust fund to which the Sellers transfer mortgage loans originated or
acquired by them from time to time. Equity One has established standard policies
for the servicing and collection of mortgage loans. Servicing includes, but is
not limited to, collecting and remitting mortgage loan payments, accounting for
principal and interest, preparation of tax related information in connection
with the mortgage loans, supervision of delinquent mortgage loans, making
inspections as required of the mortgaged properties, loss mitigation efforts,
foreclosure proceedings and, if applicable, the disposition of mortgaged
properties, and generally administering the mortgage loans, for which it
receives servicing fees.
Collection Procedures
When a borrower fails to make a payment on a mortgage loan, the Servicer
contacts the borrower in an attempt to get the borrower to cure the deficiency.
Pursuant to its servicing procedures, the Servicer generally mails to the
borrower a notice of intent to foreclose after the mortgage loan becomes 60 days
contractually past due (assuming 30 day months) (three payments due but not
received). Within 45 days thereafter, if the mortgage loan remains delinquent,
the Servicer will institute appropriate legal action to foreclose on the
mortgaged property. The Servicer may terminate these foreclosure proceedings if
the borrower cures the delinquency. Mortgage loans to borrowers in bankruptcy
proceedings may be restructured in accordance with law and with a view to
maximizing recovery on these mortgage loans, including any deficiencies.
Once foreclosure is initiated, the Servicer uses a foreclosure tracking
system to monitor the progress of the proceedings. The system includes state
specific parameters to monitor whether proceedings are progressing within the
time frame typical for the state in which the mortgaged property is located.
During the foreclosure proceeding, the Servicer determines the amount of the
foreclosure bid and whether to liquidate the mortgage loan.
After foreclosure, the Servicer may liquidate the mortgaged property and
charge-off the portion of the mortgage loan balance that was not recovered as
part of Liquidation Proceeds. If foreclosed, the mortgaged property is sold at a
public or private sale and may be purchased by the Servicer.
Servicing and charge-off policies and collection practices may change over
time in accordance with, among other things, the business judgment of the
Servicer, changes in the servicing portfolio and applicable laws and
regulations.
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Foreclosure, Delinquency and Loss Experience
The following table summarizes the foreclosure, delinquency and loss
experience of mortgage loans owned and serviced by Equity One and its
subsidiaries at or for the years specified therein. A mortgage loan is
characterized as delinquent if the borrower has not paid the scheduled payment
due by the due date. The table below discloses delinquency percentages of
mortgage loans 60 days or more past due on a contractual basis and includes
mortgage loans where the mortgage loan is in foreclosure or the borrower has
filed for bankruptcy, but excludes mortgage loans which are real estate owned.
You should not consider this information as a basis for assessing the
likelihood, amount, or severity of delinquency or losses on the Loans, and no
assurances can be given that the foreclosure, delinquency and loss experience
presented in the table below will be indicative of the actual foreclosure,
delinquency and loss experience on the Loans.
Foreclosure, Delinquency and Loss Table(1)
(Dollars in Thousands)
At or for the At or for the
At or for the At or for the At or for the Four Months Four Months
Year Ended Year Ended Year Ended Ended Ended
November 30, 2001 November 30, 2002 November 30, 2003 March 31, 2003 March 31, 2004
----------------- ----------------- ----------------- -------------- --------------
Portfolio Unpaid
Principal Balance(2) $2,928,485 $4,198,638 $6,272,912 $4,690,673 $6,904,452
Average Portfolio
Unpaid Principal
Balance(3) $2,226,183 $3,602,983 $5,092,792 $4,440,848 $6,685,908
60+ Days
Delinquent(4) 4.11% 5.36% 4.62% 5.45% 4.50%
Real Estate Owned(5) $13,002 $17,925 $25,957 $25,095 $26,864
Total Credit
Losses(6) 0.25% 0.31% 0.44% 0.37%(7) 0.33%(7)
- ----------
(1) This table includes only mortgage loans owned and serviced by Equity One
and its subsidiaries and real estate owned by Equity One and its
subsidiaries.
(2) Portfolio Unpaid Principal Balance is the net amount of (a) principal to be
paid on each mortgage loan, (b) loan origination fees, net of costs, (c)
unearned interest and (d) other miscellaneous deferred charges and fees;
and excludes the principal balance of each mortgage loan for which the
related mortgaged property had been acquired through foreclosure or deed in
lieu of foreclosure by that date.
(3) Average Portfolio Unpaid Principal Balances are calculated by summing
monthly Portfolio Unpaid Principal Balances and dividing by the number of
months summed (i.e., thirteen (13) in the case of the annual figures and
five (5) in the case of the four month figures).
(4) Delinquency percentages are calculated as the dollar amount of the unpaid
principal balance of the mortgage loans that are delinquent divided by the
Portfolio Unpaid Principal Balance. Delinquency percentages do not include
the principal balance of mortgage loans as to which the related mortgaged
property had been acquired through foreclosure or deed in lieu of
foreclosure by that date. For the columns entitled "At or for the Year
Ended November 30, 2001," "At or for the Year Ended November 30, 2002," "At
or for the Year Ended November 30, 2003," "At or for the Four Months Ended
March 31, 2003" and "At or for the Four Months Ended March 31, 2004"
delinquency percentages are calculated based on the number of days payments
are contractually past due and assumes 30-day months. Consequently, a
payment due on the first day of a month is not 30 days delinquent until the
first day of the following month.
(5) Real estate owned represents the aggregate estimated fair value of the
properties acquired through foreclosure or deed in lieu of foreclosure.
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(6) Total Credit Losses includes charge-offs of principal, net of subsequent
recoveries, relating to mortgage loans written off as uncollectible and
initial write-downs of loans upon transfer to real estate owned. It does
not include (a) subsequent write downs of real estate owned balances, (b)
expenses associated with maintaining, repairing, and selling foreclosed
properties and real estate owned and (c) losses (gains) on the disposition
of real estate owned.
(7) Annualized.
Historically, a variety of factors, including the appreciation of real
estate values, have limited the loss and delinquency experience on mortgage
loans. There can be no assurance that factors beyond the Servicer's control,
like national or local economic conditions or downturn in the real estate
markets of its lending areas, will not result in increased rates of
delinquencies and foreclosure losses in the future.
Servicing Compensation and Payment of Expenses
The Servicer will be paid a monthly fee from interest collected with
respect to each Loan, as well as from any Liquidation Proceeds from a Liquidated
Loan that are applied to accrued and unpaid interest, equal to one-twelfth of
the Stated Principal Balance of the Loan multiplied by the Servicing Fee Rate
(the "Servicing Fee"). The "Servicing Fee Rate" for each Loan will equal 0.50%
per annum.
The "Adjusted Net Mortgage Rate" of any Loan is its mortgage rate, less the
sum of the Servicing Fee Rate and the per annum rate on each Loan payable to the
Trustee. The amount of the monthly Servicing Fee may also be adjusted with
respect to prepaid Loans, as described herein under "--Adjustment to Servicing
Fee in Connection with Certain Prepaid Loans."
The Servicer is also entitled to receive, as additional servicing
compensation, amounts in respect of interest paid in connection with any
principal prepayment of a Loan subsequent to its Due Date in any Prepayment
Period, which payment of interest is intended to cover the period on and after
the Due Date ("Prepayment Interest Excess"), all late payment fees, assumption
fees, prepayment penalties and other similar charges and, so long as no Event of
Default has occurred and is continuing under the Pooling and Servicing
Agreement, all reinvestment income earned on amounts on deposit in the
Certificate Account. The Servicer is obligated to pay certain ongoing expenses
associated with the Loans and incurred by the Trustee in connection with its
responsibilities under the Pooling and Servicing Agreement.
Adjustment to Servicing Fee in Connection with Certain Prepaid Loans
When a borrower prepays a Loan between Due Dates, the borrower only has to
pay interest on the amount prepaid through the date of prepayment and not
thereafter. If a borrower prepays a Loan in a particular group in whole or in
part during any Prepayment Period on a date that is prior to the Loan's Due
Date, the amount of interest that accrues on the amount of the prepayment will
be less than the corresponding amount of interest accruing on the related class
or classes of Certificates. Accordingly, there will be a shortfall in the amount
of interest to be distributed to certificateholders of the related class with
respect to those prepaid Loans.
Pursuant to the Pooling and Servicing Agreement, the Servicing Fee for any
month will be reduced, up to the full amount of the Servicing Fee, in order to
pass through to certificateholders the interest to which they would be entitled
in respect of each prepaid Loan in the group relating to that class on the
related Distribution Date. If the amount of shortfalls in interest resulting
from prepayments exceeds the amount of the Servicing Fee otherwise payable on
the related Distribution Date, the amount of interest to which
certificateholders will be entitled will be reduced by the amount of that
excess. See "Description of the Certificates--Distribution of Interest."
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Advances
Subject to the following limitations, the Servicer will be required to
advance (each, an "Advance") prior to each Distribution Date, from its own funds
or funds in the Certificate Account that are not Available Funds for that
Distribution Date, an amount equal to
o the aggregate of payments of principal and interest on the Loans,
net of the Servicing Fee with respect to those Loans, which were
due on the Due Date in the calendar month preceding the month of
that Distribution Date and which were still delinquent on the
Determination Date in the month of that Distribution Date, plus
o interest on each Loan as to which the trust fund has acquired the
related mortgaged property through foreclosure or deed-in-lieu of
foreclosure ("REO Property").
The "Determination Date" means, as to any Distribution Date, the 21st day
of the month of that Distribution Date, or, if that day is not a business day,
the next preceding business day; provided, however, that the Determination Date
in each month will be at least two business days preceding the related
Distribution Date.
Advances are intended to maintain a regular flow of scheduled interest and
principal payments on the Offered Certificates rather than to guarantee or
insure against losses. The Servicer only has to make Advances with respect to
delinquent payments of principal of or interest on each Loan to the extent that
the Advances are, in its reasonable judgment, recoverable from future payments
and collections or insurance payments or proceeds of liquidation of the related
Loan.
If the Servicer decides on any Determination Date to make an Advance on a
Loan, that Advance will be included with the distribution on the related
Distribution Date to the holders of the Offered Certificates. Failure by the
Servicer to make an Advance required under the Pooling and Servicing Agreement
with respect to the Offered Certificates will be an Event of Default thereunder,
in which case the Trustee, acting in the capacity of servicer, or the successor
servicer will be obligated to make that Advance, in accordance with the terms of
the Pooling and Servicing Agreement.
DESCRIPTION OF THE CERTIFICATES
General
The trust fund will issue the Certificates pursuant to the Pooling and
Servicing Agreement. Set forth below are descriptions of the material terms and
provisions pertaining to the issuance of the Certificates. When this document
refers to particular provisions or terms used in the Pooling and Servicing
Agreement, the actual provisions, including definitions of terms, are
incorporated in this document by reference.
The Mortgage Pass-Through Certificates, Series 2004-2, will consist of the
Senior Certificates, the Subordinate Certificates, the Class X Certificates and
the Class R Certificates. Each Certificate will represent an undivided,
fractional ownership interest in the trust fund created and held pursuant to the
Pooling and Servicing Agreement, subject to the limits and the priority of
distribution described therein.
This document only offers the Senior Certificates and the Subordinate
Certificates. Each class of the Senior Certificates and Subordinate Certificates
will have the initial Class Certificate Balance and will bear interest at the
rate per annum set forth or described on the cover page hereof, subject to the
applicable Net WAC Cap. However, the pass-through rates on the Class AF-5, Class
AF-6, Class AV-1, Class AV-2, Class M-1, Class M-2, Class M-3 and Class M-4
Certificates will increase in the circumstances described under "--Distribution
of Interest." Interest on the Offered Certificates will be subject to adjustment
as described under "--Distribution of Interest." The Class X Certificates and
the Class R Certificates, which are not being offered hereby, may be sold at any
time on or after the Closing Date in accordance with the Pooling and Servicing
Agreement.
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The Offered Certificates will have an initial aggregate principal balance
of $700,000,000 and will initially evidence in the aggregate a beneficial
ownership interest of approximately 100% of the principal of the trust fund. The
trust fund will initially issue the Offered Certificates in book-entry form.
Separate REMIC Structure
For federal income tax purposes, the trust fund, other than the Pre-Funding
Account, the Yield Maintenance Agreement, the Net WAC Cap Account and the
Reserve Fund, created by the Pooling and Servicing Agreement will include
multiple segregated asset pools, each of which will be treated as a separate
REMIC, creating a tiered REMIC structure. The Offered Certificates, excluding
any associated rights to receive payments from the Net WAC Cap Account or
Reserve Fund, will be designated as regular interests in a REMIC.
Book-Entry Certificates
The trust fund will issue the Offered Certificates in one or more
certificates that equal the aggregate initial Class Certificate Balance of the
relevant class of Certificates and which will be held by a nominee of The
Depository Trust Company ("DTC"). Persons acquiring beneficial ownership
interests in the Offered Certificates ("Beneficial Owners") will hold their
Certificates indirectly through the book-entry facilities of DTC in the United
States or, upon request, through Clearstream, Luxembourg, or the Euroclear
System in Europe, if they are participants of those systems, or indirectly
through participants of those systems. Investors may hold their beneficial
interests in the Offered Certificates in minimum denominations representing an
original principal amount of $25,000 and integral multiples of $1 in excess
thereof. One investor of each class of the Offered Certificates may hold a
beneficial interest therein that is not an integral multiple of $1. DTC has
informed the Depositor that its nominee will be Cede & Co. ("Cede").
Accordingly, Cede is expected to be the holder of record of the Offered
Certificates. Except as described in the prospectus under "Description of the
Certificates--Book-Entry Certificates," no Beneficial Owner of an Offered
Certificate will be entitled to receive a physical certificate representing that
Certificate (a "Definitive Certificate").
Unless and until Definitive Certificates are issued, it is anticipated that
the only certificateholder of the Offered Certificates will be Cede, as nominee
of DTC. Beneficial Owners of the Offered Certificates will not be
"Certificateholders," as that term is used in the Pooling and Servicing
Agreement. Beneficial Owners are only permitted to exercise the rights of
certificateholders directly through DTC and DTC participants. Monthly and annual
reports on the trust fund provided to Cede, as nominee of DTC, may be made
available to Beneficial Owners upon request, in accordance with the rules,
regulations and procedures creating and affecting DTC, and to the DTC
participants to whose accounts the Offered Certificates of those Beneficial
Owners are credited.
For a description of the book-entry procedures generally applicable to the
Offered Certificates, see "Description of the Securities--Book-Entry
Registration of Securities" in the prospectus. For information with respect to
tax documentation procedures relating to the Certificates, see "Federal Income
Tax Consequences" herein and "Global Clearance, Settlement and Tax Documentation
Procedures--Certain U.S. Federal Income Tax Documentation Requirements" in Annex
I hereto.
Payments on Loans; Certificate and Distribution Accounts
On or prior to the Closing Date, the Servicer will establish an account
(the "Certificate Account") that will be maintained for the benefit of the
Trustee on behalf of the certificateholders. Funds credited to the Certificate
Account may be invested for the benefit and at the risk of the Servicer in
Permitted Investments that are scheduled to mature on or prior to the business
day preceding the next Distribution Date. "Permitted Investments" will be
specified in the Pooling and Servicing Agreement and will be limited to the
types of investments described in the prospectus under "Credit
Enhancement--Reserve Accounts."
All payments in respect of principal and interest, net of the related
Servicing Fee, on the Loans received by the Servicer subsequent to the Initial
Cut-off Date or Subsequent Cut-off Date, as applicable, other than principal and
interest due on the Loans on or before the Initial Cut-off Date or Subsequent
Cut-off Date, as applicable, including Insurance Proceeds and Liquidation
Proceeds, net of Liquidation Expenses, are required to be paid into the
Certificate Account not later than the next business day following receipt
thereof. The Servicer may retain as
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additional servicing compensation Prepayment Interest Excess, all late payment
fees, assumption fees, prepayment penalties and other similar charges and, so
long as no Event of Default has occurred and is continuing under the Pooling and
Servicing Agreement, all reinvestment income earned on amounts on deposit in the
Certificate Account.
Pursuant to the Pooling and Servicing Agreement, the Servicer will have the
right to make Permitted Trustee Withdrawals for payment to the Trustee from
amounts held in the Certificate Account and, to the extent that the Servicer
does not make those Permitted Trustee Withdrawals within a reasonable time after
a request has been made by the Trustee, the Trustee will have the right to make
those Permitted Trustee Withdrawals from amounts held in the Distribution
Account (prior to making any other distributions from the Distribution Account
on the applicable Distribution Date). "Permitted Trustee Withdrawals" consist
of, among other things, withdrawals of (i) expenses incurred by the Trustee in
connection with the transition of servicing upon the occurrence of an Event of
Default under the Pooling and Servicing Agreement in an amount not to exceed
$75,000 per servicing transition event and (ii) reimbursable indemnity amounts
not to exceed $150,000 per annum.
On or prior to the business day immediately preceding each Distribution
Date, the Servicer will withdraw from the Certificate Account the amount of
Available Funds with respect to that Distribution Date, and will deposit this
amount in an account established and maintained by the Trustee for the benefit
of the certificateholders (the "Distribution Account").
Distributions Generally
The Trustee will make distributions on the Certificates on the 25th day of
each month, or if that day is not a business day, on the first business day
thereafter, commencing on May 25, 2004 (each, a "Distribution Date"), to the
persons in whose names (1) the Class AF-1, Class AV-1, Class AV-2, Class B-1 and
Class B-2 Certificates are registered at the close of business on the business
day preceding that Distribution Date, and (2) the Class AF-2, Class AF-3, Class
AF-4, Class AF-5, Class AF-6, Class M-1, Class M-2, Class M-3 and Class M-4
Certificates are registered at the close of business on the last business day of
the calendar month immediately preceding that Distribution Date (or, with
respect to the first Distribution Date and each such class, at the close of
business on the Closing Date) (each, a "Record Date").
Distributions on each Distribution Date will be made by check mailed to the
address of the person entitled thereto as it appears on the applicable
certificate register or, in the case of a certificateholder who holds 100% of a
class of Certificates or who holds Certificates with an aggregate initial
principal balance of $1,000,000 or more and who has so notified the Trustee in
writing in accordance with the Pooling and Servicing Agreement, by wire transfer
in immediately available funds to the account of that certificateholder at a
bank or other depository institution having appropriate wire transfer
facilities. However, the final distribution in retirement of the Certificates
will be made only upon presentment and surrender of the Certificates at the
Corporate Trust Office of the Trustee.
As described below, distributions to holders of Certificates will be made
on each Distribution Date from Available Funds. "Available Funds" with respect
to any Distribution Date generally will be equal to the sum of
o all scheduled installments of interest and principal on the Loans
due on the Due Date in the calendar month preceding the month in
which that Distribution Date occurs and received prior to the
related Determination Date, together with any Advances in respect
thereof;
o all proceeds of any insurance policies, including any primary
mortgage guaranty insurance policies, with respect to the Loans,
to the extent those proceeds are not applied to the restoration
of the related mortgaged property or released to the borrower in
accordance with the Servicer's normal servicing procedures
(collectively, "Insurance Proceeds") and all other cash amounts
received and retained in connection with any condemnation or
partial release of a mortgaged property or the liquidation of
defaulted Loans, by foreclosure or otherwise (together with
Insurance Proceeds, "Liquidation Proceeds"), during the calendar
month preceding the month of that Distribution Date (in each
case, net of unreimbursed expenses incurred in connection with a
liquidation or foreclosure and unreimbursed Advances, if any);
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o all partial or full prepayments received on the Loans during the
calendar month preceding the month of that Distribution Date (the
"Prepayment Period");
o amounts received with respect to that Distribution Date as the
Substitution Adjustment Amount or purchase price in respect of a
Deleted Loan or a Loan repurchased by a Seller or the Servicer or
sold by the Servicer as of that Distribution Date, reduced by
amounts in reimbursement for Advances previously made and other
amounts as to which the Servicer is entitled to be reimbursed
from the Certificate Account pursuant to the Pooling and
Servicing Agreement; and
o on the Distribution Date immediately following the end of the
Funding Period, the amount, if any, remaining in the Pre-Funding
Account (net of any investment income thereon).
The Class R Certificates will remain outstanding for so long as the trust
fund exists, whether or not they are receiving current distributions. On each
Distribution Date, the holders of the Class R Certificates will be entitled to
receive any remaining Available Funds after payment of the other distributions
described in "--Distribution of Interest" "--Distribution of Principal" and
"--Distribution of Monthly Excess Interest Amounts," including the required
deposit into the Net WAC Cap Account and payments, if any, required to be made
to the Class X Certificates for that Distribution Date.
Distribution of Interest
On each Distribution Date, the Trustee will distribute payments of interest
in the order of priority and in the amounts set forth below to the extent
available (the "Monthly Interest Distribution"):
(A) from the Group I Interest Remittance Amount for that Distribution
Date:
(1) first, to the Trustee, any amounts then due and owing
representing fees of the Trustee based on the aggregate Stated
Principal Balance of the Group I Loans and, to the extent not
paid by Permitted Trustee Withdrawals, expenses and indemnity
amounts due and owing to the Trustee relating to the Group I
Loans;
(2) second, to the Servicer, an amount equal to the sum of (a) the
Servicing Fee relating to the Group I Loans, except to the extent
previously paid with permitted withdrawals from the Certificate
Account, and (b) any other amounts expended by the Servicer in
connection with the Group I Loans and reimbursable thereto under
the Pooling and Servicing Agreement but not previously
reimbursed;
(3) third, concurrently, to the Class AF-1, Class AF-2, Class AF-3,
Class AF-4, Class AF-5 and Class AF-6 Certificates, pro rata, the
applicable Interest Distribution Amounts for that Distribution
Date;
(4) fourth, concurrently, to the Class AF-1, Class AF-2, Class AF-3,
Class AF-4, Class AF-5 and Class AF-6 Certificates, pro rata, the
applicable Unpaid Interest Amounts, if any; and
(5) fifth, concurrently, to the Class AV-1 and Class AV-2
Certificates, pro rata, an amount equal to the excess, if any, of
(a) the amount required to be distributed pursuant to clause B(3)
and clause B(4) below (with respect to the Class AV-1
Certificates) and clause C(3) and clause C(4) below (with respect
to the Class AV-2 Certificates) for that Distribution Date over
(b) the amount actually distributed pursuant to those clauses
from the Group II-A Interest Remittance Amount and the Group II-B
Interest Remittance Amount, respectively, and not otherwise paid.
(B) from the Group II-A Interest Remittance Amount for that Distribution
Date:
(1) first, to the Trustee, any amounts then due and owing
representing fees of the Trustee based on the aggregate Stated
Principal Balance of the Group II-A Loans and, to the
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extent not paid by Permitted Trustee Withdrawals, expenses and
indemnity amounts due and owing to the Trustee relating to the
Group II-A Loans;
(2) second, to the Servicer, an amount equal to the sum of (a) the
Servicing Fee relating to the Group II-A Loans, except to the
extent previously paid with permitted withdrawals from the
Certificate Account, and (b) any other amounts expended by the
Servicer in connection with the Group II-A Loans and reimbursable
thereto under the Pooling and Servicing Agreement but not
previously reimbursed;
(3) third, to the Class AV-1 Certificates, the applicable Interest
Distribution Amount for that Distribution Date;
(4) fourth, to the Class AV-1 Certificates, the applicable Unpaid
Interest Amounts, if any; and
(5) fifth, concurrently to the Class AF Certificates and Class AV-2
Certificates, pro rata, an amount equal to the excess, if any, of
(a) the amount required to be distributed pursuant to clause A(3)
and clause A(4) above (with respect to the Class AF Certificates)
and clause C(3) and clause C(4) below (with respect to the Class
AV-2 Certificates) for that Distribution Date over (b) the amount
actually distributed pursuant to those clauses from the Group I
Interest Remittance Amount and the Group II-B Interest Remittance
Amount, respectively, and not otherwise paid.
(C) from the Group II-B Interest Remittance Amount for that Distribution
Date:
(1) first, to the Trustee, any amounts then due and owing
representing fees of the Trustee based on the aggregate Stated
Principal Balance of the Group II-B Loans and, to the extent not
paid by Permitted Trustee Withdrawals, expenses and indemnity
amounts due and owing to the Trustee relating to the Group II-B
Loans;
(2) second, to the Servicer, an amount equal to the sum of (a) the
Servicing Fee relating to the Group II-B Loans, except to the
extent previously paid with permitted withdrawals from the
Certificate Account, and (b) any other amounts expended by the
Servicer in connection with the Group II-B Loans and reimbursable
thereto under the Pooling and Servicing Agreement but not
previously reimbursed;
(3) third, to the Class AV-2 Certificates, the applicable Interest
Distribution Amount for that Distribution Date;
(4) fourth, to the Class AV-2 Certificates, the applicable Unpaid
Interest Amounts, if any; and
(5) fifth, concurrently to the Class AF Certificates and Class AV-1
Certificates, pro rata, an amount equal to the excess, if any, of
(a) the amount required to be distributed pursuant to clause A(3)
and clause A(4) above (with respect to the Class AF Certificates)
and clause B(3) and clause B(4) above (with respect to the Class
AV-1 Certificates) for that Distribution Date over (b) the amount
actually distributed pursuant to those clauses from the Group I
Interest Remittance Amount and the Group II-A Interest Remittance
Amount, respectively, and not otherwise paid.
(D) from the Remaining Interest Remittance Amount for that Distribution
Date:
(1) first, to the Class M-1 Certificates, the applicable Interest
Distribution Amount for that Distribution Date;
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(2) second, to the Class M-2 Certificates, the applicable Interest
Distribution Amount for that Distribution Date;
(3) third, to the Class M-3 Certificates, the applicable Interest
Distribution Amount for that Distribution Date;
(4) fourth, to the Class M-4 Certificates, the applicable Interest
Distribution Amount for that Distribution Date;
(5) fifth, to the Class B-1 Certificates, the applicable Interest
Distribution Amount for that Distribution Date;
(6) sixth, to the Class B-2 Certificates, the applicable Interest
Distribution Amount for that Distribution Date; and
(7) seventh, the Monthly Excess Interest Amount for that Distribution
Date, will be applied as described below under "--Distribution of
Monthly Excess Cashflow Amounts."
Accrued interest to be distributed on any Distribution Date will be
calculated on the basis of the related Class Certificate Balance immediately
prior to that Distribution Date. Interest will be calculated and payable on the
basis of:
o with respect to the Class AF-1, Class AV-1, Class AV-2, Class B-1
and Class B-2 Certificates, a 360-day year and the actual number
of days elapsed in the related Interest Accrual Period; and
o with respect to the Class AF-2, Class AF-3, Class AF-4, Class
AF-5, Class AF-6, Class M-1, Class M-2, Class M-3 and Class M-4
Certificates, a 360-day year divided into twelve 30-day months.
Any Unpaid Interest Amount will be carried forward and added to the amount
holders of the relevant class of Offered Certificates will be entitled to
receive on the next Distribution Date. Such a shortfall could occur, for
example, if losses realized on the Loans were exceptionally high or were
concentrated in a particular month.
"Group I Interest Remittance Amount" means, as of any Determination Date,
the sum, without duplication, of (1) all interest collected or advanced on the
Group I Loans during the related Due Period, and (2) the portion of any
Substitution Adjustment Amount, Termination Price, purchase price of a Loan sold
by the Servicer or repurchased by a Seller or the Servicer pursuant to the
Pooling and Servicing Agreement, or Liquidation Proceeds, relating to interest
with respect to the Group I Loans and received during the related Due Period.
"Group II-A Interest Remittance Amount" means, as of any Determination
Date, the sum, without duplication, of (1) all interest collected or advanced on
the Group II-A Loans during the related Due Period, and (2) the portion of any
Substitution Adjustment Amount, Termination Price, purchase price of a Loan sold
by the Servicer or repurchased by a Seller or the Servicer pursuant to the
Pooling and Servicing Agreement, or Liquidation Proceeds, relating to interest
with respect to the Group II-A Loans and received during the related Due Period.
"Group II-B Interest Remittance Amount" means, as of any Determination
Date, the sum, without duplication, of (1) all interest collected or advanced on
the Group II-B Loans during the related Due Period, and (2) the portion of any
Substitution Adjustment Amount, Termination Price, purchase price of a Loan sold
by the Servicer or repurchased by a Seller or the Servicer pursuant to the
Pooling and Servicing Agreement, or Liquidation Proceeds, relating to interest
with respect to the Group II-B Loans and received during the related Due Period.
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With respect to each Distribution Date, the "Interest Accrual Period"
o for the Class AF-1, Class AV-1, Class AV-2, Class B-1 and Class
B-2 Certificates will be the period commencing on the
Distribution Date in the prior calendar month (or on the Closing
Date with respect to the first Distribution Date) and ending on
the day preceding that Distribution Date, and
o for the Class AF-2, Class AF-3, Class AF-4, Class AF-5, Class
AF-6, Class M-1, Class M-2, Class M-3 and Class M-4 Certificates
will be the calendar month preceding that Distribution Date.
The "Interest Distribution Amount" for each class of the Offered
Certificates will be equal to the amount of interest accrued during the related
Interest Accrual Period at the Pass-Through Rate for that class on the related
Class Certificate Balance, less the amount of Net Interest Shortfalls applicable
to that class.
The "Monthly Excess Interest Amount" for any Distribution Date is an amount
equal to any Remaining Interest Remittance Amount remaining after the
distributions set forth in clauses D(1) through D(6) of the Monthly Interest
Distribution.
With respect to any Distribution Date and any class of the Offered
Certificates, "Net Interest Shortfalls" is a pro rata portion (based on the
amount of interest to which each of those classes would have been entitled
notwithstanding those Net Interest Shortfalls) of an amount equal to the sum of:
o the aggregate amount of interest that would otherwise have been
received with respect to each Loan that was the subject of a
Relief Act Reduction during the calendar month preceding the
month of that Distribution Date, and
o any Net Prepayment Interest Shortfalls with respect to the Loans
and that Distribution Date.
With respect to any Distribution Date, a "Net Prepayment Interest
Shortfall" is the amount by which the aggregate of Prepayment Interest
Shortfalls during the calendar month preceding the month of that Distribution
Date exceeds the aggregate amount payable on that Distribution Date by the
Servicer with respect to the Loans as described under "Servicing of
Loans--Adjustment to Servicing Fee in Connection with Certain Prepaid Loans."
The "Net WAC Cap" with respect to each Distribution Date is a rate equal to
o with respect to the Class AF-1 Certificates, the weighted average
Adjusted Net Mortgage Rate of the Group I Loans as of the first
day of the Due Period relating to that Distribution Date,
weighted on the basis of the aggregate principal balance of the
Group I Loans as of the first day of the related Due Period, all
calculated on the basis of a 360-day year and the actual number
of days elapsed in the related Interest Accrual Period (the
"Adjustable Class AF Cap"),
o with respect to the Class AF-2, Class AF-3, Class AF-4, Class
AF-5 and Class AF-6 Certificates, the weighted average Adjusted
Net Mortgage Rate of the Group I Loans as of the first day of the
Due Period relating to that Distribution Date, weighted on the
basis of the aggregate principal balance of the Group I Loans as
of the first day of the related Due Period, all calculated on the
basis of a 360-day year made up of twelve 30-day months (the
"Fixed Class AF Cap"),
o with respect to the Class AV-1 Certificates, the weighted average
Adjusted Net Mortgage Rate of the Group II-A Loans as of the
first day of the Due Period relating to that Distribution Date,
weighted on the basis of the aggregate principal balance of the
Group II-A Loans as of the first day of the related Due Period,
all calculated on the basis of a 360-day year and the actual
number of days elapsed in the related Interest Accrual Period,
74
o with respect to the Class AV-2 Certificates, the weighted average
Adjusted Net Mortgage Rate of the Group II-B Loans as of the
first day of the Due Period relating to that Distribution Date,
weighted on the basis of the aggregate principal balance of the
Group II-B Loans as of the first day of the related Due Period,
all calculated on the basis of a 360-day year and the actual
number of days elapsed in the related Interest Accrual Period,
o with respect to the Class M-1, Class M-2, Class M-3 and Class M-4
Certificates, the lesser of
o the Fixed Class AF Cap, or
o the weighted average Adjusted Net Mortgage Rate of the Loans
as of the first day of the Due Period relating to that
Distribution Date, weighted on the basis of the aggregate
principal balance of the Loans as of the first day of the
related Due Period, all calculated on the basis of a 360-day
year made up of twelve 30-day months,
o with respect to the Class B-1 or Class B-2 Certificates, the
lesser of
o the Adjustable Class AF Cap, or
o the weighted average Adjusted Net Mortgage Rate of the Loans
as of the first day of the Due Period relating to that
Distribution Date, weighted on the basis of the aggregate
principal balance of the Loans as of the first day of the
related Due Period, all calculated on the basis of a 360-day
year and the actual number of days elapsed in the related
Interest Accrual Period.
The Class AF-1, Class AV-1, Class AV-2, Class B-1 and Class B-2
Certificates will also be entitled to receive any Net WAC Cap Carryover for each
Distribution Date from the Net WAC Cap Account, on a pro rata basis, to the
extent of the available funds therein. The Class AV-1 and Class AV-2
Certificates may also be entitled to receive Net WAC Cap Carryover relating to
the Class AV-1 and Class AV-2 Certificates, respectively, for each Distribution
Date from the Reserve Fund as described below under "--The Reserve Fund and the
Yield Maintenance Agreement." The "Net WAC Cap Carryover" payable to the Class
AF-1, Class AV-1, Class AV-2, Class B-1 and Class B-2 Certificates with respect
to each Distribution Date is the sum of:
o the excess, if any, of the Interest Distribution Amount for the
relevant class of Certificates for that Distribution Date,
calculated at the Formula Rate, over the actual Interest
Distribution Amount for the relevant class of Certificates for
that Distribution Date, and
o any Net WAC Cap Carryover relating to that class remaining unpaid
from the prior Distribution Date, together with interest accrued
thereon at the Formula Rate during the related Interest Accrual
Period.
The "Pass-Through Rate" for each class of the Offered Certificates is the
lesser of: (1) the lesser of (a) the rate per annum set forth or described with
respect to that class on the cover page hereof (except that with respect to any
Distribution Date after the date on which the Servicer has the option to
purchase, in whole, the Loans and the REO Property, if any, in the trust fund at
that time, as described under the caption "--Optional Termination," the rate on
the Class AF-5 Certificates will increase to 5.699% per annum, the rate on the
Class AF-6 Certificates will increase to 5.156% per annum, the rate on the Class
M-1 Certificates will increase to 5.692% per annum, the rate on the Class M-2
Certificates will increase to 6.060% per annum, the rate on the Class M-3
Certificates will increase to 6.181% per annum, the rate on the Class M-4
Certificates will increase to 6.378% per annum, the rate on the Class AV-1
Certificates will increase to One-Month LIBOR plus 0.480% and the rate on the
Class AV-2 Certificates will increase to One-Month LIBOR plus 0.500%) and (b)
14.00% (the "Formula Rate"), and (2) the applicable Net WAC Cap.
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A "Prepayment Interest Shortfall" is the amount by which interest paid by a
borrower in connection with a prepayment of principal on a Loan is less than one
month's interest at the related mortgage rate, net of the Servicing Fee Rate, on
the Stated Principal Balance of that Loan.
A "Relief Act Reduction" is a reduction in the amount of monthly interest
payment on a Loan pursuant to the Servicemembers Civil Relief Act. See "Legal
Aspects of the Loans--Servicemembers Civil Relief Act" in the prospectus.
The "Remaining Interest Remittance Amount" for any Distribution Date is an
amount equal to the sum of any Group I Interest Remittance Amount, Group II-A
Interest Remittance Amount and Group II-B Interest Remittance Amount remaining
after the distributions set forth in clauses (A), (B) and (C) of the Monthly
Interest Distribution.
The "Unpaid Interest Amount" for each class of the Offered Certificates
will be equal to the amount, if any, by which that class' Interest Distribution
Amount on each prior Distribution Date exceeded the amount actually distributed
to that class as interest on that Distribution Date and not subsequently
distributed, together with interest accrued thereon at the Pass-Through Rate.
Distribution of Principal
On each Distribution Date before the Stepdown Date or with respect to which
a Trigger Event is in effect, the Trustee will distribute payments of principal
in the order of priority and in the amounts set forth below to the extent
available ("Pre-Stepdown Monthly Principal Distribution"):
(A) from the Principal Distribution Amount for the Group I Loans:
(1) first, the Class AF-6 Lockout Distribution Amount to the Class
AF-6 Certificates, until the Class Certificate Balance thereof
has been reduced to zero; and
(2) second, sequentially, to the Class AF-1, Class AF-2, Class AF-3,
Class AF-4, Class AF-5 and Class AF-6 Certificates, in that
order, until the respective Class Certificate Balances thereof
have been reduced to zero.
(B) from the Principal Distribution Amount for the Group II-A Loans:
(1) to the Class AV-1 Certificates, until the Class Certificate
Balance thereof has been reduced to zero.
(C) from the Principal Distribution Amount for the Group II-B Loans:
(1) to the Class AV-2 Certificates, until the Class Certificate
Balance thereof has been reduced to zero.
(D) from the Pre-Stepdown Cross-collateralization Principal Distribution
Amount:
(1) concurrently, to (i) the Class AF-1, Class AF-2, Class AF-3,
Class AF-4, Class AF-5 and Class AF-6 Certificates, in the order
set forth in clause (A) above, (ii) the Class AV-1 Certificates
and (iii) the Class AV-2 Certificates, pro rata based on their
respective Class Certificate Balances outstanding after giving
effect to the distributions in clauses (A), (B) and (C) above,
until their respective Class Certificate Balances have been
reduced to zero.
(E) from the Pre-Stepdown Remaining Principal Distribution Amount:
(1) first, to the Class M-1 Certificates, until the Class Certificate
Balance thereof has been reduced to zero;
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(2) second, to the Class M-2 Certificates, until the Class
Certificate Balance thereof has been reduced to zero;
(3) third, to the Class M-3 Certificates, until the Class Certificate
Balance thereof has been reduced to zero;
(4) fourth, to the Class M-4 Certificates, until the Class
Certificate Balance thereof has been reduced to zero;
(5) fifth, to the Class B-1 Certificates, until the Class Certificate
Balance thereof has been reduced to zero;
(6) sixth, to the Class B-2 Certificates, until the Class Certificate
Balance thereof has been reduced to zero; and
(7) seventh, any amount of the Pre-Stepdown Remaining Principal
Distribution Amount remaining after making all of the
distributions in clauses (E)(1) through (E)(6) above will be
included as part of the Monthly Excess Cashflow Amount and will
be applied as described below under "--Distribution of Monthly
Excess Cashflow Amounts."
On each Distribution Date on or after the Stepdown Date and as long as a
Trigger Event is not in effect, the Trustee will distribute payments of
principal in the order of priority and in the amounts set forth below to the
extent available ("Post-Stepdown Monthly Principal Distribution"):
(A) from the Principal Distribution Amount for the Group I Loans:
(1) first, the Class AF-6 Lockout Distribution Amount to the Class
AF-6 Certificates, until the Class Certificate Balance thereof
has been reduced to zero; and
(2) second, the Class AF Principal Distribution Amount after giving
effect to the payment of the Class AF-6 Lockout Distribution
Amount, sequentially, to the Class AF-1, Class AF-2, Class AF-3,
Class AF-4, Class AF-5 and Class AF-6 Certificates, in that
order, until the respective Class Certificate Balances thereof
have been reduced to zero.
(B) from the Principal Distribution Amount for the Group II-A Loans:
(1) the Class AV-1 Principal Distribution Amount to the Class AV-1
Certificates, until the Class Certificate Balance thereof has
been reduced to zero.
(C) from the Principal Distribution Amount for the Group II-B Loans:
(1) the Class AV-2 Principal Distribution Amount to the Class AV-2
Certificates, until the Class Certificate Balance thereof has
been reduced to zero.
(D) from the Post-Stepdown Cross-collateralization Principal Distribution
Amount:
(1) concurrently, to (i) the Class AF-1, Class AF-2, Class AF-3,
Class AF-4, Class AF-5 and Class AF-6 Certificates, in the order
set forth in clause (A) above, (ii) the Class AV-1 Certificates
and (iii) the Class AV-2 Certificates, pro rata based on their
respective Class Certificate Balances outstanding after giving
effect to the distributions in clauses (A), (B) and (C) above,
until their respective Class Certificate Balances have been
reduced to zero.
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(E) from the Post-Stepdown Remaining Principal Distribution Amount:
(1) first, to the Class M-1 Certificates, the Class M-1 Principal
Distribution Amount, until the Class Certificate Balance thereof
has been reduced to zero;
(2) second, to the Class M-2 Certificates, the Class M-2 Principal
Distribution Amount, until the Class Certificate Balance thereof
has been reduced to zero;
(3) third, to the Class M-3 Certificates, the Class M-3 Principal
Distribution Amount, until the Class Certificate Balance thereof
has been reduced to zero;
(4) fourth, to the Class M-4 Certificates, the Class M-4 Principal
Distribution Amount, until the Class Certificate Balance thereof
has been reduced to zero;
(5) fifth, to the Class B-1 Certificates, the Class B-1 Principal
Distribution Amount, until the Class Certificate Balance thereof
has been reduced to zero;
(6) sixth, to the Class B-2 Certificates, the Class B-2 Principal
Distribution Amount, until the Class Certificate Balance thereof
has been reduced to zero; and
(7) seventh, any amount of the Post-Stepdown Remaining Principal
Distribution Amount remaining after making all of the
distributions in clauses (E)(1) through (E)(6) above will be
included as part of the Monthly Excess Cashflow Amount and will
be applied as described below under "--Distribution of Monthly
Excess Cashflow Amounts."
"Aggregate Class B Early Distribution Amount" means, as of any Distribution
Date, the aggregate sum of all amounts paid to the Class B-1 and Class B-2
Certificates on prior Distribution Dates pursuant to clauses (23) and (24) of
the Monthly Excess Cashflow Distribution.
"Aggregate Trust Fund Principal Balance" means, as of any date of
determination, the sum of (1) the Pool Principal Balance and (2) the amount, if
any, on deposit in the Pre-Funding Account, each as of such date of
determination.
"Allocation Percentage" means, with respect to any Distribution Date and
group of Loans, the percentage equivalent of a fraction, the numerator of which
is (1) the Principal Remittance Amount for that group of Loans for that
Distribution Date, and the denominator of which is (2) the sum of the Principal
Remittance Amounts for all groups of Loans for that Distribution Date.
"Basic Principal Distribution Amount" means, with respect to any
Distribution Date and group of Loans, the amount by which (1) the Principal
Remittance Amount for that group of Loans for that Distribution Date exceeds (2)
the product of the Overcollateralization Release Amount, if any, for that
Distribution Date and the Allocation Percentage for that group of Loans for that
Distribution Date.
The "Class Certificate Balance" of each class of Offered Certificates as of
any Distribution Date is the initial aggregate principal balance thereof reduced
by the sum of (1) all amounts previously distributed to holders of that class of
Offered Certificates as payments of principal, and (2) with respect to any class
of Subordinate Certificates, all Applied Realized Loss Amounts for that class
for previous Distribution Dates.
"Class AF Principal Distribution Amount" means, as of any Distribution Date
(1) prior to the Stepdown Date or with respect to which a Trigger Event is in
effect, the lesser of (a) the Principal Distribution Amount for the Group I
Loans and (b) the aggregate of the Class Certificate Balances of the Class AF
Certificates immediately prior to that Distribution Date and (2) on or after the
Stepdown Date and as long as a Trigger Event is not in effect, the lesser of (a)
the aggregate of the Class Certificate Balances of the Class AF Certificates
immediately prior to that Distribution Date and (b) the product of (i) the
Allocation Percentage of the Group I Loans and (ii) the Senior Principal
Distribution Amount.
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The "Class AF-6 Lockout Distribution Amount" for any Distribution Date (1)
prior to the May 2013 Distribution Date, will be the lesser of (a) the product
of (i) the applicable Class AF-6 Lockout Percentage for such Distribution Date
and (ii) the Class AF-6 Pro Rata Distribution Amount for such Distribution Date
and (b) the Class Certificate Balance of the Class AF-6 Certificates immediately
prior to that Distribution Date, and (2) on or after the May 2013 Distribution
Date, will be the Class AF Principal Distribution Amount for such Distribution
Date.
The "Class AF-6 Lockout Percentage" for each Distribution Date shall be as
follows:
Distribution Date Class AF-6 Lockout Percentage
----------------- -----------------------------
May 2004 - April 2007 0%
May 2007 - April 2009 45%
May 2009 - April 2010 80%
May 2010 - April 2011 100%
May 2011 - April 2013 300%
The "Class AF-6 Pro Rata Distribution Amount" for any Distribution Date
will be an amount equal to the product of (a) a fraction, the numerator of which
is the Class Certificate Balance of the Class AF-6 Certificates immediately
prior to such Distribution Date and the denominator of which is an amount equal
to the sum of the Class Certificate Balances of all classes of the Class AF
Certificates immediately prior to such Distribution Date and (b) the Class AF
Principal Distribution Amount for such Distribution Date.
"Class AV-1 Principal Distribution Amount" means, as of any Distribution
Date on or after the Stepdown Date and as long as a Trigger Event is not in
effect, the lesser of (1) the Class Certificate Balance of the Class AV-1
Certificates immediately prior to that Distribution Date and (2) the product of
(a) the Allocation Percentage of the Group II-A Loans and (b) the Senior
Principal Distribution Amount.
"Class AV-2 Principal Distribution Amount" means, as of any Distribution
Date on or after the Stepdown Date and as long as a Trigger Event is not in
effect, the lesser of (1) the Class Certificate Balance of the Class AV-2
Certificates immediately prior to that Distribution Date and (2) the product of
(a) the Allocation Percentage of the Group II-B Loans and (b) the Senior
Principal Distribution Amount.
"Class M-1 Principal Distribution Amount" means, as of any Distribution
Date on or after the Stepdown Date and as long as a Trigger Event is not in
effect, the excess of (1) the sum of (a) the sum of the Class Certificate
Balances of the Senior Certificates (after taking into account the payment of
the Senior Principal Distribution Amount on that Distribution Date) and (b) the
Class Certificate Balance of the Class M-1 Certificates immediately prior to
that Distribution Date over (2) the lesser of (a) the product of (i)
approximately 72.50% and (ii) the Pool Principal Balance as of the last day of
the related Due Period and (b) the Pool Principal Balance as of the last day of
the related Due Period minus the product of (i) 0.50% and (ii) the Initial
Aggregate Trust Fund Principal Balance.
"Class M-2 Principal Distribution Amount" means, as of any Distribution
Date on or after the Stepdown Date and as long as a Trigger Event is not in
effect, the excess of (1) the sum of (a) the sum of the Class Certificate
Balances of the Senior Certificates (after taking into account the payment of
the Senior Principal Distribution Amount on that Distribution Date), (b) the
Class Certificate Balance of the Class M-1 Certificates (after taking into
account the payment of the Class M-1 Principal Distribution Amount on that
Distribution Date) and (c) the Class Certificate Balance of the Class M-2
Certificates immediately prior to that Distribution Date over (2) the lesser of
(a) the product of (i) approximately 82.70% and (ii) the Pool Principal Balance
as of the last day of the related Due Period and (b) the Pool Principal Balance
as of the last day of the related Due Period minus the product of (i) 0.50% and
(ii) the Initial Aggregate Trust Fund Principal Balance.
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"Class M-3 Principal Distribution Amount" means, as of any Distribution
Date on or after the Stepdown Date and as long as a Trigger Event is not in
effect, the excess of (1) the sum of (a) the sum of the Class Certificate
Balances of the Senior Certificates (after taking into account the payment of
the Senior Principal Distribution Amount on that Distribution Date), (b) the
Class Certificate Balance of the Class M-1 Certificates (after taking into
account the payment of the Class M-1 Principal Distribution Amount on that
Distribution Date), (c) the Class Certificate Balance of the Class M-2
Certificates (after taking into account the payment of the Class M-2 Principal
Distribution Amount on that Distribution Date) and (d) the Class Certificate
Balance of the Class M-3 Certificates immediately prior to that Distribution
Date over (2) the lesser of (a) the product of (i) approximately 85.00% and (ii)
the Pool Principal Balance as of the last day of the related Due Period and (b)
the Pool Principal Balance as of the last day of the related Due Period minus
the product of (i) 0.50% and (ii) the Initial Aggregate Trust Fund Principal
Balance.
"Class M-4 Principal Distribution Amount" means, as of any Distribution
Date on or after the Stepdown Date and as long as a Trigger Event is not in
effect, the excess of (1) the sum of (a) the sum of the Class Certificate
Balances of the Senior Certificates (after taking into account the payment of
the Senior Principal Distribution Amount on that Distribution Date), (b) the
Class Certificate Balance of the Class M-1 Certificates (after taking into
account the payment of the Class M-1 Principal Distribution Amount on that
Distribution Date), (c) the Class Certificate Balance of the Class M-2
Certificates (after taking into account the payment of the Class M-2 Principal
Distribution Amount on that Distribution Date), (d) the Class Certificate
Balance of the Class M-3 Certificates (after taking into account the payment of
the Class M-3 Principal Distribution Amount on that Distribution Date) and (e)
the Class Certificate Balance of the Class M-4 Certificates immediately prior to
that Distribution Date over (2) the lesser of (a) the product of (i)
approximately 87.10% and (ii) the Pool Principal Balance as of the last day of
the related Due Period and (b) the Pool Principal Balance as of the last day of
the related Due Period minus the product of (i) 0.50% and (ii) the Initial
Aggregate Trust Fund Principal Balance.
"Class B-1 Principal Distribution Amount" means, as of any Distribution
Date on or after the Stepdown Date and as long as a Trigger Event is not in
effect, the excess of (1) the sum of (a) the sum of the Class Certificate
Balances of the Senior Certificates (after taking into account the payment of
the Senior Principal Distribution Amount on that Distribution Date), (b) the
Class Certificate Balance of the Class M-1 Certificates (after taking into
account the payment of the Class M-1 Principal Distribution Amount on that
Distribution Date), (c) the Class Certificate Balance of the Class M-2
Certificates (after taking into account the payment of the Class M-2 Principal
Distribution Amount on that Distribution Date), (d) the Class Certificate
Balance of the Class M-3 Certificates (after taking into account the payment of
the Class M-3 Principal Distribution Amount on that Distribution Date), (e) the
Class Certificate Balance of the Class M-4 Certificates (after taking into
account the payment of the Class M-4 Principal Distribution Amount on that
Distribution Date) and (f) the Class Certificate Balance of the Class B-1
Certificates immediately prior to that Distribution Date over (2) the lesser of
(a) the product of (i) approximately 89.20% and (ii) the Pool Principal Balance
as of the last day of the related Due Period and (b) the Pool Principal Balance
as of the last day of the related Due Period minus the product of (i) 0.50% and
(ii) the Initial Aggregate Trust Fund Principal Balance.
"Class B-2 Principal Distribution Amount" means, as of any Distribution
Date on or after the Stepdown Date and as long as a Trigger Event is not in
effect, the excess of (1) the sum of (a) the sum of the Class Certificate
Balances of the Senior Certificates (after taking into account the payment of
the Senior Principal Distribution Amount on that Distribution Date), (b) the
Class Certificate Balance of the Class M-1 Certificates (after taking into
account the payment of the Class M-1 Principal Distribution Amount on that
Distribution Date), (c) the Class Certificate Balance of the Class M-2
Certificates (after taking into account the payment of the Class M-2 Principal
Distribution Amount on that Distribution Date), (d) the Class Certificate
Balance of the Class M-3 Certificates (after taking into account the payment of
the Class M-3 Principal Distribution Amount on that Distribution Date), (e) the
Class Certificate Balance of the Class M-4 Certificates (after taking into
account the payment of the Class M-4 Principal Distribution Amount on that
Distribution Date), (f) the Class Certificate Balance of the Class B-1
Certificates (after taking into account the payment of the Class B-1 Principal
Distribution Amount on that Distribution Date) and (g) the Class Certificate
Balance of the Class B-2 Certificates immediately prior to that Distribution
Date over (2) the lesser of (a) the product of (i) approximately 91.30% and (ii)
the Pool Principal Balance as of the last day of the related Due Period and (b)
the Pool Principal Balance as of the last day of the related Due Period minus
the product of (i) 0.50% and (ii) the Initial Aggregate Trust Fund Principal
Balance.
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"Due Period" means, with respect to any Distribution Date, the calendar
month preceding the month of that Distribution Date.
"Extra Principal Distribution Amount" means, as of any Distribution Date,
the lesser of (1) the Monthly Excess Interest Amount for that Distribution Date
and (2) the Overcollateralization Deficiency for that Distribution Date.
"Initial Aggregate Trust Fund Principal Balance" means the sum of (1) the
Initial Cut-off Date Pool Principal Balance and (2) the amount on deposit in the
Pre-Funding Account on the Closing Date.
"Overcollateralization Amount" means, as of any Distribution Date, (1) the
Aggregate Trust Fund Principal Balance as of the last day of the immediately
preceding Due Period, minus (2) the aggregate Class Certificate Balance of all
classes of Offered Certificates (after taking into account all distributions of
principal on that Distribution Date).
"Overcollateralization Deficiency" means, as of any Distribution Date, the
excess, if any, of (1) the Targeted Overcollateralization Amount for that
Distribution Date over (2) the Overcollateralization Amount for that
Distribution Date, calculated for this purpose after taking into account the
reduction on that Distribution Date of the Class Certificate Balances of all
classes of Offered Certificates resulting from the distribution of the related
Basic Principal Distribution Amount on that Distribution Date, but prior to
taking into account any Applied Realized Loss Amounts on that Distribution Date.
"Overcollateralization Release Amount" means, with respect to any
Distribution Date on or after the Stepdown Date on which a Trigger Event is not
in effect, the lesser of (1) the Principal Remittance Amount for that
Distribution Date and (2) the excess, if any, of (a) the Overcollateralization
Amount for that Distribution Date, assuming that 100% of the Principal
Remittance Amount is applied as a principal payment on the Certificates on that
Distribution Date, over (b) the Targeted Overcollateralization Amount for that
Distribution Date. With respect to any Distribution Date on which a Trigger
Event is in effect, the Overcollateralization Release Amount will be zero.
"Post-Stepdown Cross-collateralization Principal Distribution Amount" for
any Distribution Date is an amount equal to the sum of the Principal
Distribution Amounts for all groups of Loans remaining after the distributions
set forth in clauses (A), (B) and (C) of the Post-Stepdown Monthly Principal
Distribution (capped at a maximum amount equal to the Senior Principal
Distribution Amount remaining after the distributions set forth in clauses (A),
(B) and (C) of the Post-Stepdown Monthly Principal Distribution).
"Post-Stepdown Remaining Principal Distribution Amount" for any
Distribution Date is an amount equal to the sum of the Principal Distribution
Amounts for all groups of Loans remaining after the distributions set forth in
clauses (A), (B), (C) and (D) of the Post-Stepdown Monthly Principal
Distribution.
"Pre-Stepdown Cross-collateralization Principal Distribution Amount" for
any Distribution Date is an amount equal to the sum of the Principal
Distribution Amounts for all groups of Loans remaining after the distributions
set forth in clauses (A), (B) and (C) of the Pre-Stepdown Monthly Principal
Distribution.
"Pre-Stepdown Remaining Principal Distribution Amount" for any Distribution
Date is an amount equal to the sum of the Principal Distribution Amounts for all
groups of Loans remaining after the distributions set forth in clauses (A), (B),
(C) and (D) of the Pre-Stepdown Monthly Principal Distribution.
"Principal Distribution Amount" means, with respect to any Distribution
Date and group of Loans, the sum of (1) the Basic Principal Distribution Amount
for that group of Loans for that Distribution Date and (2) the product of the
Extra Principal Distribution Amount for that Distribution Date and the
Allocation Percentage for that group of Loans for that Distribution Date.
"Principal Remittance Amount" means, with respect to any Distribution Date
and any group of Loans, to the extent of funds available therefor as described
herein, the amount equal to the sum (less certain amounts available for
reimbursement of Advances and certain other reimbursable expenses pursuant to
the Pooling and
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Servicing Agreement) of the following amounts (without duplication): (1) each
payment of principal on a Loan in that group due during the related Due Period
and received by the Servicer on or prior to the related Determination Date,
including any Advances with respect thereto, (2) all full and partial principal
prepayments on Loans in that group received by the Servicer during the related
Prepayment Period, (3) the Liquidation Proceeds allocable to principal of Loans
in that group received during the related Due Period, (4) the Stated Principal
Balance of each Loan in that group that was sold by the Servicer or repurchased
by a Seller or the Servicer pursuant to the Pooling and Servicing Agreement as
of that Distribution Date, (5) any Substitution Adjustment Amounts in connection
with any Deleted Loans in that group received with respect to that Distribution
Date, (6) on the Distribution Date on which the trust fund is to be terminated
in accordance with the Pooling and Servicing Agreement, that portion of the
Termination Price allocable to principal of Loans in that group and (7) on the
Distribution Date immediately following the end of the Funding Period, any
amounts remaining in the Pre-Funding Account after the end of the Funding Period
(net of any investment income thereon).
"Remaining Principal Distribution Amount" means, as of any Distribution
Date, the sum of (a) the Pre-Stepdown Remaining Principal Distribution Amount
remaining after making all of the distributions in clauses (E)(1) through (E)(6)
of the Pre-Stepdown Monthly Principal Distribution and (b) the Post-Stepdown
Remaining Principal Distribution Amount remaining after making all of the
distributions in clauses (E)(1) through (E)(6) of the Post-Stepdown Monthly
Principal Distribution, each for that Distribution Date.
"Senior Enhancement Percentage" for any Distribution Date is the percentage
obtained by dividing (1) the sum of (a) the aggregate Class Certificate Balance
of the Subordinate Certificates and (b) the Overcollateralization Amount, in
each case before taking into account the distribution of the Principal
Distribution Amounts on that Distribution Date by (2) the Aggregate Trust Fund
Principal Balance as of the last day of the related Due Period.
"Senior Principal Distribution Amount" means, as of any Distribution Date
on or after the Stepdown Date and as long as a Trigger Event is not in effect,
the excess of (1) the sum of the Class Certificate Balances of the Senior
Certificates immediately prior to that Distribution Date over (2) the lesser of
(a) the product of (i) approximately 55.70% and (ii) the Pool Principal Balance
as of the last day of the related Due Period and (b) the Pool Principal Balance
as of the last day of the related Due Period minus the product of (i) 0.50% and
(ii) the Initial Aggregate Trust Fund Principal Balance.
"Senior Specified Enhancement Percentage" on any date of determination
thereof means approximately 44.30%.
"60+ Day Delinquent Loan" means each Loan with respect to which any portion
of a Scheduled Payment is, as of the last day of the prior Due Period, sixty
days or more contractually past due (assuming 30 day months), each Loan in
foreclosure, all REO Property and each Loan with respect to which the mortgagor
has filed for bankruptcy after the Closing Date.
"Stepdown Date" means the earlier of (1) the Distribution Date on which the
Class Certificate Balances of the Senior Certificates have been reduced to zero
or (2) the later to occur of (a) the Distribution Date in May 2007 (the 37th
Distribution Date) or (b) the first Distribution Date on which the Senior
Enhancement Percentage is greater than or equal to the Senior Specified
Enhancement Percentage.
"Targeted Overcollateralization Amount" means as of any Distribution Date,
(1) prior to the Stepdown Date, the sum of (a) approximately 4.35% of the
Initial Aggregate Trust Fund Principal Balance and (b) the Aggregate Class B
Early Distribution Amount, and (2) on and after the Stepdown Date, the lesser of
(a) the sum of (i) approximately 4.35% of the Initial Aggregate Trust Fund
Principal Balance and (ii) the Aggregate Class B Early Distribution Amount and
(b) the greater of (i) the excess of (x) approximately 12.90% of the Pool
Principal Balance as of the last day of the related Due Period over (y) the
excess of (I) the sum of the Class Certificate Balances of the Class B-1 and
Class B-2 Certificates as of the Closing Date over (II) the aggregate of
distributions made in respect of principal to the Class B-1 and Class B-2
Certificates on all prior Distribution Dates and (ii) 0.50% of the Initial
Aggregate Trust Fund Principal Balance. With respect to any Distribution Date on
which a Trigger Event is in effect, the Targeted Overcollateralization Amount
will be equal to the Targeted Overcollateralization Amount for the immediately
preceding Distribution Date.
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A "Trigger Event" is in effect on a Distribution Date if (1) the six-month
rolling average of 60+ Day Delinquent Loans equals or exceeds 37.25% of the
Senior Enhancement Percentage or (2) the aggregate amount of Realized Losses
incurred since the Initial Cut-off Date through the last day of the related Due
Period divided by the Initial Aggregate Trust Fund Principal Balance exceeds the
applicable percentages set forth below with respect to that Distribution Date:
- --------------------------------- -------------------------------------------
Distribution Date Occurring In Percentage
- --------------------------------- -------------------------------------------
May 2007 - April 2008 3.25% (or 3.50% if the Class Certificate
Balance of the Class B-2 Certificates has
been reduced to zero and no part of that
reduction was due to the application of
Realized Loss Amounts) for the first month
plus an additional 1/12th of 2.00% (or
1/12th of 1.75% if the Class Certificate
Balance of the Class B-2 Certificates has
been reduced to zero and no part of that
reduction was due to the application of
Realized Loss Amounts) for each month
thereafter
- --------------------------------- -------------------------------------------
May 2008 - April 2009 5.25% for the first month plus an additional
1/12th of 1.25% for each month thereafter
- --------------------------------- -------------------------------------------
May 2009 - April 2010 6.50% for the first month plus an additional
1/12th of 0.75% for each month thereafter
- --------------------------------- -------------------------------------------
May 2010 - April 2011 7.25% for the first month plus an additional
1/12th of 0.50% for each month thereafter
- --------------------------------- -------------------------------------------
May 2011 and thereafter 7.75%
- --------------------------------- -------------------------------------------
Allocation of Losses
A "Realized Loss" is:
o as to any Liquidated Loan, the outstanding principal balance
thereof (determined immediately before that Loan became a
Liquidated Loan), less the Liquidation Proceeds allocable to
principal received in connection with the liquidation of that
Loan, which have not theretofore been used to reduce the Stated
Principal Balance of that Loan; and
o as to any Loan, a Deficient Valuation.
"Liquidated Loan" means, with respect to any Distribution Date, a defaulted
Loan, including any REO Property, which was liquidated in the calendar month
preceding the month of that Distribution Date and as to which the Servicer has
determined, in accordance with the Pooling and Servicing Agreement, that it has
received all amounts it expects to receive in connection with the liquidation of
that Loan, including the final disposition of an REO Property.
A Realized Loss may result from the personal bankruptcy of a mortgagor if
the bankruptcy court establishes the value of the mortgaged property at an
amount less than the then outstanding Stated Principal Balance of the Loan
secured by the mortgaged property and reduces the secured debt to that value. In
this case, the trust fund, as the holder of that Loan, would become an unsecured
creditor to the extent of the difference between the outstanding Principal
Balance of the mortgage loan and the reduced secured debt (a "Deficient
Valuation").
Realized Losses will, in effect, be absorbed first by the Class X
Certificates (through the application of the Monthly Excess Interest Amount and,
if necessary, through a reduction in the Overcollateralization Amount).
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If, after giving effect to the distribution of the Principal Distribution
Amount on any Distribution Date the aggregate Class Certificate Balance of the
Offered Certificates exceeds the Aggregate Trust Fund Principal Balance as of
the end of the related Due Period, the excess (the "Realized Loss Amount") will
be allocated against the Class B-2, Class B-1, Class M-4, Class M-3, Class M-2
and Class M-1 Certificates, in that order, until the respective Class
Certificate Balances thereof are reduced to zero. Any application of the
Realized Loss Amount in reduction of a Class of Subordinate Certificate's Class
Certificate Balance will not be reversed or reinstated. However, on future
Distribution Dates, holders of Subordinate Certificates may receive amounts in
respect of prior reductions in the Class Certificate Balances of their
Certificates as described below. These subsequent payments will be applied in
the reverse of the order set forth above.
Distribution of Monthly Excess Cashflow Amounts
The weighted average Adjusted Net Mortgage Rate for the Loans is generally
expected to be higher than the weighted average of the Pass-Through Rates on the
Offered Certificates, thus generating certain excess interest collections which,
in the absence of losses, will not be necessary to fund interest distributions
on the Certificates.
If Realized Losses that are not covered by an application of the Monthly
Excess Interest Amount occur, these Realized Losses will result in an
Overcollateralization Deficiency (because the Realized Losses will reduce the
Pool Principal Balance without giving rise to a corresponding reduction of the
aggregate Class Certificate Balance of the Certificates). The cashflow
priorities of the trust fund require that, in this situation, an Extra Principal
Distribution Amount be paid (subject to the availability of any Monthly Excess
Cashflow Amount in subsequent months) for the purpose of re-establishing the
Overcollateralization Amount at the then required Targeted Overcollateralization
Amount.
On and after the Stepdown Date and assuming that a Trigger Event is not in
effect, the Targeted Overcollateralization Amount may be permitted to decrease
or "step-down." If the Targeted Overcollateralization Amount is permitted to
"step-down" on a Distribution Date, the Pooling and Servicing Agreement permits
a portion of the Principal Remittance Amount for that Distribution Date not to
be passed through as a distribution of principal on the Offered Certificates on
that Distribution Date. This has the effect of decelerating the amortization of
the Certificates relative to the Pool Principal Balance, thereby reducing the
actual level of the Overcollateralization Amount. This portion of the Principal
Remittance Amount not distributed as principal on the Certificates therefore
"releases" overcollateralization from the trust fund. The amounts of these
releases are the "Overcollateralization Release Amounts."
On any Distribution Date, the sum of the Monthly Excess Interest Amount,
the Overcollateralization Release Amount and the Remaining Principal
Distribution Amount is the "Monthly Excess Cashflow Amount."
On each Distribution Date the Trustee will distribute the Monthly Excess
Cashflow Amount in the order of priority and in the amounts set forth below (the
"Monthly Excess Cashflow Distribution"):
(1) first, concurrently, to the Class AF-1, Class AF-2, Class AF-3,
Class AF-4, Class AF-5, Class AF-6, Class AV-1 and Class AV-2
Certificates, pro rata, any remaining applicable Interest
Distribution Amount for that Distribution Date;
(2) second, concurrently, to the Class AF-1, Class AF-2, Class AF-3,
Class AF-4, Class AF-5, Class AF-6, Class AV-1 and Class AV-2
Certificates, pro rata, any remaining Unpaid Interest Amounts for
the classes of Senior Certificates;
(3) third, to fund the Extra Principal Distribution Amount for that
Distribution Date;
(4) fourth, to the Class M-1 Certificates, any remaining Interest
Distribution Amount for that Distribution Date;
(5) fifth, to the Class M-1 Certificates, any remaining Unpaid
Interest Amount for the Class M-1 Certificates;
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(6) sixth, to fund the Class M-1 Realized Loss Amortization Amount
for that Distribution Date;
(7) seventh, to the Class M-2 Certificates, any remaining Interest
Distribution Amount for that Distribution Date;
(8) eighth, to the Class M-2 Certificates, any remaining Unpaid
Interest Amount for the Class M-2 Certificates;
(9) ninth, to fund the Class M-2 Realized Loss Amortization Amount
for that Distribution Date;
(10) tenth, to the Class M-3 Certificates, any remaining Interest
Distribution Amount for that Distribution Date;
(11) eleventh, to the Class M-3 Certificates, any remaining Unpaid
Interest Amount for the Class M-3 Certificates;
(12) twelfth, to fund the Class M-3 Realized Loss Amortization Amount
for that Distribution Date;
(13) thirteenth, to the Class M-4 Certificates, any remaining Interest
Distribution Amount for that Distribution Date;
(14) fourteenth, to the Class M-4 Certificates, any remaining Unpaid
Interest Amount for the Class M-4 Certificates;
(15) fifteenth, to fund the Class M-4 Realized Loss Amortization
Amount for that Distribution Date;
(16) sixteenth, to the Class B-1 Certificates, any remaining Interest
Distribution Amount for that Distribution Date;
(17) seventeenth, to the Class B-1 Certificates, any remaining Unpaid
Interest Amount for the Class B-1 Certificates;
(18) eighteenth, to fund the Class B-1 Realized Loss Amortization
Amount for that Distribution Date;
(19) nineteenth, to the Class B-2 Certificates, any remaining Interest
Distribution Amount for that Distribution Date;
(20) twentieth, to the Class B-2 Certificates, any remaining Unpaid
Interest Amount for the Class B-2 Certificates;
(21) twenty-first, to fund the Class B-2 Realized Loss Amortization
Amount for that Distribution Date;
(22) twenty-second, for deposit into the Net WAC Cap Account, the
amount equal to (a) the Net WAC Cap Carryover for that
Distribution Date (the amount so deposited as limited by
available funds), plus (b) the amount, if any, sufficient to
increase the aggregate amount on deposit in the Net WAC Cap
Account to $10,000 after giving effect to any payments of Net WAC
Cap Carryover to the Class AF-1, Class AV-1, Class AV-2, Class
B-1 and Class B-2 Certificates on that Distribution Date;
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(23) twenty-third, to the Class B-2 Certificates as principal, any
remaining amounts, until the Class Certificate Balance thereof
has been reduced to zero;
(24) twenty-fourth, to the Class B-1 Certificates as principal, any
remaining amounts, until the Class Certificate Balance thereof
has been reduced to zero; and
(25) twenty-fifth, to the Class X and Class R Certificates, the
amounts specified in the Pooling and Servicing Agreement.
For purposes of the foregoing, the following terms will have the respective
meanings set forth below.
"Applied Realized Loss Amount" means the Class B-2 Applied Realized Loss
Amount, the Class B-1 Applied Realized Loss Amount, the Class M-4 Applied
Realized Loss Amount, the Class M-3 Applied Realized Loss Amount, the Class M-2
Applied Realized Loss Amount and the Class M-1 Applied Realized Loss Amount, as
applicable.
"Class B-1 Applied Realized Loss Amount" means, as to the Class B-1
Certificates and as of any Distribution Date, the lesser of (1) the Class
Certificate Balance thereof (after taking into account the distribution of all
Principal Distribution Amounts on that Distribution Date, but prior to the
application of the Class B-1 Applied Realized Loss Amount, if any, on that
Distribution Date) and (2) the excess of (a) the Realized Loss Amount as of that
Distribution Date over (b) the Class B-2 Applied Realized Loss Amount as of that
Distribution Date.
"Class B-1 Realized Loss Amortization Amount" means, as to the Class B-1
Certificates and as of any Distribution Date, the lesser of (1) the Unpaid
Realized Loss Amount for the Class B-1 Certificates as of that Distribution Date
and (2) the excess of (a) the Monthly Excess Cashflow Amount over (b) the sum of
the amounts described in clauses (1) through (17) of the Monthly Excess Cashflow
Distribution for that Distribution Date.
"Class B-2 Applied Realized Loss Amount" means, as to the Class B-2
Certificates and as of any Distribution Date, the lesser of (1) the Class
Certificate Balance thereof (after taking into account the distribution of all
Principal Distribution Amounts on that Distribution Date, but prior to the
application of the Class B-2 Applied Realized Loss Amount, if any, on that
Distribution Date) and (2) the Realized Loss Amount as of that Distribution
Date.
"Class B-2 Realized Loss Amortization Amount" means, as to the Class B-2
Certificates and as of any Distribution Date, the lesser of (1) the Unpaid
Realized Loss Amount for the Class B-2 Certificates as of that Distribution Date
and (2) the excess of (a) the Monthly Excess Cashflow Amount over (b) the sum of
the amounts described in clauses (1) through (20) of the Monthly Excess Cashflow
Distribution for that Distribution Date.
"Class M-1 Applied Realized Loss Amount" means, as to the Class M-1
Certificates and as of any Distribution Date, the lesser of (1) the Class
Certificate Balance thereof (after taking into account the distribution of all
Principal Distribution Amounts on that Distribution Date, but prior to the
application of the Class M-1 Applied Realized Loss Amount, if any, on that
Distribution Date) and (2) the excess of (a) the Realized Loss Amount as of that
Distribution Date over (b) the sum of the Class M-2 Applied Realized Loss
Amount, the Class M-3 Applied Realized Loss Amount, the Class M-4 Applied
Realized Loss Amount, the Class B-1 Applied Realized Loss Amount and the Class
B-2 Applied Realized Loss Amount, in each case as of that Distribution Date.
"Class M-1 Realized Loss Amortization Amount" means, as to the Class M-1
Certificates and as of any Distribution Date, the lesser of (1) the Unpaid
Realized Loss Amount for the Class M-1 Certificates as of that Distribution Date
and (2) the excess of (a) the Monthly Excess Cashflow Amount over (b) the sum of
the amounts described in clauses (1) through (5) of the Monthly Excess Cashflow
Distribution for that Distribution Date.
"Class M-2 Applied Realized Loss Amount" means, as to the Class M-2
Certificates and as of any Distribution Date, the lesser of (1) the Class
Certificate Balance thereof (after taking into account the distribution of all
Principal Distribution Amounts on that Distribution Date, but prior to the
application of the Class M-2 Applied Realized Loss Amount, if any, on that
Distribution Date) and (2) the excess of (a) the Realized Loss Amount as of that
Distribution Date over (b) the sum of the Class M-3 Applied Realized Loss
Amount, the Class M-4 Applied
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Realized Loss Amount, the Class B-1 Applied Realized Loss Amount and the Class
B-2 Applied Realized Loss Amount, in each case as of that Distribution Date.
"Class M-2 Realized Loss Amortization Amount" means, as to the Class M-2
Certificates and as of any Distribution Date, the lesser of (1) the Unpaid
Realized Loss Amount for the Class M-2 Certificates as of that Distribution Date
and (2) the excess of (a) the Monthly Excess Cashflow Amount over (b) the sum of
the amounts described in clauses (1) through (8) of the Monthly Excess Cashflow
Distribution for that Distribution Date.
"Class M-3 Applied Realized Loss Amount" means, as to the Class M-3
Certificates and as of any Distribution Date, the lesser of (1) the Class
Certificate Balance thereof (after taking into account the distribution of all
Principal Distribution Amounts on that Distribution Date, but prior to the
application of the Class M-3 Applied Realized Loss Amount, if any, on that
Distribution Date) and (2) the excess of (a) the Realized Loss Amount as of that
Distribution Date over (b) the sum of the Class M-4 Applied Realized Loss
Amount, the Class B-1 Applied Realized Loss Amount and the Class B-2 Applied
Realized Loss Amount, in each case as of that Distribution Date.
"Class M-3 Realized Loss Amortization Amount" means, as to the Class M-3
Certificates and as of any Distribution Date, the lesser of (1) the Unpaid
Realized Loss Amount for the Class M-3 Certificates as of that Distribution Date
and (2) the excess of (a) the Monthly Excess Cashflow Amount over (b) the sum of
the amounts described in clauses (1) through (11) of the Monthly Excess Cashflow
Distribution for that Distribution Date.
"Class M-4 Applied Realized Loss Amount" means, as to the Class M-4
Certificates and as of any Distribution Date, the lesser of (1) the Class
Certificate Balance thereof (after taking into account the distribution of all
Principal Distribution Amounts on that Distribution Date, but prior to the
application of the Class M-4 Applied Realized Loss Amount, if any, on that
Distribution Date) and (2) the excess of (a) the Realized Loss Amount as of that
Distribution Date over (b) the sum of the Class B-1 Applied Realized Loss Amount
and the Class B-2 Applied Realized Loss Amount, in each case as of that
Distribution Date.
"Class M-4 Realized Loss Amortization Amount" means, as to the Class M-4
Certificates and as of any Distribution Date, the lesser of (1) the Unpaid
Realized Loss Amount for the Class M-4 Certificates as of that Distribution Date
and (2) the excess of (a) the Monthly Excess Cashflow Amount over (b) the sum of
the amounts described in clauses (1) through (14) of the Monthly Excess Cashflow
Distribution for that Distribution Date.
"Realized Loss Amortization Amount" means the Class M-1 Realized Loss
Amortization Amount, the Class M-2 Realized Loss Amortization Amount, the Class
M-3 Realized Loss Amortization Amount, the Class M-4 Realized Loss Amortization
Amount, the Class B-1 Realized Loss Amortization Amount or the Class B-2
Realized Loss Amortization Amount, as applicable.
"Unpaid Realized Loss Amount" means for any class of Subordinate
Certificates and as to any Distribution Date, the excess of (1) the cumulative
amount of Applied Realized Loss Amounts with respect to that class for all prior
Distribution Dates over (2) the cumulative amount of Realized Loss Amortization
Amounts with respect to that class for all prior Distribution Dates.
Determination of One-Month LIBOR
On each LIBOR Determination Date, the Trustee will determine One-Month
LIBOR for the next Interest Accrual Period for the Class AF-1, Class AV-1, Class
AV-2, Class B-1 and Class B-2 Certificates.
"One-Month LIBOR" means, as of any LIBOR Determination Date, the London
interbank offered rate for one-month United States dollar deposits which appears
in Telerate Page 3750 as of 11:00 a.m., London time, on that date. If the rate
does not appear on Telerate Page 3750, the rate for that day will be determined
on the basis of the rates at which deposits in United States dollars are offered
by the Reference Banks at approximately 11:00 a.m. (London time), on that day to
prime banks in the London interbank market. The Trustee will request the
principal London office of each of the Reference Banks to provide a quotation of
its rate. If at least two quotations are provided, the rate for that day will be
the arithmetic mean of the quotations (rounded upwards if necessary to the
nearest whole multiple of 1/16%). If fewer than two quotations are provided as
requested, the rate for that day will be the arithmetic mean of the rates quoted
by major banks in New York City, selected by the Trustee in consultation
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with the Servicer, at approximately 11:00 a.m. (New York City time) on that day
for loans in United States dollars to leading European banks.
"LIBOR Determination Date" means, with respect to any Interest Accrual
Period for the Class AF-1, Class AV-1, Class AV-2, Class B-1 and Class B-2
Certificates, the second London business day preceding the commencement of that
Interest Accrual Period. For purposes of determining One-Month LIBOR, a "London
business day" is any day on which dealings in deposits of United States dollars
are transacted in the London interbank market.
"Reference Banks" means only three major banks that are engaged in
transactions in Eurodollar deposits in the international Eurocurrency market
selected by the Trustee after consultation with the Servicer.
"Telerate Page 3750" means the display page currently so designated on the
Moneyline Telerate Service (or such other page as may replace that page on that
service for the purpose of displaying comparable rates or prices).
Net WAC Cap Account
The Pooling and Servicing Agreement provides for a reserve fund (the "Net
WAC Cap Account") which will be established with an initial deposit of $10,000
on the Closing Date and held by the Trustee for the benefit of the holders of
the Class AF-1, Class AV-1, Class AV-2, Class B-1 and Class B-2 Certificates. To
the extent of amounts on deposit therein, on each Distribution Date after the
Trustee has made all of the distributions and deposits described above under
"--Distribution of Interest," "--Distribution of Principal," and "--Distribution
of Monthly Excess Cashflow Amounts," holders of the Class AF-1, Class AV-1,
Class AV-2, Class B-1 and Class B-2 Certificates will be entitled to receive
payments from the Net WAC Cap Account equal to any Net WAC Cap Carryover
applicable to those classes, which payments will be made to those classes on a
pro rata basis. The amount required to be deposited in the Net WAC Cap Account
on each Distribution Date will equal any Net WAC Cap Carryover relating to the
Class AF-1, Class AV-1, Class AV-2, Class B-1 and Class B-2 Certificates for
that Distribution Date plus the amount, if any, sufficient to increase the
amount on deposit in the Net WAC Cap Account (after giving effect to any
payments to be made to the holders of the Class AF-1, Class AV-1, Class AV-2,
Class B-1 and Class B-2 Certificates from that account on that date) to $10,000,
to the extent of funds available after giving effect to any required payments of
the Monthly Excess Cashflow Amount. Any investment earnings on amounts on
deposit in the Net WAC Cap Account will be paid to (and for the benefit of) the
holders of the Class X Certificates and will not be available to pay any Net WAC
Cap Carryover. The Net WAC Cap Account will not be included as an asset of any
REMIC.
The Reserve Fund and the Yield Maintenance Agreement
On the Closing Date, the Trustee will establish a reserve fund account (the
"Reserve Fund") to cover certain payments on the Class AV-1 and Class AV-2
Certificates. The Reserve Fund will be an asset of the trust fund but not of any
REMIC. Amounts on deposit in the Reserve Fund will be invested in Permitted
Investments. In addition, on the Closing Date, a yield maintenance agreement
(the "Yield Maintenance Agreement") will be entered into by Wachovia Bank,
National Association and the Trustee. Pursuant to the Yield Maintenance
Agreement, on each Distribution Date, an amount will be deposited in the Reserve
Fund in respect of each of the Class AV-1 and Class AV-2 Certificates equal to
the Reserve Fund Addition (as defined below) for such class.
On each Distribution Date, after the Trustee has made all of the
distributions and deposits described above under "--Distribution of Interest,"
"--Distribution of Principal," "--Distribution of Monthly Excess Cashflow
Amounts," and "--Net WAC Cap Account," the Trustee will withdraw all funds
available in the Reserve Fund to make the following payments in the following
order of priority:
(A) first, to pay to each of the Class AV-1 and Class AV-2 Certificates,
to the extent of amounts available with respect to that class, the
Interest Distribution Amounts payable to the Class AV-1 and Class AV-2
Certificates, respectively, to the extent not covered by Available
Funds;
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(B) second, to pay to each of the Class AV-1 and Class AV-2 Certificates,
to the extent of amounts available with respect to that class, the
Basic Principal Distribution Amounts payable to the Class AV-1 and
Class AV-2 Certificates, respectively, to the extent not covered by
Available Funds;
(C) third, to pay to the Class AV-1 and Class AV-2 Certificates, to the
extent of amounts available with respect to that class, any remaining
Net WAC Cap Carryover relating to the Class AV-1 and Class AV-2
Certificates, respectively, to the extent not paid out of the Net WAC
Cap Account on that Distribution Date; and
(D) fourth, to the holders of the Class X Certificates, all remaining
amounts.
With respect to any Distribution Date, the "Reserve Fund Addition" for a
class will equal a monthly payment calculated at a per annum rate equal to the
excess, if any, of (1) One-Month LIBOR (determined as described above under
"--Determination of One-Month LIBOR") over (2) the Strike Price, on an amount
equal to the Projected Principal Balance for that class for that Distribution
Date, accrued during the related Interest Accrual Period. The "Strike Price" for
each of the Class AV-1 and Class AV-2 Certificates and each "Projected Principal
Balance" will be determined pursuant to the schedule attached to this prospectus
supplement as Annex II.
The Projected Principal Balances set forth in Annex II to this prospectus
supplement with respect to the Class AV-1 and Class AV-2 Certificates are based
on a prepayment assumption with respect to the Group II Loans. There can be no
assurance that the Group II Loans will pay at these rates or at any other rates.
See "Yield, Prepayment and Maturity Considerations" herein.
The Yield Maintenance Agreement Counterparty
The counterparty to the Yield Maintenance Agreement will be Wachovia Bank,
National Association, a national banking association (the "Bank"), a subsidiary
of Wachovia Corporation, whose principal office is located in Charlotte, North
Carolina. Wachovia Corporation is the fifth largest bank holding company in the
United States based on approximately $401 billion in total assets as of December
31, 2003.
The Bank is a national banking association with its principal office in
Charlotte, North Carolina and is subject to examination and primary regulation
by the Office of the Comptroller of the Currency of the United States. The Bank
is a commercial bank offering a wide range of banking, trust and other services
to its customers. As of December 31, 2003, the Bank had total assets of
approximately $354 billion, total net loans of approximately $174 billion, total
deposits of approximately $226 billion and stockholder's equity of approximately
$30 billion.
The Bank submits quarterly to the Federal Deposit Insurance Corporation
(the "FDIC") certain reports called "Consolidated Reports of Condition and
Income for a Bank With Domestic and Foreign Offices" (each, a "Call Report", and
collectively, the "Call Reports"). The publicly available portions of the Call
Reports with respect to the Bank are on file with the FDIC, and copies of such
portions of the Call Reports may be obtained from the FDIC, Public Information
Center, 801 17th Street, N.W., Room 100, Washington, D.C. 20434, (877) 275-3344,
at prescribed rates. In addition, such portions of the Call Reports are
available to the public free of charge at the FDIC's web site at
http://www.fdic.gov.
In 1989, the United States Congress passed comprehensive financial
institutions legislation known as the Financial Institutions Reform, Recovery
and Enforcement Act ("FIRREA"). Pursuant to the provisions of FIRREA, an
FDIC-insured financial institution sharing common ownership with a failed
institution can be required to indemnify the FDIC for its losses resulting from
the insolvency of the failed institution, even if such indemnification causes
the affiliated institution also to become insolvent. As a result, the Bank, may
under certain circumstances, be obligated for the liabilities of the banking
subsidiaries of Wachovia Corporation.
NO BANKING OR OTHER AFFILIATE CONTROLLED BY WACHOVIA CORPORATION, EXCEPT
THE BANK, IS OBLIGATED TO MAKE PAYMENTS UNDER THE YIELD MAINTENANCE AGREEMENT.
The information contained in this section relates to and has been obtained
from the Bank and is furnished solely to provide limited introductory
information regarding the Bank and does not purport to be comprehensive.
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Information regarding the Bank is qualified in its entirety by the detailed
information appearing in the documents and financial statements referenced
above.
The delivery hereof shall not create any implication that there has been no
change in the affairs of the Bank since the date hereof, or that the information
contained in this section is correct as of any time subsequent to its date.
Optional Sale of Troubled Loans and Optional Purchase of Defaulted Loans
The Servicer may, at its option, sell any Loan in the trust fund as to
which the Servicer reasonably believes that default in payment is imminent. In
addition, the Servicer may, at its option, purchase from the trust fund any Loan
that is contractually delinquent in payment by 91 days or more (assuming 30 day
months). Any sale or purchase will be at a price equal to 100% of the Stated
Principal Balance of the Loan plus accrued interest thereon at the applicable
mortgage rate, less the Servicing Fee Rate, from the date through which interest
was last paid by the related borrower or advanced, and not reimbursed, to the
first day of the month in which that amount is to be distributed.
Optional Termination
On any Distribution Date on which the Pool Principal Balance is less than
10% of the Initial Aggregate Trust Fund Principal Balance (the first such
Distribution Date, the "Optional Termination Date"), the Servicer will have the
option to purchase, in whole, the Loans and the REO Property, if any, remaining
in the trust fund and, thereby, effect early retirement of the Certificates. In
the event the Servicer exercises this option, the purchase price (the
"Termination Price") distributed with respect to the Offered Certificates will
be 100% of their then outstanding principal balance, and the sum of:
o any accrued and unpaid interest on the applicable class of
Certificates at the applicable Pass-Through Rate (including any
Unpaid Interest Amounts) through the Distribution Date on which
the Servicer effects early retirement of the Certificates, and
o any accrued and unpaid Net WAC Cap Carryover payable to that
class of Certificates as of that Distribution Date.
Distributions on the Certificates in respect of any optional termination will be
paid to the Certificates as described in "--Distribution of Principal" and
"--Distribution of Interest."
The Trustee
JPMorgan Chase Bank will be the Trustee under the Pooling and Servicing
Agreement. The Depositor, the Servicer and the Sellers may maintain other
banking relationships in the ordinary course of business with JPMorgan Chase
Bank. Offered Certificates may be surrendered at the corporate trust office of
the Trustee located at Four New York Plaza, 6th Floor, New York, New York 10004,
Attention: Institutional Trust Services/Global Debt, Equity One 2004-2, or at
any other addresses that the Trustee may designate from time to time.
The principal compensation to be paid to the Trustee in respect of its
duties under the Pooling and Servicing Agreement will be a trustee fee. The
trustee fee is a fee payable monthly, accrued at a rate of 0.02% per annum on
the Pool Principal Balance.
Derivative Transactions
The holders of a majority of the percentage interests of the Class R
Certificates may at any time, at their option, direct the Trustee to enter into
derivative transactions on behalf of, and for the benefit of, one or more
classes of Certificates. All derivative transactions entered into by the Trustee
on behalf of certificateholders will be subject to the receipt by the Trustee of
(1) opinions of counsel to the effect that the inclusion of the derivatives in
the trust fund will not (a) be inconsistent with the ERISA provisions set forth
in this prospectus supplement and in the Pooling and Servicing Agreement, or
cause the Offered Certificates to fail to qualify for any applicable prohibited
transaction exemption, or (b) disqualify any REMIC or result in a prohibited
transaction tax under the Code, and (2)
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written confirmation from each Rating Agency that the inclusion of the
derivative would not result in a downgrade of its then current rating of any
class of Certificates.
Events of Default
"Events of Default" under the Pooling and Servicing Agreement will include:
o any failure by the Servicer to deposit in the Certificate Account
or remit to the Trustee any payment (other than Advances)
required to be made with respect to any class of Certificates
under the terms of the Pooling and Servicing Agreement, which
failure shall continue unremedied for five days after the date
upon which written notice of that failure shall have been given
(a) to the Servicer by the Trustee or the Depositor or (b) to the
Servicer, the Depositor and the Trustee by the holders of
Certificates of that class evidencing not less than 25% of the
Voting Rights allocated to that class;
o any failure by the Servicer to duly observe or perform in any
material respect any other of the covenants or agreements on the
part of the Servicer contained in the Pooling and Servicing
Agreement, which failure shall continue unremedied for a period
of thirty days after the date on which written notice of that
failure shall have been given (a) to the Servicer by the Trustee
or the Depositor or (b) to the Servicer, the Depositor and the
Trustee by the holders of Certificates of any class evidencing
not less than 25% of the Voting Rights allocated to that class;
o a decree or order of a court or agency or supervisory authority
having jurisdiction in the premises for the appointment of a
receiver or liquidator in any insolvency, readjustment of debt,
marshalling of assets and liabilities or similar proceeding, or
for the winding-up or liquidation of its affairs, shall have been
entered against the Servicer and that decree or order shall have
remained in force undischarged or unstayed for a period of sixty
consecutive days;
o the Servicer shall consent to the appointment of a receiver or
liquidator in any insolvency, readjustment of debt, marshalling
of assets and liabilities or similar proceedings of or relating
to the Servicer or all or substantially all of the property of
the Servicer;
o the Servicer shall admit in writing its inability to pay its
debts generally as they become due, file a petition to take
advantage of, or commence a voluntary case under, any applicable
insolvency or reorganization statute, make an assignment for the
benefit of its creditors, or voluntarily suspend payment of its
obligations;
o so long as the Servicer is a Seller, any failure by any Seller to
observe or perform in any material respect any of the other
covenants or agreements on the part of any Seller contained in
this Agreement, which failure shall continue unremedied for a
period of sixty days after the date on which written notice of
that failure shall have been given to that Seller by the Trustee
or the Depositor, or to that Seller and the Trustee by the
holders of Certificates of any class evidencing not less than 25%
of the Voting Rights allocated to that class;
o any failure of the Servicer to make any Advance in the manner and
at the time required to be made pursuant to the relevant
provisions of the Pooling and Servicing Agreement which continues
unremedied for a period of one business day after the date of
that failure.
If an Event of Default described in one of the first six bullets above has
occurred, then, and in each and every such case, so long as that Event of
Default has not been remedied, the Trustee may, and at the direction of the
holders of Certificates of any class evidencing not less than 25% of the Voting
Rights allocated to that class shall, by notice in writing to the Servicer (with
a copy to each rating agency), terminate all of the rights and obligations of
the Servicer under the Pooling and Servicing Agreement and in and to the Loans
and the proceeds thereof, other than its rights as a certificateholder under the
Pooling and Servicing Agreement. If an Event of Default described in the
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seventh bullet above has occurred, then, and in each and every such case, so
long as that Event of Default has not been remedied, the Trustee shall, by
telephonic notice to the Servicer, followed by notice in writing (with a copy to
each rating agency), terminate all of the rights and obligations of the Servicer
under the Pooling and Servicing Agreement and in and to the Loans and the
proceeds thereof, other than its rights as a certificateholder under the Pooling
and Servicing Agreement. On and after the receipt by the Servicer of that
telephonic notice, all authority and power of the Servicer under the Pooling and
Servicing Agreement, whether with respect to the Loans or otherwise, shall pass
to and be vested in the Trustee. The Trustee, in its capacity as successor
servicer, shall, subject to certain limitations described in the Pooling and
Servicing Agreement, thereupon be obligated to make any required Advances. No
assurance can be given that termination of the rights and obligations of the
Servicer under the Pooling and Servicing Agreement would not adversely affect
the servicing of the Loans, including the delinquency experience of the Loans.
Voting Rights
With respect to any date of determination, the Offered Certificates will be
allocated 100% of all "Voting Rights." The Voting Rights allocated to each class
of the Offered Certificates will be the fraction, expressed as a percentage, the
numerator of which is the Class Certificate Balance of that class then
outstanding and the denominator of which is the aggregate Stated Principal
Balance of the Loans then outstanding. The Voting Rights allocated to each class
of Certificates will be allocated among all holders of the class in proportion
to the outstanding principal balance of those Certificates. The Class X
Certificates and the Class R Certificates will not have any Voting Rights.
YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS
General
The effective yield to the holders of the Offered Certificates (other than
the Class AF-1, Class AV-1, Class AV-2, Class B-1 and Class B-2 Certificates)
will be lower than the yield otherwise produced by the applicable rate at which
interest is passed through to those holders and the purchase price of those
Certificates because monthly distributions will not be payable to those holders
until the 25th day, or, if that day is not a business day, the following
business day, of the month following the month in which interest accrues on the
Loans, without any additional distribution of interest or earnings thereon in
respect of that delay.
Delinquencies on the Loans that are not advanced by or on behalf of the
Servicer, because those advances would be nonrecoverable, may adversely affect
the yield on the Offered Certificates. Shortfalls resulting from delinquencies
not so advanced may be borne by the Offered Certificates.
With the exception of any distributions of the Aggregate Class B Early
Distribution Amount to the Class B-1 and Class B-2 Certificates, the Subordinate
Certificates are not expected to receive any principal distributions until at
least the Distribution Date in May 2007 (unless the aggregate Class Certificate
Balance of the Senior Certificates is reduced to zero prior thereto). As a
result, the weighted average lives of the Subordinate Certificates will be
longer than would have been the case if principal distributions were to be made
on a pro rata basis. The longer weighted average lives may increase the risk
that an Applied Realized Loss Amount will be allocated to one or more classes of
Subordinate Certificates.
The weighted average life and yield to maturity of each class of Offered
Certificates will also be influenced by the amount of Monthly Excess Cashflow
Amounts generated by the Loans and applied in reduction of the Class Certificate
Balances of those Certificates. The level of Monthly Excess Cashflow Amounts
available on any Distribution Date to be applied in reduction of the Class
Certificate Balances of the Offered Certificates will be influenced by, among
other factors,
o the overcollateralization level of the Loans at that time (i.e.,
the extent to which interest on the Loans is accruing on a higher
principal balance than the aggregate Class Certificate Balance of
the Offered Certificates),
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o the delinquency and default experience of the Loans, and
o the level of the various indices applicable to the Group II
Loans.
To the extent that greater amounts of Monthly Excess Cashflow Amounts are
distributed in reduction of the Class Certificate Balance of a class of Offered
Certificates, the weighted average life thereof can be expected to shorten. No
assurance can be given as to the amount of Monthly Excess Cashflow Amounts
distributed at any time or in the aggregate.
The recordation of the mortgages in the name of MERS (R) is a new practice
in the mortgage lending industry. The Sellers expect that the Servicer will be
able to commence foreclosure proceedings on the mortgaged properties, when
necessary and appropriate; however, public recording officers and others may
have limited, if any, experience with lenders seeking to foreclose Mortgages,
assignments of which are registered with MERS (R). 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 certificateholders and increase the amount of realized losses on the Loans.
Prepayment Considerations and Risks
The rate of principal payments and the aggregate amount of distributions
on, and the yield to maturity of, the Offered Certificates will be related to
the rate and timing of payments of principal on the Loans. The rate of principal
payments on the Loans will in turn be affected by the amortization schedules of
the Loans and by the rate of principal prepayments, including for this purpose
prepayments resulting from refinancing, liquidations of the Loans due to
defaults, casualties, condemnations and repurchases by a Seller or the Servicer.
The Loans may be prepaid by the borrowers at any time, many without a prepayment
penalty. The Loans are subject to the due-on-sale provisions included therein.
In addition, the Servicer and its affiliates periodically conduct telemarketing
and mass mailings to their existing customers with respect to the refinancing of
existing mortgage loans. Although these marketing efforts are not specifically
directed to customers who have mortgage loans included in a trust fund, these
customers may receive the marketing materials as part of a broader mailing,
which may result in an increase in the rate of prepayments of mortgage loans
included in a trust fund through refinancings. See "The Mortgage Pool."
Prepayments, liquidations and purchases of the Loans, including any
optional purchase by the Servicer of a defaulted Loan and any optional
repurchase of the remaining Loans in connection with the termination of the
trust fund, in each case as described under "Description of the
Certificates--Optional Sale of Troubled Loans and Optional Purchase of Defaulted
Loans" and "--Optional Termination," will result in distributions on the Offered
Certificates of principal amounts that would otherwise be distributed over the
remaining terms of the Loans. Since the rate of payment of principal of the
Loans will depend on future events and a variety of factors, no assurance can be
given as to that rate or the rate of principal prepayments. The extent to which
the yield to maturity of a class of Offered Certificates may vary from the
anticipated yield will depend upon the degree to which that Offered Certificate
is purchased at a discount or premium, and the degree to which the timing of
payments thereon is sensitive to prepayments, liquidations and purchases of the
Loans. Further, you should consider the risk that, in the case of an Offered
Certificate purchased at a discount, a slower than anticipated rate of principal
payments, including prepayments, on Loans could result in you receiving an
actual yield that is lower than your anticipated yield. In the case of an
Offered Certificate purchased at a premium, a faster than anticipated rate of
principal payments could result in you receiving an actual yield that is lower
than your 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 borrowers'
housing needs, job transfers, unemployment, borrowers' 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 Loans, the
Loans could be subject to higher prepayment rates than if prevailing interest
rates were to remain at or above the mortgage rates on the Loans. Conversely, if
prevailing interest rates were to rise significantly, the rate of prepayments on
the Loans would generally be expected to decrease. No assurances can be given as
to the rate of prepayments on the Loans in stable or changing interest rate
environments.
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The timing of changes in the rate of prepayments on Loans may significantly
affect your actual yield to maturity, even if the average rate of principal
payments is consistent with your expectation. In general, the earlier a
prepayment of principal on the Loans occurs, the greater the effect on your
yield to maturity. The effect on your yield as a result of principal payments
occurring at a rate higher or lower than the rate that you anticipated during
the period immediately following the issuance of the Offered Certificates may
not be offset by a subsequent like decrease or increase in the rate of principal
payments.
Mandatory Prepayment
In the event that at the end of the Funding Period there is an amount on
deposit in the Pre-Funding Account that has not been used to acquire Subsequent
Loans, the holders of the Offered Certificates will receive an additional
distribution allocable to principal in an amount equal to that unused amount
less any investment income thereon. Although there can be no assurance, the
Depositor anticipates that there should be no material principal prepayment to
the holders of the Offered Certificates due to a lack of Subsequent Loans.
The Pass-Through Rates
The Pass-Through Rate for each class of Offered Certificates is subject to
an applicable Net WAC Cap. If Loans bearing higher mortgage rates were to prepay
at rates faster than Loans with lower mortgage rates, the Net WAC Cap relating
to your class of Certificates would be lower than otherwise would be the case.
Although the holders of Class AF-1, Class AV-1, Class AV-2, Class B-1 and Class
B-2 Certificates will be entitled to receive the related Net WAC Cap Carryover
to the extent funds are available for that purpose as described and in the
priority set forth in this prospectus supplement, there is no assurance that
sufficient funds will be available. The ratings of the Offered Certificates do
not address the likelihood of the payment of any Net WAC Cap Carryover.
The yield to investors in the Class AF-1, Class AV-1, Class AV-2, Class B-1
and Class B-2 Certificates will be sensitive to, among other things, the level
of One-Month LIBOR and, in the case of the Class AV-1, Class AV-2, Class B-1 and
Class B-2 Certificates, the level of the index rate applicable to the Group II
Loans. All of the Group II Loans are 2/28 or 3/27 Loans, which will bear
interest at fixed mortgage rates for 24 months and 36 months, respectively,
after origination. Although each of the Group II Loans bears interest at an
adjustable rate, this rate is subject to a minimum rate, a maximum rate, an
initial rate cap and a periodic rate cap. If Six-Month LIBOR, the index rate for
the Group II Loans, increases substantially between Adjustment Dates, the
adjusted mortgage rate on the related Group II Loan may not equal Six-Month
LIBOR plus the related gross margin due to the constraint of the caps. In this
event, the related mortgage rate will be less than would have been the case in
the absence of the caps. In addition, the mortgage rate applicable to any
Adjustment Date will be based on Six-Month LIBOR as of the Adjustment Date.
Thus, if the value of Six-Month LIBOR with respect to a Group II Loan rises, the
lag in time before the corresponding mortgage rate increases will, all other
things being equal, slow the upward adjustment of the Net WAC Cap. Furthermore,
Group II Loans that have not reached their first Adjustment Date are more likely
to be subject to the applicable periodic rate cap on their first Adjustment
Date. See "The Mortgage Pool" in this prospectus supplement. Although the
holders of Class AF-1, Class AV-1, Class AV-2, Class B-1 and Class B-2
Certificates will be entitled to receive the related Net WAC Cap Carryover to
the extent funds are available for that purpose as described and in the priority
set forth in this prospectus supplement, there is no assurance that sufficient
funds will be available. The ratings of the Offered Certificates do not address
the likelihood of the payment of any Net WAC Cap Carryover.
Although the mortgage rates on the Group II Loans are subject to
adjustment, the mortgage rates adjust less frequently than One-Month LIBOR and
adjust by reference to Six-Month LIBOR. Changes in One-Month LIBOR may not
correlate with changes in Six-Month LIBOR and either may not correlate with
prevailing interest rates. It is possible that an increased level of One-Month
LIBOR could occur simultaneously with a lower level of prevailing interest
rates, which would be expected to result in faster prepayments, thus reducing
the weighted average lives of the Class AF-1, Class AV-1, Class AV-2, Class B-1
and Class B-2 Certificates.
Weighted Average Lives of the Offered Certificates
The weighted average life of an Offered Certificate is determined by (1)
multiplying the amount of the net reduction, if any, of the Class Certificate
Balance of that Certificate on each Distribution Date by the number of
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years from the date of issuance to that Distribution Date, (2) summing the
results and (3) dividing the sum by the aggregate amount of the net reductions
in Class Certificate Balance of that Certificate referred to in clause (1).
For a discussion of the factors that may influence the rate of payments,
including prepayments, of the Loans, see "--Prepayment Considerations and Risks"
herein and "Yield and Prepayment Considerations" in the prospectus.
In general, the weighted average lives of the Offered Certificates will be
shortened if the level of prepayments of principal of the Loans increases.
However, the weighted average lives of the Offered Certificates will depend upon
a variety of other factors, including, without limitation, the timing of changes
in the rate of principal payments, changes in the interest rate environment and
delays in realizing on REO Properties.
The interaction of the foregoing factors may have different effects on the
Offered Certificates at different times during the life of each class.
Accordingly, no assurance can be given as to the weighted average life of each
class of Offered Certificates. Further, to the extent the price of any class of
Offered Certificates represents a discount or premium to its original Class
Certificate Balance, variability in the weighted average life of that class of
Certificates will result in variability in its yield to maturity. For an example
of how the weighted average life of the Offered Certificates may be affected at
various constant percentages of Prepayment Assumption, see "--Decrement Tables"
below.
Structuring Assumptions
Unless otherwise specified, the information in the tables in this
prospectus supplement has been prepared on the basis of the following assumed
characteristics of the Loans and the following additional assumptions
(collectively, the "Structuring Assumptions"):
o the Group I Loans consist of 8 Initial Group I Loans and 8 Group
I Subsequent Loans with the following characteristics:
Original Remaining
Gross Term to Original Term to
Mortgage Maturity Amortization Maturity
Loan Type Principal Balance Rate (months) Term (months) (months)
--------- ----------------- ---- -------- ------------- --------
Initial $1,461,738.49 8.814% 60 300 57
Initial 9,416,520.86 8.224 120 300 116
Initial 8,383,115.50 9.288 180 360 176
Initial 479,786.03 7.856 120 120 116
Initial 16,048,765.27 7.393 180 180 176
Initial 17,984,866.58 7.646 240 240 236
Initial 967,680.96 6.962 300 300 297
Initial 298,258,819.35 7.229 360 360 356
Subsequent 395,682.69 8.814 60 300 60
Subsequent 2,548,988.31 8.224 120 300 120
Subsequent 2,269,252.49 9.288 180 360 180
Subsequent 129,874.82 7.856 120 120 120
Subsequent 4,344,291.87 7.393 180 180 180
Subsequent 4,868,381.36 7.646 240 240 240
Subsequent 261,944.67 6.962 300 300 300
Subsequent 80,736,638.82 7.229 360 360 360
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o the Group II-A Loans consist of 10 Initial Group II-A Loans and
10 Group II-A Subsequent Loans with the following
characteristics:
Original Original Remaining Months
Gross Term to Amortization Term to to Next Initial
Loan Principal Mortgage Maturity Term Maturity Gross Adjustment Rate
Type Index Balance Rate (months) (months) (months) Margin Date Cap
---- ----- ------- ---- -------- -------- -------- ------ ---- ---
Initial 6M LIBOR $798,340.32 7.317% 360 360 354 6.860% 18 1.000%
Initial 6M LIBOR 18,418,503.63 7.055 360 360 356 5.443 20 1.500
Initial 6M LIBOR 113,363.67 7.990 360 360 341 8.430 5 2.000
Initial 6M LIBOR 249,940.57 5.750 360 360 357 5.250 21 2.000
Initial 6M LIBOR 86,661,045.51 7.022 360 360 356 6.995 20 3.000
Initial 6M LIBOR 16,422,000.68 7.356 360 360 356 6.468 20 3.000
Initial 6M LIBOR 328,194.24 8.500 360 360 356 8.480 32 1.000
Initial 6M LIBOR 1,043,928.40 7.021 360 360 356 5.290 32 1.500
Initial 6M LIBOR 14,047,567.00 6.943 360 360 357 6.969 33 3.000
Initial 6M LIBOR 382,801.72 6.478 360 360 358 6.317 34 3.000
Subsequent 6M LIBOR 210,646.56 7.317 360 360 360 6.860 24 1.000
Subsequent 6M LIBOR 4,859,825.26 7.055 360 360 360 5.443 24 1.500
Subsequent 6M LIBOR 29,911.64 7.990 360 360 360 8.430 24 2.000
Subsequent 6M LIBOR 65,948.22 5.750 360 360 360 5.250 24 2.000
Subsequent 6M LIBOR 22,866,001.86 7.022 360 360 360 6.995 24 3.000
Subsequent 6M LIBOR 4,333,036.79 7.356 360 360 360 6.468 24 3.000
Subsequent 6M LIBOR 86,595.89 8.500 360 360 360 8.480 36 1.000
Subsequent 6M LIBOR 275,446.35 7.021 360 360 360 5.290 36 1.500
Subsequent 6M LIBOR 3,706,529.17 6.943 360 360 360 6.969 36 3.000
Subsequent 6M LIBOR 101,004.38 6.478 360 360 360 6.317 36 3.000
Mortgage
Rate
Periodic Maximum Minimum Adjustment
Loan Principal Rate Mortgage Mortgage Frequency
Type Index Balance Cap Rate Rate (in months)
---- ----- ------- --- ---- ---- -----------
Initial 6M LIBOR $798,340.32 1.000% 13.461% 7.317% 6
Initial 6M LIBOR 18,418,503.63 1.500 14.055 7.055 6
Initial 6M LIBOR 113,363.67 1.000 13.990 7.990 6
Initial 6M LIBOR 249,940.57 1.500 12.750 5.750 6
Initial 6M LIBOR 86,661,045.51 1.000 13.501 7.020 6
Initial 6M LIBOR 16,422,000.68 1.500 13.365 7.356 6
Initial 6M LIBOR 328,194.24 1.000 14.500 8.500 6
Initial 6M LIBOR 1,043,928.40 1.500 14.021 7.021 6
Initial 6M LIBOR 14,047,567.00 1.000 13.025 6.939 6
Initial 6M LIBOR 382,801.72 1.500 13.478 6.478 6
Subsequent 6M LIBOR 210,646.56 1.000 13.461 7.317 6
Subsequent 6M LIBOR 4,859,825.26 1.500 14.055 7.055 6
Subsequent 6M LIBOR 29,911.64 1.000 13.990 7.990 6
Subsequent 6M LIBOR 65,948.22 1.500 12.750 5.750 6
Subsequent 6M LIBOR 22,866,001.86 1.000 13.501 7.020 6
Subsequent 6M LIBOR 4,333,036.79 1.500 13.365 7.356 6
Subsequent 6M LIBOR 86,595.89 1.000 14.500 8.500 6
Subsequent 6M LIBOR 275,446.35 1.500 14.021 7.021 6
Subsequent 6M LIBOR 3,706,529.17 1.000 13.025 6.939 6
Subsequent 6M LIBOR 101,004.38 1.500 13.478 6.478 6
S-96
o the Group II-B Loans consist of 7 Initial Group II-B Loans and 7
Group II-B Subsequent Loans with the following characteristics:
Original Original Remaining Months
Gross Term to Amortization Term to to Next Initial
Loan Principal Mortgage Maturity Term Maturity Gross Adjustment Rate
Type Index Balance Rate (months) (months) (months) Margin Date Cap
---- ----- ------- ---- -------- -------- -------- ------ ---- ---
Initial 6M LIBOR $508,260.70 6.888% 360 360 356 6.868% 20 1.000%
Initial 6M LIBOR 8,184,188.30 6.919 360 360 356 5.289 20 1.500
Initial 6M LIBOR 39,415.16 9.650 360 360 339 6.500 3 2.000
Initial 6M LIBOR 26,969,464.92 7.087 360 360 356 7.112 20 3.000
Initial 6M LIBOR 21,345,342.73 7.178 360 360 355 6.504 19 3.000
Initial 6M LIBOR 707,382.78 6.446 360 360 356 5.250 32 1.500
Initial 6M LIBOR 2,932,236.70 6.728 360 360 356 6.699 32 3.000
Subsequent 6M LIBOR 131,965.98 6.888 360 360 360 6.868 24 1.000
Subsequent 6M LIBOR 2,124,961.55 6.919 360 360 360 5.289 24 1.500
Subsequent 6M LIBOR 10,233.84 9.650 360 360 360 6.500 24 2.000
Subsequent 6M LIBOR 7,002,414.14 7.087 360 360 360 7.112 24 3.000
Subsequent 6M LIBOR 5,542,154.07 7.178 360 360 360 6.504 24 3.000
Subsequent 6M LIBOR 183,666.50 6.446 360 360 360 5.250 36 1.500
Subsequent 6M LIBOR 761,332.71 6.728 360 360 360 6.699 36 3.000
Mortgage
Rate
Periodic Maximum Minimum Adjustment
Loan Principal Rate Mortgage Mortgage Frequency
Type Index Balance Cap Rate Rate (in months)
---- ----- ------- --- ---- ---- -----------
Initial 6M LIBOR $508,260.70 1.000% 12.888% 6.888% 6
Initial 6M LIBOR 8,184,188.30 1.500 13.919 6.919 6
Initial 6M LIBOR 39,415.16 1.000 15.650 9.650 6
Initial 6M LIBOR 26,969,464.92 1.000 13.299 7.087 6
Initial 6M LIBOR 21,345,342.73 1.500 13.219 7.174 6
Initial 6M LIBOR 707,382.78 1.500 13.446 6.446 6
Initial 6M LIBOR 2,932,236.70 1.000 13.020 6.728 6
Subsequent 6M LIBOR 131,965.98 1.000 12.888 6.888 6
Subsequent 6M LIBOR 2,124,961.55 1.500 13.919 6.919 6
Subsequent 6M LIBOR 10,233.84 1.000 15.650 9.650 6
Subsequent 6M LIBOR 7,002,414.14 1.000 13.299 7.087 6
Subsequent 6M LIBOR 5,542,154.07 1.500 13.219 7.174 6
Subsequent 6M LIBOR 183,666.50 1.500 13.446 6.446 6
Subsequent 6M LIBOR 761,332.71 1.000 13.020 6.728 6
S-97
o One-Month LIBOR and Six-Month LIBOR remain constant at 1.10% and
1.32%, respectively,
o For each Loan listed in the above three tables, the "Adjusted Net
Mortgage Rate" is equal to the related "Gross Mortgage Rate" less
the sum of the Servicing Fee Rate and the per annum rate on each
Loan payable to the Trustee,
o the Loans prepay at the specified constant percentages of the
Prepayment Assumption,
o no Loan is ever delinquent and no Loan ever defaults,
o there are no Net Interest Shortfalls and all prepayments are
prepays in full and include 30 days interest thereon,
o the initial Class Certificate Balance of each class of Offered
Certificates is as set forth on the cover page hereof,
o interest accrues on the Offered Certificates at the Pass-Through
Rate set forth on the cover page hereof and as described under
"Description of the Certificates--Distribution of Interest,"
o distributions in respect of the Offered Certificates are received
in cash on the 25th day of each month commencing May 25, 2004,
o the Closing Date of the sale of the Offered Certificates is May
6, 2004,
o all of the Pre-Funded Amount is used to purchase Subsequent Loans
by the close of business on June 30, 2004, and
o where indicated, the Servicer exercises the option to repurchase
the Loans described herein under "Description of the
Certificates--Optional Termination" at the earliest possible
date.
While it is assumed that each of the Loans prepays at the specified constant
percentages of the Prepayment Assumption, this is not likely to be the case.
Moreover, discrepancies may exist between the characteristics of the actual
Loans which will be delivered to the Trustee and characteristics of the Loans
used in preparing the tables herein.
Prepayments of mortgage loans commonly are measured relative to a
prepayment standard or model. The model used in this prospectus supplement for
the Group I Loans is the Standard Prepayment Assumption ("SPA") and for the
Group II Loans is a constant prepayment rate ("CPR" and together with SPA, the
"Prepayment Assumption"), which represents an assumed rate of prepayment each
month of the then outstanding principal balance of a pool of new mortgage loans.
The Prepayment Assumption does 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 pool of mortgage loans, including the
Loans. 100% of the Prepayment Assumption with respect to the Group I Loans
assumes prepayment rates of 2.20% per annum of the then unpaid principal balance
of the Group I Loans in the first month of the life of the Group I Loans and an
additional 2.20% per annum in each month thereafter (for example, 4.40% per
annum in the second month) until the 10th month. Beginning in the 10th month and
in each month thereafter during the life of the Group I Loans, 100% of the
Prepayment Assumption assumes a constant prepayment rate of 22.00% per annum.
100% of the Prepayment Assumption assumes a constant prepayment rate of 28.00%
per annum for the Group II Loans. 0% of the Prepayment Assumption assumes no
prepayments. There is no assurance that prepayments will occur at any rate of
the Prepayment Assumption or at any other rate.
Decrement Tables
The following tables indicate the percentages of the initial Class
Certificate Balances of the Offered Certificates that would be outstanding after
each of the dates shown at various constant percentages of the Prepayment
Assumption and the corresponding weighted average lives of the Offered
Certificates. The tables have been prepared on the basis of the Structuring
Assumptions. It is not likely that the Loans will have the precise
characteristics described herein or that all of the Loans will prepay at a
constant percentage of the Prepayment Assumption. Moreover, the diverse
remaining terms to maturity of the Loans could produce slower or faster
principal distributions than indicated in the tables, which have been prepared
using the specified constant
S-98
percentages of the Prepayment Assumption, even if the remaining term to maturity
of the Loans is consistent with the remaining term to maturity of the Loans
specified in the Structuring Assumptions.
Class AF-1 Certificates
Percent of Initial Class Certificate Balance Outstanding
Various Constant Percentages of the Prepayment Assumption
---------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
Date 0% 50% 75% 100% 125% 150%
- --------------------------------------------------------------------------------------------------------------
Initial 100 100 100 100 100 100
April 25, 2005 86 65 54 42 31 19
April 25, 2006 81 34 11 0 0 0
April 25, 2007 77 7 0 0 0 0
April 25, 2008 73 0 0 0 0 0
April 25, 2009 68 0 0 0 0 0
April 25, 2010 64 0 0 0 0 0
April 25, 2011 59 0 0 0 0 0
April 25, 2012 55 0 0 0 0 0
April 25, 2013 50 0 0 0 0 0
April 25, 2014 49 0 0 0 0 0
April 25, 2015 42 0 0 0 0 0
April 25, 2016 35 0 0 0 0 0
April 25, 2017 27 0 0 0 0 0
April 25, 2018 19 0 0 0 0 0
April 25, 2019 7 0 0 0 0 0
April 25, 2020 0 0 0 0 0 0
April 25, 2021 0 0 0 0 0 0
April 25, 2022 0 0 0 0 0 0
April 25, 2023 0 0 0 0 0 0
April 25, 2024 0 0 0 0 0 0
April 25, 2025 0 0 0 0 0 0
April 25, 2026 0 0 0 0 0 0
April 25, 2027 0 0 0 0 0 0
April 25, 2028 0 0 0 0 0 0
April 25, 2029 0 0 0 0 0 0
April 25, 2030 0 0 0 0 0 0
April 25, 2031 0 0 0 0 0 0
April 25, 2032 0 0 0 0 0 0
April 25, 2033 0 0 0 0 0 0
April 25, 2034 0 0 0 0 0 0
Weighted Average
Life to Maturity
(Years)** 8.43 1.56 1.13 0.91 0.77 0.67
Weighted Average
Life to Call (Years)** 8.43 1.56 1.13 0.91 0.77 0.67
- --------------------------------------------------------------------------------------------------------------
** Determined as specified under "--Weighted Average Lives of the Offered
Certificates."
S-99
Class AF-2 Certificates
Percent of Initial Class Certificate Balance Outstanding
Various Constant Percentages of the Prepayment Assumption
---------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
Date 0% 50% 75% 100% 125% 150%
- --------------------------------------------------------------------------------------------------------------
Initial 100 100 100 100 100 100
April 25, 2005 100 100 100 100 100 100
April 25, 2006 100 100 100 48 0 0
April 25, 2007 100 100 0 0 0 0
April 25, 2008 100 30 0 0 0 0
April 25, 2009 100 0 0 0 0 0
April 25, 2010 100 0 0 0 0 0
April 25, 2011 100 0 0 0 0 0
April 25, 2012 100 0 0 0 0 0
April 25, 2013 100 0 0 0 0 0
April 25, 2014 100 0 0 0 0 0
April 25, 2015 100 0 0 0 0 0
April 25, 2016 100 0 0 0 0 0
April 25, 2017 100 0 0 0 0 0
April 25, 2018 100 0 0 0 0 0
April 25, 2019 100 0 0 0 0 0
April 25, 2020 90 0 0 0 0 0
April 25, 2021 51 0 0 0 0 0
April 25, 2022 8 0 0 0 0 0
April 25, 2023 0 0 0 0 0 0
April 25, 2024 0 0 0 0 0 0
April 25, 2025 0 0 0 0 0 0
April 25, 2026 0 0 0 0 0 0
April 25, 2027 0 0 0 0 0 0
April 25, 2028 0 0 0 0 0 0
April 25, 2029 0 0 0 0 0 0
April 25, 2030 0 0 0 0 0 0
April 25, 2031 0 0 0 0 0 0
April 25, 2032 0 0 0 0 0 0
April 25, 2033 0 0 0 0 0 0
April 25, 2034 0 0 0 0 0 0
Weighted Average
Life to Maturity
(Years)** 17.01 3.82 2.62 2.01 1.62 1.38
Weighted Average
Life to Call (Years)** 17.01 3.82 2.62 2.01 1.62 1.38
- --------------------------------------------------------------------------------------------------------------
** Determined as specified under "--Weighted Average Lives of the Offered
Certificates."
S-100
Class AF-3 Certificates
Percent of Initial Class Certificate Balance Outstanding
Various Constant Percentages of the Prepayment Assumption
---------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
Date 0% 50% 75% 100% 125% 150%
- --------------------------------------------------------------------------------------------------------------
Initial 100 100 100 100 100 100
April 25, 2005 100 100 100 100 100 100
April 25, 2006 100 100 100 100 75 30
April 25, 2007 100 100 95 31 0 0
April 25, 2008 100 100 49 11 0 0
April 25, 2009 100 69 22 0 0 0
April 25, 2010 100 48 2 0 0 0
April 25, 2011 100 31 0 0 0 0
April 25, 2012 100 21 0 0 0 0
April 25, 2013 100 9 0 0 0 0
April 25, 2014 100 0 0 0 0 0
April 25, 2015 100 0 0 0 0 0
April 25, 2016 100 0 0 0 0 0
April 25, 2017 100 0 0 0 0 0
April 25, 2018 100 0 0 0 0 0
April 25, 2019 100 0 0 0 0 0
April 25, 2020 100 0 0 0 0 0
April 25, 2021 100 0 0 0 0 0
April 25, 2022 100 0 0 0 0 0
April 25, 2023 81 0 0 0 0 0
April 25, 2024 58 0 0 0 0 0
April 25, 2025 39 0 0 0 0 0
April 25, 2026 25 0 0 0 0 0
April 25, 2027 11 0 0 0 0 0
April 25, 2028 0 0 0 0 0 0
April 25, 2029 0 0 0 0 0 0
April 25, 2030 0 0 0 0 0 0
April 25, 2031 0 0 0 0 0 0
April 25, 2032 0 0 0 0 0 0
April 25, 2033 0 0 0 0 0 0
April 25, 2034 0 0 0 0 0 0
Weighted Average
Life to Maturity
(Years)** 20.64 6.32 4.16 3.01 2.25 1.87
Weighted Average
Life to Call (Years)** 20.64 6.32 4.16 3.01 2.25 1.87
- --------------------------------------------------------------------------------------------------------------
** Determined as specified under "--Weighted Average Lives of the Offered
Certificates."
S-101
Class AF-4 Certificates
Percent of Initial Class Certificate Balance Outstanding
Various Constant Percentages of the Prepayment Assumption
---------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
Date 0% 50% 75% 100% 125% 150%
- --------------------------------------------------------------------------------------------------------------
Initial 100 100 100 100 100 100
April 25, 2005 100 100 100 100 100 100
April 25, 2006 100 100 100 100 100 100
April 25, 2007 100 100 100 100 4 0
April 25, 2008 100 100 100 100 4 0
April 25, 2009 100 100 100 45 0 0
April 25, 2010 100 100 100 0 0 0
April 25, 2011 100 100 51 0 0 0
April 25, 2012 100 100 22 0 0 0
April 25, 2013 100 100 0 0 0 0
April 25, 2014 100 85 0 0 0 0
April 25, 2015 100 35 0 0 0 0
April 25, 2016 100 0 0 0 0 0
April 25, 2017 100 0 0 0 0 0
April 25, 2018 100 0 0 0 0 0
April 25, 2019 100 0 0 0 0 0
April 25, 2020 100 0 0 0 0 0
April 25, 2021 100 0 0 0 0 0
April 25, 2022 100 0 0 0 0 0
April 25, 2023 100 0 0 0 0 0
April 25, 2024 100 0 0 0 0 0
April 25, 2025 100 0 0 0 0 0
April 25, 2026 100 0 0 0 0 0
April 25, 2027 100 0 0 0 0 0
April 25, 2028 81 0 0 0 0 0
April 25, 2029 17 0 0 0 0 0
April 25, 2030 0 0 0 0 0 0
April 25, 2031 0 0 0 0 0 0
April 25, 2032 0 0 0 0 0 0
April 25, 2033 0 0 0 0 0 0
April 25, 2034 0 0 0 0 0 0
Weighted Average
Life to Maturity
(Years)** 24.49 10.72 7.23 5.00 2.92 2.38
Weighted Average
Life to Call (Years)** 24.49 10.72 7.23 5.00 2.92 2.38
- --------------------------------------------------------------------------------------------------------------
** Determined as specified under "--Weighted Average Lives of the Offered
Certificates."
S-102
Class AF-5 Certificates
Percent of Initial Class Certificate Balance Outstanding
Various Constant Percentages of the Prepayment Assumption
---------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
Date 0% 50% 75% 100% 125% 150%
- --------------------------------------------------------------------------------------------------------------
Initial 100 100 100 100 100 100
April 25, 2005 100 100 100 100 100 100
April 25, 2006 100 100 100 100 100 100
April 25, 2007 100 100 100 100 100 0
April 25, 2008 100 100 100 100 100 0
April 25, 2009 100 100 100 100 17 0
April 25, 2010 100 100 100 82 0 0
April 25, 2011 100 100 100 31 0 0
April 25, 2012 100 100 100 0 0 0
April 25, 2013 100 100 68 0 0 0
April 25, 2014 100 100 1 0 0 0
April 25, 2015 100 100 0 0 0 0
April 25, 2016 100 91 0 0 0 0
April 25, 2017 100 38 0 0 0 0
April 25, 2018 100 0 0 0 0 0
April 25, 2019 100 0 0 0 0 0
April 25, 2020 100 0 0 0 0 0
April 25, 2021 100 0 0 0 0 0
April 25, 2022 100 0 0 0 0 0
April 25, 2023 100 0 0 0 0 0
April 25, 2024 100 0 0 0 0 0
April 25, 2025 100 0 0 0 0 0
April 25, 2026 100 0 0 0 0 0
April 25, 2027 100 0 0 0 0 0
April 25, 2028 100 0 0 0 0 0
April 25, 2029 100 0 0 0 0 0
April 25, 2030 26 0 0 0 0 0
April 25, 2031 0 0 0 0 0 0
April 25, 2032 0 0 0 0 0 0
April 25, 2033 0 0 0 0 0 0
April 25, 2034 0 0 0 0 0 0
Weighted Average
Life to Maturity
(Years)** 25.77 12.80 9.27 6.72 4.69 2.59
Weighted Average
Life to Call (Years)** 25.77 12.80 9.27 6.72 4.69 2.59
- --------------------------------------------------------------------------------------------------------------
** Determined as specified under "--Weighted Average Lives of the Offered
Certificates."
S-103
Class AF-6 Certificates
Percent of Initial Class Certificate Balance Outstanding
Various Constant Percentages of the Prepayment Assumption
---------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
Date 0% 50% 75% 100% 125% 150%
- --------------------------------------------------------------------------------------------------------------
Initial 100 100 100 100 100 100
April 25, 2005 100 100 100 100 100 100
April 25, 2006 100 100 100 100 100 100
April 25, 2007 100 100 100 100 100 6
April 25, 2008 99 89 86 90 100 6
April 25, 2009 98 78 75 73 75 6
April 25, 2010 95 66 58 46 19 0
April 25, 2011 92 54 39 18 0 0
April 25, 2012 83 27 8 0 0 0
April 25, 2013 73 13 1 0 0 0
April 25, 2014 0 0 0 0 0 0
April 25, 2015 0 0 0 0 0 0
April 25, 2016 0 0 0 0 0 0
April 25, 2017 0 0 0 0 0 0
April 25, 2018 0 0 0 0 0 0
April 25, 2019 0 0 0 0 0 0
April 25, 2020 0 0 0 0 0 0
April 25, 2021 0 0 0 0 0 0
April 25, 2022 0 0 0 0 0 0
April 25, 2023 0 0 0 0 0 0
April 25, 2024 0 0 0 0 0 0
April 25, 2025 0 0 0 0 0 0
April 25, 2026 0 0 0 0 0 0
April 25, 2027 0 0 0 0 0 0
April 25, 2028 0 0 0 0 0 0
April 25, 2029 0 0 0 0 0 0
April 25, 2030 0 0 0 0 0 0
April 25, 2031 0 0 0 0 0 0
April 25, 2032 0 0 0 0 0 0
April 25, 2033 0 0 0 0 0 0
April 25, 2034 0 0 0 0 0 0
Weighted Average
Life to Maturity
(Years)** 8.93 6.71 6.12 5.73 5.41 2.99
Weighted Average
Life to Call (Years)** 8.93 6.71 6.12 5.73 5.41 2.98
- --------------------------------------------------------------------------------------------------------------
** Determined as specified under "--Weighted Average Lives of the Offered
Certificates."
S-104
Class AV-1 Certificates
Percent of Initial Class Certificate Balance Outstanding
Various Constant Percentages of the Prepayment Assumption
---------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
Date 0% 50% 75% 100% 125% 150%
- --------------------------------------------------------------------------------------------------------------
Initial 100 100 100 100 100 100
April 25, 2005 95 81 74 68 61 54
April 25, 2006 94 67 56 46 37 28
April 25, 2007 93 57 43 31 22 14
April 25, 2008 92 47 35 28 22 14
April 25, 2009 91 39 30 24 19 14
April 25, 2010 90 36 27 21 16 11
April 25, 2011 88 32 24 19 13 7
April 25, 2012 87 30 21 16 9 5
April 25, 2013 85 27 20 12 6 3
April 25, 2014 83 25 18 9 4 2
April 25, 2015 82 23 15 7 3 1
April 25, 2016 79 22 12 5 2 0
April 25, 2017 77 21 9 4 1 0
April 25, 2018 75 19 7 3 * 0
April 25, 2019 72 16 6 2 0 0
April 25, 2020 70 13 5 1 0 0
April 25, 2021 66 11 4 1 0 0
April 25, 2022 63 9 3 0 0 0
April 25, 2023 60 8 2 0 0 0
April 25, 2024 56 6 2 0 0 0
April 25, 2025 52 5 1 0 0 0
April 25, 2026 50 4 * 0 0 0
April 25, 2027 47 3 0 0 0 0
April 25, 2028 44 3 0 0 0 0
April 25, 2029 41 2 0 0 0 0
April 25, 2030 37 1 0 0 0 0
April 25, 2031 29 * 0 0 0 0
April 25, 2032 20 0 0 0 0 0
April 25, 2033 9 0 0 0 0 0
April 25, 2034 0 0 0 0 0 0
Weighted Average
Life to Maturity
(Years)** 19.78 6.60 4.61 3.44 2.62 2.00
Weighted Average
Life to Call
(Years)** 19.67 5.88 4.01 2.95 2.24 1.68
- --------------------------------------------------------------------------------------------------------------
* Less than 1% but greater than 0.
** Determined as specified under "--Weighted Average Lives of the Offered
Certificates."
S-105
Class AV-2 Certificates
Percent of Initial Class Certificate Balance Outstanding
Various Constant Percentages of the Prepayment Assumption
---------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
Date 0% 50% 75% 100% 125% 150%
- --------------------------------------------------------------------------------------------------------------
Initial 100 100 100 100 100 100
April 25, 2005 95 81 74 68 61 54
April 25, 2006 94 67 56 46 37 28
April 25, 2007 93 57 43 31 22 14
April 25, 2008 92 47 35 28 22 14
April 25, 2009 91 39 30 24 19 14
April 25, 2010 89 35 27 21 16 11
April 25, 2011 88 32 24 19 13 7
April 25, 2012 87 29 21 16 9 5
April 25, 2013 85 27 20 12 6 3
April 25, 2014 83 25 18 9 4 2
April 25, 2015 81 23 15 7 3 1
April 25, 2016 79 22 12 5 2 0
April 25, 2017 77 21 9 4 1 0
April 25, 2018 75 19 7 3 * 0
April 25, 2019 72 16 6 2 0 0
April 25, 2020 69 13 5 1 0 0
April 25, 2021 66 11 4 1 0 0
April 25, 2022 63 9 3 0 0 0
April 25, 2023 59 8 2 0 0 0
April 25, 2024 55 6 2 0 0 0
April 25, 2025 52 5 1 0 0 0
April 25, 2026 49 4 * 0 0 0
April 25, 2027 47 3 0 0 0 0
April 25, 2028 44 3 0 0 0 0
April 25, 2029 40 2 0 0 0 0
April 25, 2030 37 1 0 0 0 0
April 25, 2031 29 * 0 0 0 0
April 25, 2032 19 0 0 0 0 0
April 25, 2033 9 0 0 0 0 0
April 25, 2034 0 0 0 0 0 0
Weighted Average
Life to Maturity
(Years)** 19.71 6.60 4.61 3.44 2.62 2.00
Weighted Average
Life to Call (Years)** 19.60 5.87 4.01 2.95 2.24 1.68
- --------------------------------------------------------------------------------------------------------------
* Less than 1% but greater than 0.
** Determined as specified under "--Weighted Average Lives of the Offered
Certificates."
S-106
Class M-1 Certificates
Percent of Initial Class Certificate Balance Outstanding
Various Constant Percentages of the Prepayment Assumption
---------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
Date 0% 50% 75% 100% 125% 150%
- --------------------------------------------------------------------------------------------------------------
Initial 100 100 100 100 100 100
April 25, 2005 100 100 100 100 100 100
April 25, 2006 100 100 100 100 100 100
April 25, 2007 100 100 100 100 100 100
April 25, 2008 100 100 88 66 57 89
April 25, 2009 100 100 71 50 34 34
April 25, 2010 100 87 58 37 23 14
April 25, 2011 100 75 46 28 16 9
April 25, 2012 100 65 37 21 11 6
April 25, 2013 100 56 30 16 8 4
April 25, 2014 100 47 24 12 5 *
April 25, 2015 100 40 19 9 4 0
April 25, 2016 100 34 15 6 1 0
April 25, 2017 100 29 12 5 0 0
April 25, 2018 100 25 10 3 0 0
April 25, 2019 100 21 7 1 0 0
April 25, 2020 100 17 6 0 0 0
April 25, 2021 100 15 5 0 0 0
April 25, 2022 100 12 4 0 0 0
April 25, 2023 100 10 1 0 0 0
April 25, 2024 100 8 0 0 0 0
April 25, 2025 97 7 0 0 0 0
April 25, 2026 89 5 0 0 0 0
April 25, 2027 80 4 0 0 0 0
April 25, 2028 71 3 0 0 0 0
April 25, 2029 61 1 0 0 0 0
April 25, 2030 50 0 0 0 0 0
April 25, 2031 38 0 0 0 0 0
April 25, 2032 25 0 0 0 0 0
April 25, 2033 11 0 0 0 0 0
April 25, 2034 0 0 0 0 0 0
Weighted Average
Life to Maturity
(Years)** 25.74 11.12 7.86 6.00 5.15 5.06
Weighted Average
Life to Call (Years)** 25.60 10.23 7.13 5.42 4.69 4.66
- --------------------------------------------------------------------------------------------------------------
* Less than 1% but greater than 0.
** Determined as specified under "--Weighted Average Lives of the Offered
Certificates."
S-107
Class M-2 Certificates
Percent of Initial Class Certificate Balance Outstanding
Various Constant Percentages of the Prepayment Assumption
---------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
Date 0% 50% 75% 100% 125% 150%
- --------------------------------------------------------------------------------------------------------------
Initial 100 100 100 100 100 100
April 25, 2005 100 100 100 100 100 100
April 25, 2006 100 100 100 100 100 100
April 25, 2007 100 100 100 100 100 100
April 25, 2008 100 100 88 66 49 35
April 25, 2009 100 100 71 50 34 22
April 25, 2010 100 87 58 37 23 14
April 25, 2011 100 75 46 28 16 9
April 25, 2012 100 65 37 21 11 6
April 25, 2013 100 56 30 16 8 *
April 25, 2014 100 47 24 12 5 0
April 25, 2015 100 40 19 9 * 0
April 25, 2016 100 34 15 6 0 0
April 25, 2017 100 29 12 3 0 0
April 25, 2018 100 25 10 0 0 0
April 25, 2019 100 21 7 0 0 0
April 25, 2020 100 17 6 0 0 0
April 25, 2021 100 15 3 0 0 0
April 25, 2022 100 12 0 0 0 0
April 25, 2023 100 10 0 0 0 0
April 25, 2024 100 8 0 0 0 0
April 25, 2025 97 7 0 0 0 0
April 25, 2026 89 5 0 0 0 0
April 25, 2027 80 2 0 0 0 0
April 25, 2028 71 0 0 0 0 0
April 25, 2029 61 0 0 0 0 0
April 25, 2030 50 0 0 0 0 0
April 25, 2031 38 0 0 0 0 0
April 25, 2032 25 0 0 0 0 0
April 25, 2033 11 0 0 0 0 0
April 25, 2034 0 0 0 0 0 0
Weighted Average
Life to Maturity
(Years)** 25.73 11.05 7.79 5.92 4.93 4.45
Weighted Average
Life to Call (Years)** 25.60 10.23 7.13 5.40 4.51 4.10
- --------------------------------------------------------------------------------------------------------------
* Less than 1% but greater than 0.
** Determined as specified under "--Weighted Average Lives of the Offered
Certificates."
S-108
Class M-3 Certificates
Percent of Initial Class Certificate Balance Outstanding
Various Constant Percentages of the Prepayment Assumption
---------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
Date 0% 50% 75% 100% 125% 150%
- --------------------------------------------------------------------------------------------------------------
Initial 100 100 100 100 100 100
April 25, 2005 100 100 100 100 100 100
April 25, 2006 100 100 100 100 100 100
April 25, 2007 100 100 100 100 100 100
April 25, 2008 100 100 88 66 49 35
April 25, 2009 100 100 71 50 34 22
April 25, 2010 100 87 58 37 23 14
April 25, 2011 100 75 46 28 16 9
April 25, 2012 100 65 37 21 11 *
April 25, 2013 100 56 30 16 8 0
April 25, 2014 100 47 24 12 0 0
April 25, 2015 100 40 19 9 0 0
April 25, 2016 100 34 15 4 0 0
April 25, 2017 100 29 12 0 0 0
April 25, 2018 100 25 10 0 0 0
April 25, 2019 100 21 7 0 0 0
April 25, 2020 100 17 1 0 0 0
April 25, 2021 100 15 0 0 0 0
April 25, 2022 100 12 0 0 0 0
April 25, 2023 100 10 0 0 0 0
April 25, 2024 100 8 0 0 0 0
April 25, 2025 97 7 0 0 0 0
April 25, 2026 89 0 0 0 0 0
April 25, 2027 80 0 0 0 0 0
April 25, 2028 71 0 0 0 0 0
April 25, 2029 61 0 0 0 0 0
April 25, 2030 50 0 0 0 0 0
April 25, 2031 38 0 0 0 0 0
April 25, 2032 25 0 0 0 0 0
April 25, 2033 11 0 0 0 0 0
April 25, 2034 0 0 0 0 0 0
Weighted Average
Life to Maturity
(Years)** 25.73 10.98 7.72 5.87 4.83 4.28
Weighted Average
Life to Call (Years)** 25.60 10.23 7.13 5.39 4.46 3.97
- --------------------------------------------------------------------------------------------------------------
* Less than 1% but greater than 0.
** Determined as specified under "--Weighted Average Lives of the Offered
Certificates."
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Class M-4 Certificates
Percent of Initial Class Certificate Balance Outstanding
Various Constant Percentages of the Prepayment Assumption
---------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
Date 0% 50% 75% 100% 125% 150%
- --------------------------------------------------------------------------------------------------------------
Initial 100 100 100 100 100 100
April 25, 2005 100 100 100 100 100 100
April 25, 2006 100 100 100 100 100 100
April 25, 2007 100 100 100 100 100 100
April 25, 2008 100 100 88 66 49 35
April 25, 2009 100 100 71 50 34 22
April 25, 2010 100 87 58 37 23 14
April 25, 2011 100 75 46 28 16 9
April 25, 2012 100 65 37 21 11 0
April 25, 2013 100 56 30 16 8 0
April 25, 2014 100 47 24 12 0 0
April 25, 2015 100 40 19 9 0 0
April 25, 2016 100 34 15 0 0 0
April 25, 2017 100 29 12 0 0 0
April 25, 2018 100 25 10 0 0 0
April 25, 2019 100 21 6 0 0 0
April 25, 2020 100 17 0 0 0 0
April 25, 2021 100 15 0 0 0 0
April 25, 2022 100 12 0 0 0 0
April 25, 2023 100 10 0 0 0 0
April 25, 2024 100 8 0 0 0 0
April 25, 2025 97 1 0 0 0 0
April 25, 2026 89 0 0 0 0 0
April 25, 2027 80 0 0 0 0 0
April 25, 2028 71 0 0 0 0 0
April 25, 2029 61 0 0 0 0 0
April 25, 2030 50 0 0 0 0 0
April 25, 2031 38 0 0 0 0 0
April 25, 2032 25 0 0 0 0 0
April 25, 2033 11 0 0 0 0 0
April 25, 2034 0 0 0 0 0 0
Weighted Average
Life to Maturity
(Years)** 25.72 10.93 7.68 5.82 4.80 4.22
Weighted Average
Life to Call (Years)** 25.60 10.23 7.13 5.38 4.45 3.93
- --------------------------------------------------------------------------------------------------------------
** Determined as specified under "--Weighted Average Lives of the Offered
Certificates."
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Class B-1 Certificates
Percent of Initial Class Certificate Balance Outstanding
Various Constant Percentages of the Prepayment Assumption
---------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
Date 0% 50% 75% 100% 125% 150%
- --------------------------------------------------------------------------------------------------------------
Initial 100 100 100 100 100 100
April 25, 2005 100 100 100 100 100 100
April 25, 2006 0 0 0 36 82 100
April 25, 2007 0 0 0 0 0 8
April 25, 2008 0 0 0 0 0 0
April 25, 2009 0 0 0 0 0 0
April 25, 2010 0 0 0 0 0 0
April 25, 2011 0 0 0 0 0 0
April 25, 2012 0 0 0 0 0 0
April 25, 2013 0 0 0 0 0 0
April 25, 2014 0 0 0 0 0 0
April 25, 2015 0 0 0 0 0 0
April 25, 2016 0 0 0 0 0 0
April 25, 2017 0 0 0 0 0 0
April 25, 2018 0 0 0 0 0 0
April 25, 2019 0 0 0 0 0 0
April 25, 2020 0 0 0 0 0 0
April 25, 2021 0 0 0 0 0 0
April 25, 2022 0 0 0 0 0 0
April 25, 2023 0 0 0 0 0 0
April 25, 2024 0 0 0 0 0 0
April 25, 2025 0 0 0 0 0 0
April 25, 2026 0 0 0 0 0 0
April 25, 2027 0 0 0 0 0 0
April 25, 2028 0 0 0 0 0 0
April 25, 2029 0 0 0 0 0 0
April 25, 2030 0 0 0 0 0 0
April 25, 2031 0 0 0 0 0 0
April 25, 2032 0 0 0 0 0 0
April 25, 2033 0 0 0 0 0 0
April 25, 2034 0 0 0 0 0 0
Weighted Average
Life to Maturity
(Years)** 1.48 1.65 1.78 1.95 2.20 2.62
Weighted Average
Life to Call (Years)** 1.48 1.65 1.78 1.95 2.20 2.62
- --------------------------------------------------------------------------------------------------------------
** Determined as specified under "--Weighted Average Lives of the Offered
Certificates."
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Class B-2 Certificates
Percent of Initial Class Certificate Balance Outstanding
Various Constant Percentages of the Prepayment Assumption
---------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
Date 0% 50% 75% 100% 125% 150%
- --------------------------------------------------------------------------------------------------------------
Initial 100 100 100 100 100 100
April 25, 2005 100 100 100 100 100 100
April 25, 2006 0 0 0 0 0 25
April 25, 2007 0 0 0 0 0 0
April 25, 2008 0 0 0 0 0 0
April 25, 2009 0 0 0 0 0 0
April 25, 2010 0 0 0 0 0 0
April 25, 2011 0 0 0 0 0 0
April 25, 2012 0 0 0 0 0 0
April 25, 2013 0 0 0 0 0 0
April 25, 2014 0 0 0 0 0 0
April 25, 2015 0 0 0 0 0 0
April 25, 2016 0 0 0 0 0 0
April 25, 2017 0 0 0 0 0 0
April 25, 2018 0 0 0 0 0 0
April 25, 2019 0 0 0 0 0 0
April 25, 2020 0 0 0 0 0 0
April 25, 2021 0 0 0 0 0 0
April 25, 2022 0 0 0 0 0 0
April 25, 2023 0 0 0 0 0 0
April 25, 2024 0 0 0 0 0 0
April 25, 2025 0 0 0 0 0 0
April 25, 2026 0 0 0 0 0 0
April 25, 2027 0 0 0 0 0 0
April 25, 2028 0 0 0 0 0 0
April 25, 2029 0 0 0 0 0 0
April 25, 2030 0 0 0 0 0 0
April 25, 2031 0 0 0 0 0 0
April 25, 2032 0 0 0 0 0 0
April 25, 2033 0 0 0 0 0 0
April 25, 2034 0 0 0 0 0 0
Weighted Average
Life to Maturity
(Years)** 1.23 1.34 1.41 1.52 1.65 1.85
Weighted Average
Life to Call (Years)** 1.23 1.34 1.41 1.52 1.65 1.85
- --------------------------------------------------------------------------------------------------------------
** Determined as specified under "--Weighted Average Lives of the Offered
Certificates."
S-112
Yield Sensitivity of the Subordinate Certificates
If the Class Certificate Balances of the Class B-2, Class B-1, Class M-4,
Class M-3 and Class M-2 Certificates and the Overcollateralization Amount have
been reduced to zero, the yield to maturity on the Class M-1 Certificates will
become extremely sensitive to losses on the Loans (and the timing thereof) that
are covered by subordination, because the entire amount of any Realized Losses
(to the extent not covered by Net Monthly Excess Cashflow) will be allocated to
the Class M-1 Certificates. If the Class Certificate Balance of the Class B-2,
Class B-1, Class M-4 and Class M-3 Certificates and the Overcollateralization
Amount have been reduced to zero, the yield to maturity on the Class M-2
Certificates will become extremely sensitive to losses on the Loans (and the
timing thereof) that are covered by subordination, because the entire amount of
any Realized Losses (to the extent not covered by Net Monthly Excess Cashflow)
will be allocated to the Class M-2 Certificates. If the Class Certificate
Balance of the Class B-2, Class B-1 and Class M-4 Certificates and the
Overcollateralization Amount have been reduced to zero, the yield to maturity on
the Class M-3 Certificates will become extremely sensitive to losses on the
Loans (and the timing thereof) that are covered by subordination, because the
entire amount of any Realized Losses (to the extent not covered by Net Monthly
Excess Cashflow) will be allocated to the Class M-3 Certificates. If the Class
Certificate Balance of the Class B-2 and Class B-1 Certificates and the
Overcollateralization Amount have been reduced to zero, the yield to maturity on
the Class M-4 Certificates will become extremely sensitive to losses on the
Loans (and the timing thereof) that are covered by subordination, because the
entire amount of any Realized Losses (to the extent not covered by Net Monthly
Excess Cashflow) will be allocated to the Class M-4 Certificates. If the Class
Certificate Balance of the Class B-2 Certificates and the Overcollateralization
Amount have been reduced to zero, the yield to maturity on the Class B-1
Certificates will become extremely sensitive to losses on the Loans (and the
timing thereof) that are covered by subordination, because the entire amount of
any Realized Losses (to the extent not covered by Net Monthly Excess Cashflow)
will be allocated to the Class B-1 Certificates. If the Overcollateralization
Amount has been reduced to zero, the yield to maturity on the Class B-2
Certificates will become extremely sensitive to losses on the Loans (and the
timing thereof) that are covered by subordination, because the entire amount of
any Realized Losses (to the extent not covered by Net Monthly Excess Cashflow)
will be allocated to the Class B-2 Certificates. The initial undivided interests
in the trust fund evidenced by the Class M-1, Class M-2, Class M-3, Class M-4,
Class B-1 and Class B-2 Certificates are approximately 8.40%, approximately
5.10%, approximately 1.15%, approximately 1.05%, approximately 1.05% and
approximately 1.05%, respectively.
Investors in the Subordinate Certificates should fully consider the risk
that Realized Losses on the Loans could result in the failure of investors to
fully recover their investments. In addition, once Realized Losses have been
allocated to the Subordinate Certificates, their Class Certificate Balances will
be permanently reduced by the amounts so allocated. Therefore, the amounts of
Realized Losses allocated to the Subordinate Certificates will no longer accrue
interest nor will these amounts be reinstated thereafter. However, Applied
Realized Loss Amounts may be recovered in the form of Realized Loss Amortization
Amounts by the holders of the Subordinate Certificates from Net Monthly Excess
Cashflow in the priorities set forth under "Description of the Certificates
- -Distribution of Monthly Excess Cashflow Amounts" in this prospectus supplement.
With the exception of any distributions of the Aggregate Class B Early
Distribution Amount to the Class B-1 and Class B-2 Certificates, unless the
Class Certificate Balance of the Senior Certificates has been reduced to zero,
the Subordinate Certificates will not be entitled to any principal distributions
until the Stepdown Date or during any period in which a Trigger Event is in
effect. As a result, the weighted average lives of the Subordinate Certificates
will be longer than would otherwise be the case if distributions of principal
were allocated on a pro rata basis among all of the Offered Certificates. As a
result of the longer weighted average lives of the Subordinate Certificates, the
holders of these Certificates have a greater risk of suffering a loss on their
investments. Further, because a Trigger Event is based on delinquencies and not
losses, it is possible for the Subordinate Certificates, other than the Class
B-1 and Class B-2 Certificates, to receive no principal distributions (unless
the Class Certificate Balance of the Senior Certificates has been reduced to
zero) on and after the Stepdown Date even if no losses have occurred on the
Loans.
With the exception of any distributions of the Aggregate Class B Early
Distribution Amount to the Class B-2 Certificates, for all purposes, the Class
B-2 Certificates will have the lowest payment priority of any class of
Subordinate Certificate.
Last Scheduled Distribution Date
The "Last Scheduled Distribution Date" for the Offered Certificates is the
Distribution Date in July 2034. The Last Scheduled Distribution Date for the
Offered Certificates is the Distribution Date in the fourth month
S-113
following the latest scheduled maturity date for any of the Initial Loans. Since
the rate of distributions in reduction of the Class Certificate Balance of each
of the classes of Offered Certificates will depend on the rate of payment,
including prepayments, of the Loans, the Class Certificate Balance of any or all
of the classes of Offered Certificates could be reduced to zero significantly
earlier or later than the Last Scheduled Distribution Date. The rate of payments
on the Loans will depend on their particular characteristics, as well as on
prevailing interest rates from time to time and other economic factors, and no
assurance can be given as to the actual payment experience of the Loans. See
"Yield, Prepayment and Maturity Considerations--Prepayment Considerations and
Risks" and "--Weighted Average Lives of the Offered Certificates" herein and
"Yield and Prepayment Considerations" in the prospectus.
USE OF PROCEEDS
Immediately prior to the sale of the Loans to the Depositor, certain of the
Loans were subject to financing provided by an affiliate of Wachovia Capital
Markets, LLC and an affiliate of Greenwich Capital Markets, Inc. The Depositor
will apply a portion of the net proceeds from the sale of the Offered
Certificates to repay the financing. The Depositor will use the remaining
portion of the net proceeds received by it from the sale of the Offered
Certificates to pay the purchase price of the Initial Loans, to fund the
Pre-Funding Account, and for general corporate purposes.
FEDERAL INCOME TAX CONSEQUENCES
The discussion below regarding the federal income tax consequences relating
to the acquisition, holding, or disposition of the Offered Certificates is
intended to supplement and to be read in conjunction with the discussion set out
in the prospectus under the heading "FEDERAL INCOME TAX CONSEQUENCES."
Accordingly, investors are referred to the material under the heading "FEDERAL
INCOME TAX CONSEQUENCES" in the Prospectus for additional information.
References in the discussion below to "Offered Certificates" are exclusive of
any associated rights in respect of the Class AF-1, Class AV-1, Class AV-2,
Class B-1 and Class B-2 Certificates to receive payment in the form of the Net
WAC Cap Carryover.
For federal income tax purposes, multiple elections will be made to treat
some of the assets of the trust fund (exclusive of the Pre-Funding Account, the
Net WAC Cap Account, the Reserve Fund and the Yield Maintenance Agreement) as
several REMICs. Assuming those elections are timely made and the terms of the
Pooling and Servicing Agreement are complied with, Stradley, Ronon, Stevens &
Young, LLP, special tax counsel to the Depositor ("Tax Counsel") is of the
opinion that the trust fund (exclusive of the Pre-Funding Account, the Net WAC
Cap Account, the Reserve Fund and the Yield Maintenance Agreement) will qualify
as several REMICs within the meaning of the Code. The Offered Certificates and
the Class X Certificates will constitute "regular interests" in a REMIC. The
Class R Certificates will constitute the sole class of "residual interest" in
each REMIC. See "Federal Income Tax Consequences" in the prospectus.
The Offered Certificates will be treated as debt instruments for federal
income tax purposes. Income on the Offered Certificates must be reported under
an accrual method of accounting.
Beneficial Owners of the Class AF-1, Class AV-1, Class AV-2, Class B-1 and
Class B-2 Certificates must allocate their purchase price for that Certificate
among one or more of the following components, as appropriate - the REMIC
regular interest component and the right to receive payment in the form of the
Net WAC Cap Carryover (the "Net WAC Cap component"). For information reporting
purposes, it will be assumed that, with respect to each of the Class AF-1, Class
AV-1, Class AV-2, Class B-1 and Class B-2 Certificates, the Net WAC Cap
component will have only nominal value relative to the value of the regular
interest component. The IRS could, however, argue that the Net WAC Cap component
has a greater than de minimis value. If that argument was sustained, the regular
interest component in respect of the Class AF-1, Class AV-1, Class AV-2, Class
B-1 and Class B-2 Certificates could be viewed as having been issued with
original issue discount ("OID") (which could cause the total amount of discount
to exceed a statutorily defined de minimis amount).
Upon the sale, exchange, or other disposition of a Class AF-1, Class AV-1,
Class AV-2, Class B-1 or Class B-2 Certificate, the Beneficial Owner thereof
must allocate the amount realized among the appropriate components of that Class
AF-1, Class AV-1, Class AV-2, Class B-1 or Class B-2 Certificate based on the
relative fair market values of those components at the time of sale. Assuming
that a Beneficial Owner holds a Class AF-1, Class AV-1,
S-114
Class AV-2, Class B-1 or Class B-2 Certificate as a "capital asset" within the
meaning of section 1221 of the Code, gain or loss on the disposition of an
interest in the Net WAC Cap component should be capital gain or loss, and gain
or loss on the disposition of the regular interest should, subject to the
limitation described below, be capital gain or loss. Gain attributable to the
regular interest component of a Class AF-1, Class AV-1, Class AV-2, Class B-1 or
Class B-2 Certificate will be treated as ordinary income, however, to the extent
the gain does not exceed the excess, if any, of:
o the amount that would have been includible in the Beneficial
Owner's gross income with respect to the regular interest
component had income thereon accrued at a rate equal to 110% of
the applicable federal rate as defined in section 1274(d) of the
Code determined as of the date of purchase of that Certificate,
over
o the amount actually included in the Beneficial Owner's income.
As indicated above, a portion of the purchase price paid by a
certificateholder to acquire a Class AF-1, Class AV-1, Class AV-2, Class B-1 or
Class B-2 Certificate may be attributable to the Net WAC Cap component of that
Certificate. The portion of the overall purchase price attributable to this
component must be amortized over the life of the Certificate taking into account
the declining balance of the related regular interest component. Treasury
regulations concerning notional principal contracts provide alternative methods
for amortizing the purchase price of an interest rate cap contract and the
consequences on the disposition of the contract. A disposition of the contract
would be deemed to occur, for example, upon the sale of a Class AF-1, Class
AV-1, Class AV-2, Class B-1 or Class B-2 Certificate. Beneficial Owners are
urged to consult their tax advisors concerning the methods that can be employed
to amortize the portion of the purchase price paid for the Net WAC Cap component
of a Class AF-1, Class AV-1, Class AV-2, Class B-1 or Class B-2 Certificate.
The Offered Certificates, depending on their issue prices, as described in
the prospectus under "Federal Income Tax Consequences," may be treated as having
been issued with OID for federal income tax purposes. For purposes of
determining the amount and rate of accrual of OID and market discount, the trust
fund intends to assume that there will be prepayments on the Loans at a rate
equal to 100% of the Prepayment Assumption, as described under "Yield,
Prepayment and Maturity Considerations--Structuring Assumptions." No
representation is made as to whether the Loans will prepay at the foregoing rate
or any other rate. See "Yield, Prepayment and Maturity Considerations" herein
and "Federal Income Tax Consequences" in the prospectus.
If the Beneficial Owners of the Offered Certificates are treated as holding
the Certificates at a premium, those Beneficial Owners should consult their tax
advisors regarding the election to amortize bond premium and the method to be
employed.
As is described more fully under "Federal Income Tax Consequences" in the
prospectus, the Offered Certificates (the REMIC regular interest in the case of
the Class AF-1, Class AV-1, Class AV-2, Class B-1 and Class B-2 Certificates)
will represent qualifying assets to a Real Estate Investment Trust ("REIT")
under Section 856(c)(4)(A) and to a domestic building and loan association under
Section 7701(a)(19)(C) of the Code. Net interest income attributable to the
Offered Certificates (the REMIC regular interest in the case of the Class AF-1,
Class AV-1, Class AV-2, Class B-1 and Class B-2 Certificates) will be "interest
on obligations secured by mortgages on real property" within the meaning of
Section 856(c)(3)(B) of the Code for REIT qualification purposes, to the extent
the assets of the trust fund are assets described in those sections. The Offered
Certificates (other than the Class AF-1, Class AV-1, Class AV-2, Class B-1 and
Class B-2 Certificates) will represent qualifying assets under Section
860G(a)(3) if acquired by a REMIC within the prescribed time periods of the
Code. The Class AF-1, Class AV-1, Class AV-2, Class B-1 and Class B-2
Certificates will not be treated as qualifying assets under Section 860G(a)(3)
in their entirety and may not be appropriate investments for REMICs.
The owners of the Pre-Funding Account, the Net WAC Cap Account and the
Reserve Fund are the holders of the Class X Certificates. The Pre-Funding
Account, the Net WAC Cap Account and the Reserve Fund are outside reserve funds
and are not assets of any REMIC. Amounts transferred by a REMIC to the Net WAC
Cap Account are treated as amounts distributed by the applicable REMIC to the
holders of the Class X Certificates or transferees of the holders of the Class X
Certificates for all federal tax purposes.
S-115
The Treasury Department, in February 2003, adopted final regulations
applicable to the filing of disclosure statements and maintenance of investor
lists relating to investments in "tax shelters." These regulations require that
a taxpayer participating in a "reportable transaction" retain information
related to the transaction and disclose the transaction to the IRS by attaching
to the taxpayer's federal income tax return an IRS Form 8886. The Treasury
Department and IRS have announced that they will consider how to narrow the
breadth of the tax shelter regulations. In furtherance of this intent, the IRS,
also in February 2003, issued a Revenue Procedure that excludes from the
definition of "reportable transaction," certain transactions relating to REMICs.
The scope of the definition of the term "reportable transaction," however,
continues to be broad and the tax shelter regulations could be fairly read as
applying to a transaction such as the one in which the Offered Certificates were
issued. You should consult your own tax advisor concerning any possible
disclosure obligation with respect to your investment in, and disposition of,
the Offered Certificates.
ERISA CONSIDERATIONS
Any Plan fiduciary who proposes to cause a Plan (as defined below) to
acquire the Offered Certificates should consult with its counsel with respect to
the potential consequences under the Employee Retirement Income Security Act of
1974, as amended ("ERISA") and/or the Code, of the Plan's acquisition and
ownership of those Certificates. See "ERISA Considerations" in the prospectus.
Section 406 of ERISA and Section 4975 of the Code prohibit "parties in interest"
and "disqualified persons" with respect to an employee benefit or other plan or
arrangement, including, but not limited to, an individual retirement account,
that is subject to ERISA and/or the excise tax provisions set forth under
Section 4975 of the Code (a "Plan") from engaging in certain transactions
involving that Plan and its assets unless a statutory, regulatory or
administrative exemption applies to the transaction. Section 4975 of the Code
imposes certain excise taxes on prohibited transactions involving Plans
described under that Section. ERISA authorizes the imposition of civil penalties
for prohibited transactions involving Plans not subject to the requirements of
Section 4975 of the Code.
Some employee benefit plans, including governmental plans and certain
church plans, are not subject to ERISA's requirements. Accordingly, assets of
those plans may be invested in the Offered Certificates without regard to the
ERISA considerations described herein and in the prospectus, subject to the
provisions of other applicable federal and state law. Any plan that is qualified
and exempt from taxation under Sections 401(a) and 501(a) of the Code may
nonetheless be subject to the prohibited transaction rules set forth in Section
503 of the Code.
Except as noted above, investments by Plans are subject to ERISA's general
fiduciary requirements, including the requirement of investment prudence and
diversification and the requirement that a Plan's investments be made in
accordance with the documents governing the Plan. A fiduciary who decides to
invest the assets of a Plan in the Offered Certificates should consider, among
other factors, the extreme sensitivity of the investment to the rate of
principal payments, including prepayments, on the Loans.
The United States Department of Labor has granted individual administrative
exemptions to Greenwich Capital Markets, Inc. (Prohibited Transaction Exemption
90-59, Exemption Application No. D-8374, 55 Fed. Reg. 36724 (September 6, 1990)
("PTE 90-59")) and to the predecessor of Wachovia Capital Markets, LLC
(Prohibited Transaction Exemption 96-22, Exemption Application No. D-10165, 61
Fed. Reg. 14828 (April 3, 1996) (together with PTE 90-59, the "Underwriter
Exemption")) from some of the prohibited transaction rules of ERISA and the
related excise tax provisions of Section 4975 of the Code with respect to the
initial purchase, the holding and the subsequent resale by Plans of certificates
in pass-through trusts that consist of receivables, loans and other obligations
that meet the conditions and requirements of the Underwriter Exemption. The
Underwriter Exemption applies to the Loans in the trust fund.
On July 21, 1997, November 13, 2000 and August 22, 2002, the Department of
Labor published in the Federal Register amendments to the Underwriter Exemption.
The July 21, 1997 amendment extended exemptive relief to certain mortgage-backed
and asset-backed securities transactions using pre-funding accounts for trusts
issuing pass-through certificates. The amendments generally allow mortgage loans
or other secured receivables supporting payments to certificateholders, and
having a value equal to no more than twenty-five percent (25%) of the total
principal amount of the certificates being offered by the trust, to be
transferred to the trust within a 90-day or three-month period following the
closing date, instead of requiring that all of those obligations be either
identified or transferred on or before the closing date. The relief is available
when the following conditions are met:
S-116
o The ratio of the amount allocated to the pre-funding account to the
total principal amount of the certificates being offered (the
"pre-funding limit") must not exceed twenty-five percent (25%).
o All obligations transferred after the closing date ("additional
obligations") must meet the same terms and conditions for eligibility
as the original obligations used to create the trust, which terms and
conditions have been approved by a rating agency described in the
Underwriter Exemption (an "exemption rating agency").
o The transfer of the additional obligations to the trust during the
pre-funding period must not result in the certificates to be covered
by the Underwriter Exemption 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 certificates by the trust.
o Solely as a result of the use of pre-funding, the weighted average
annual percentage interest rate for all of the obligations in the
trust at the end of the pre-funding period must not be more than 100
basis points lower than the average interest rate for the obligations
transferred to the trust on the closing date.
o In order to insure that the characteristics of the additional
obligations are substantially similar to the original obligations
which were transferred to the trust fund:
o the characteristics of the additional obligations must be
monitored by an insurer or other credit support provider that is
independent of the depositor; or
o an independent accountant retained by the depositor must provide
the depositor with a letter (with copies provided to each
exemption rating agency rating the certificates, the related
underwriter and the related trustee) stating whether or not the
characteristics of the additional obligations conform to the
characteristics described in the related prospectus or prospectus
supplement and/or pooling and servicing agreement. In preparing
the letter, the independent accountant must use the same type of
procedures as were applicable to the obligations transferred to
the trust as of the closing date.
o The pre-funding period must end no later than three months or 90 days
after the closing date or earlier in some cases if the pre-funding
account falls below the minimum level specified in the pooling and
servicing agreement or an event of default occurs.
o Amounts transferred to any pre-funding account and/or capitalized
interest account used in connection with the pre-funding may be
invested only in specified permitted investments.
o The related prospectus or prospectus supplement must describe the
pre-funding period.
o The trustee of the trust (or any agent with whom the trustee
contracts) must be a substantial financial institution or trust
company experienced in trust activities and familiar with its duties,
responsibilities and liabilities as a fiduciary under ERISA.
o The related pooling and servicing agreement must describe the
permitted investments for the pre-funding account and/or capitalized
interest account and, if not disclosed in the related prospectus or
prospectus supplement, the terms and conditions for eligibility of
additional obligations.
The November 13, 2000 amendment to the Underwriter Exemption permits Plans
to invest in certain investment grade (i.e., securities which are rated at the
time of issuance in one of the four highest generic rating categories by at
least one rating agency) mortgage-backed securities and asset-backed securities
which are either senior or subordinated. The amendment also permits the use of
eligible interest rate swaps (both ratings dependent and non-rating dependent)
under certain circumstances; permits the use of yield supplements which involve
notional principal amounts; and makes other changes to the Underwriter Exemption
that reflect the Department's current interpretation of the Underwriter
Exemption.
S-117
For a general description of the Underwriter Exemption, as amended on July
21, 1997, November 13, 2000 and August 22, 2002, and the conditions that must be
satisfied for the Underwriter Exemption to apply, see "ERISA Considerations" in
the prospectus.
The rating of a security may change. If a class of Offered Certificates is
no longer rated at least BBB- or Baa3, Offered Certificates of that class will
no longer be eligible for relief under the Underwriter Exemption (although a
Plan that had purchased the Offered Certificate when it had an investment-grade
rating would not be required by the Underwriter Exemption to dispose of it).
Consequently, in these circumstances, such Offered Certificates may not be
purchased by Plans other than "insurance company general accounts" as such term
is defined in Section V(e) of Prohibited Transaction Class Exemption 95-60
("PTCE 95-60"), pursuant to Sections I and III of PTCE 95-60.
It is expected that the Underwriter Exemption will apply to the acquisition
and holding by Plans of Offered Certificates and that all conditions of the
Underwriter Exemption other than those within the control of the investors will
be met. In addition, as of the date hereof, there is no single borrower that is
the obligor on five percent (5%) of the Loans included in the trust fund by
aggregate unamortized principal balance of the assets of the trust fund.
Prospective Plan investors should consult with their legal advisors
concerning the impact of ERISA and the Code, the effect of the Plan Asset
Regulation described in the prospectus, the applicability of the Underwriter
Exemption, and the potential consequences in their specific circumstances, prior
to making an investment in any of the Offered Certificates. Moreover, each Plan
fiduciary should determine whether under the general fiduciary standards of
investment prudence and diversification, an investment in any of the Offered
Certificates is appropriate for the Plan, taking into account the overall
investment policy of the Plan and the composition of the Plan's investment
portfolio.
LEGAL INVESTMENT
The Offered Certificates will not constitute "mortgage related securities"
for purposes of the Secondary Mortgage Enhancement Act of 1984. Accordingly,
many institutions with legal authority to invest in "mortgage related
securities" may not be legally authorized to invest in the Offered Certificates.
The appropriate characterization of the Offered Certificates under various
legal investment restrictions, and thus the ability of investors subject to
those restrictions to purchase Offered Certificates, may be subject to
significant interpretive uncertainties. Accordingly, institutions whose
investment activities are subject to review by federal or state regulatory
authorities should consult with their counsel or the applicable authorities to
determine whether an investment in the Offered Certificates complies with
applicable guidelines, policy statements or restrictions. See "Legal Investment"
in the prospectus.
S-118
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the underwriting agreement
dated April 29, 2004 (the "Underwriting Agreement") among the Depositor, Equity
One, Wachovia Capital Markets, LLC, an indirect, wholly-owned subsidiary of
Wachovia Corporation ("Wachovia"), Greenwich Capital Markets, Inc. ("Greenwich")
and Friedman, Billings, Ramsey & Co., Inc. ("FBR" and, together with Greenwich
and Wachovia, the "Underwriters"), the Depositor has agreed to sell to each of
the Underwriters and each of the Underwriters has agreed to purchase from the
Depositor all of the Offered Certificates in the principal amounts set forth
below.
Wachovia Greenwich FBR
-------- --------- ---
Original Class Certificate $78,660,000 $78,660,000 $8,280,000
Balance of Class AF-1 Certificates
Original Class Certificate $16,340,000 $16,340,000 $1,720,000
Balance of Class AF-2 Certificates
Original Class Certificate $33,487,500 $33,487,500 $3,525,000
Balance of Class AF-3 Certificates
Original Class Certificate $8,740,000 $8,740,000 $920,000
Balance of Class AF-4 Certificates
Original Class Certificate $6,202,075 $6,202,075 $652,850
Balance of Class AF-5 Certificates
Original Class Certificate $10,450,000 $10,450,000 $1,100,000
Balance of Class AF-6 Certificates
Original Class Certificate $83,125,000 $83,125,000 $8,750,000
Balance of Class AV-1 Certificates
Original Class Certificate $36,310,425 $36,310,425 $3,822,150
Balance of Class AV-2 Certificates
Original Class Certificate $27,930,000 $27,930,000 $2,940,000
Balance of Class M-1 Certificates
Original Class Certificate $16,957,500 $16,957,500 $1,785,000
Balance of Class M-2 Certificates
Original Class Certificate $3,823,750 $3,823,750 $402,500
Balance of Class M-3 Certificates
Original Class Certificate $3,491,250 $3,491,250 $367,500
Balance of Class M-4 Certificates
Original Class Certificate $3,491,250 $3,491,250 $367,500
Balance of Class B-1 Certificates
Original Class Certificate $3,491,250 $3,491,250 $367,500
Balance of Class B-2 Certificates
The Offered Certificates will be offered by the Underwriters when, as and
if issued and sold by the Depositor to the Underwriters, subject to the
Underwriters' right to reject any subscription in whole or in part.
The Underwriters have informed the Depositor that they propose to offer the
Offered Certificates for sale to the public at the prices listed on the cover
page of this prospectus supplement. The Underwriters may effect those
S-119
transactions by selling the Offered Certificates to or through dealers, and
those dealers may receive compensation in the form of underwriting discounts,
concessions or commissions from the Underwriters. In connection with the sale of
the Offered Certificates, the Underwriters may be deemed to have received
compensation from the Depositor in the form of underwriting compensation. The
Underwriters and any dealers that participate with the Underwriters in the
distribution of the Offered Certificates may be deemed to be underwriters and
any commissions received by them and any profit on the resale of the Offered
Certificates by them may be deemed to be underwriting discounts and commissions
under the Securities Act of 1933, as amended (the "Securities Act"). After the
initial public offering of the Offered Certificates, the public offering prices
and concessions may be changed.
No Offered Certificate will have an established trading market when issued.
The Underwriters may, from time to time, act as brokers or purchase and sell
Offered Certificates in the secondary market, but the Underwriters are under no
obligation to do so and there can be no assurance that there will be a secondary
market for the Offered Certificates or liquidity in the secondary market if one
does develop.
Until the distribution of the Offered Certificates is completed, rules of
the Securities and Exchange Commission may limit the ability of the Underwriters
and certain selling group members to bid for and purchase the Offered
Certificates. As an exception to these rules, the Underwriters are permitted to
engage in certain transactions that stabilize the price of the Offered
Certificates. Those transactions consist of bids or purchases for the purpose of
pegging, fixing or maintaining the price of the Offered Certificates.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of those purchases.
Neither the Depositor nor the Underwriters make any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above, if engaged in, may have on the prices of the Offered
Certificates. In addition, neither the Depositor nor the Underwriters make any
representation that the Underwriters will engage in those transactions or that
those transactions, once commenced, will not be discontinued without notice.
Equity One and the Depositor have agreed to indemnify the Underwriters
against, or make contributions to the Underwriters with respect to specific
liabilities, including liabilities under the Securities Act.
LEGAL MATTERS
Certain legal matters relating to the Certificates, including specific
federal income tax consequences with respect thereto, will be passed upon for
the Depositor by Stradley, Ronon, Stevens & Young, LLP, Philadelphia,
Pennsylvania. McKee Nelson LLP, New York, New York, will pass upon certain legal
matters on behalf of the Underwriters.
S-120
RATINGS
It is a condition to the issuance of the Offered Certificates that they
receive the respective ratings set forth below from Standard & Poor's Ratings
Services, a division of The McGraw-Hill Companies, Inc. ("Standard & Poor's"),
Moody's Investors Service, Inc. ("Moody's"), and Fitch Ratings ("Fitch" and,
together with Standard & Poor's and Moody's, the "Rating Agencies").
Standard &
Class Poor's Moody's Fitch
- -------------------- ----------------- ---------------- -----------------
AF-1 AAA Aaa AAA
AF-2 AAA Aaa AAA
AF-3 AAA Aaa AAA
AF-4 AAA Aaa AAA
AF-5 AAA Aaa AAA
AF-6 AAA Aaa AAA
AV-1 AAA Aaa AAA
AV-2 AAA Aaa AAA
M-1 AA Aa2 AA
M-2 A A2 A+
M-3 A- A3 A
M-4 BBB+ Baa1 A-
B-1 BBB Baa1 BBB+
B-2 BBB- Baa2 BBB
The ratings that the Rating Agencies assign to mortgage pass-through
certificates address the likelihood of the receipt by certificateholders of all
distributions to which they are entitled. The rating process addresses
structural and legal aspects associated with the Offered Certificates, including
the nature of the underlying mortgage loans. The ratings assigned to mortgage
pass-through certificates do not represent any assessment of the likelihood that
principal prepayments will be made by the borrowers or the degree to which the
prepayments will differ from that originally anticipated. The rating of the
Offered Certificates will depend primarily on an assessment by the Rating
Agencies of the Loans. The ratings do not address the possibility that
certificate holders might suffer a lower than anticipated yield due to
non-credit events, and do not address the likelihood that holders of the Class
AF-1, Class AV-1, Class AV-2, Class B-1 and Class B-2 Certificates will receive
any Net WAC Cap Carryover.
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 Certificates 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 Certificates.
The Depositor has not requested that any rating agency rate the Offered
Certificates other than as stated above. However, there can be no assurance as
to whether any other rating agency will rate the Offered Certificates, or, if it
does, what rating would be assigned by that rating agency. A rating on the
Offered Certificates by another rating agency, if assigned at all, may be lower
than the ratings assigned to the Offered Certificates as stated above.
S-121
INDEX OF DEFINED TERMS
60+ Day Delinquent Loan............................82 Distribution Account...............................70
Adjustable Class AF Cap............................74 Distribution Date..................................70
Adjusted Net Mortgage Rate.........................67 DTC................................................69
Adjustment Date....................................28 Due Date...........................................26
Advance............................................68 Due Period.........................................81
Aggregate Class B Early Distribution Amount........78 Equity One.........................................64
Aggregate Trust Fund Principal Balance.............78 Equity One Standards...............................63
Allocation Percentage..............................78 ERISA.............................................116
Applied Realized Loss Amount.......................86 Events of Default..................................91
Available Funds....................................70 Extra Principal Distribution Amount................81
Balloon Loans......................................26 FBR...............................................119
Bank...............................................89 FDIC...............................................89
Basic Principal Distribution Amount................78 FIRREA.............................................89
Beneficial Owners..................................69 Fitch.............................................121
Call Report........................................89 Fixed Class AF Cap.................................74
Cede...............................................69 Formula Rate.......................................75
Certificate Account................................69 Funding Period.....................................60
Certificates.......................................24 Greenwich.........................................119
Class AF Certificates..............................24 Group I Interest Remittance Amount.................73
Class AF Principal Distribution Amount.............78 Group I Loans......................................24
Class AF-6 Lockout Distribution Amount.............79 Group I Principal Balance..........................25
Class AF-6 Lockout Percentage......................79 Group I Subsequent Loans...........................60
Class AF-6 Pro Rata Distribution Amount............79 Group II Loans.....................................24
Class AV-1 Principal Distribution Amount...........79 Group II Principal Balance.........................25
Class AV-2 Principal Distribution Amount...........79 Group II-A Interest Remittance Amount..............73
Class B-1 Applied Realized Loss Amount.............86 Group II-A Loans...................................24
Class B-1 Principal Distribution Amount............80 Group II-A Principal Balance.......................25
Class B-1 Realized Loss Amortization Amount........86 Group II-A Subsequent Loans........................60
Class B-2 Applied Realized Loss Amount.............86 Group II-B Interest Remittance Amount..............73
Class B-2 Principal Distribution Amount............80 Group II-B Loans...................................24
Class B-2 Realized Loss Amortization Amount........86 Group II-B Principal Balance.......................25
Class Certificate Balance..........................78 Group II-B Subsequent Loans........................61
Class M-1 Applied Realized Loss Amount.............86 Initial Aggregate Trust Fund Principal Balance.....81
Class M-1 Principal Distribution Amount............79 Initial Cut-off Date...............................24
Class M-1 Realized Loss Amortization Amount........86 Initial Cut-off Date Group I Principal Balance.....25
Class M-2 Applied Realized Loss Amount.............86 Initial Cut-off Date Group II Principal Balance....25
Class M-2 Principal Distribution Amount............79 Initial Cut-off Date Group II-A Principal Balance..26
Class M-2 Realized Loss Amortization Amount........87 Initial Cut-off Date Group II-B Principal Balance..26
Class M-3 Applied Realized Loss Amount.............87 Initial Cut-off Date Pool Principal Balance........26
Class M-3 Principal Distribution Amount............80 Initial Group I Loans..............................24
Class M-3 Realized Loss Amortization Amount........87 Initial Group II Loans.............................24
Class M-4 Applied Realized Loss Amount.............87 Initial Group II-A Loans...........................24
Class M-4 Principal Distribution Amount............80 Initial Group II-B Loans...........................24
Class M-4 Realized Loss Amortization Amount........87 Initial Loans......................................24
Closing Date.......................................25 Initial Rate Cap...................................28
Code...............................................60 Insurance Proceeds.................................70
Collateral Value...................................27 Interest Accrual Period............................74
Combined Loan-to-Value Ratio.......................26 Interest Distribution Amount.......................74
CPR................................................98 Last Scheduled Distribution Date..................113
Deficient Valuation................................83 LIBOR Determination Date...........................88
Definitive Certificate.............................69 Liquidated Loan....................................83
Deleted Loan.......................................60 Liquidation Proceeds...............................70
Depositor..........................................24 Loans..............................................24
Determination Date.................................68 Margin.............................................28
S-122
Maximum Mortgage Rate..............................28 Rating Agencies...................................121
MERS (R)...........................................23 Realized Loss......................................83
Minimum Mortgage Rate..............................28 Realized Loss Amortization Amount..................87
Monthly Excess Cashflow Amount.....................84 Realized Loss Amount...............................84
Monthly Excess Cashflow Distribution...............84 Record Date........................................70
Monthly Excess Interest Amount.....................74 Reference Banks....................................88
Monthly Interest Distribution......................71 Refinance Loan.....................................27
Moody's...........................................121 REIT..............................................115
Mortgage...........................................59 Relief Act Reduction...............................76
Mortgage File......................................59 Remaining Interest Remittance Amount...............76
Mortgage Notes.....................................24 Remaining Principal Distribution Amount............82
Multi-family Loan..................................24 REO Property.......................................68
Net Interest Shortfalls............................74 Replacement Loan...................................60
Net Prepayment Interest Shortfall..................74 Reserve Fund.......................................88
Net WAC Cap........................................74 Reserve Fund Addition..............................89
Net WAC Cap Account................................88 Residential Loan...................................24
Net WAC Cap Carryover..............................75 Scheduled Payments.................................26
Net WAC Cap component.............................114 Securities Act....................................120
Offered Certificates...............................24 Seller and Sellers.................................24
OID...............................................114 Senior Certificates................................24
One-Month LIBOR....................................87 Senior Enhancement Percentage......................82
Optional Termination Date..........................90 Senior Principal Distribution Amount...............82
Overcollateralization Amount.......................81 Senior Specified Enhancement Percentage............82
Overcollateralization Deficiency...................81 Servicer...........................................24
Overcollateralization Release Amount...............81 Servicing Fee......................................67
Pass-Through Rate..................................75 Servicing Fee Rate.................................67
Periodic Rate Cap..................................28 Six-Month LIBOR....................................28
Permitted Investments..............................69 SPA................................................98
Permitted Trustee Withdrawals......................70 Standard & Poor's.................................121
Plan..............................................116 Stated Principal Balance...........................25
Pool Principal Balance.............................25 Stepdown Date......................................82
Pooling and Servicing Agreement....................24 Strike Price.......................................89
Post-Stepdown Cross-collateralization Principal Structuring Assumptions............................95
Distribution Amount..............................81 Subordinate Certificates...........................24
Post-Stepdown Monthly Principal Distribution.......77 Subsequent Cut-off Date............................61
Post-Stepdown Remaining Principal Distribution Subsequent Loans...................................61
Amount...........................................81 Subsequent Transfer Agreement......................61
Pre-Funded Amount..................................60 Subsequent Transfer Date...........................61
Pre-Funding Account................................60 Substitution Adjustment Amount.....................60
Prepayment Assumption..............................98 Targeted Overcollateralization Amount..............82
Prepayment Interest Excess.........................67 Tax Counsel.......................................114
Prepayment Interest Shortfall......................76 Telerate Page 3750.................................88
Prepayment Period..................................71 Termination Price..................................90
Pre-Stepdown Cross-collateralization Principal Trigger Event......................................83
Distribution Amount .............................81 Trustee............................................24
Pre-Stepdown Monthly Principal Distribution........76 Underwriter Exemption.............................116
Pre-Stepdown Remaining Principal Distribution Underwriters......................................119
Amount ..........................................81 Underwriting Agreement............................119
Principal Distribution Amount......................81 Unpaid Interest Amount.............................76
Principal Remittance Amount........................81 Unpaid Realized Loss Amount........................87
Projected Principal Balance........................89 Voting Rights......................................92
PTCE 95-60........................................118 Wachovia..........................................119
PTE 90-59.........................................116 Yield Maintenance Agreement........................88
S-123
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ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in specific limited circumstances, the globally offered Mortgage
Pass-Through Certificates, Series 2004-2 (the "Global Securities") will be
available only in book-entry form. Investors in the Global Securities may hold
the Global Securities through The Depository Trust Company ("DTC") or, upon
request, through, either of Clearstream, Luxembourg or the Euroclear System
("Euroclear"). The Global Securities will be tradable as home market instruments
in both the European and U.S. domestic markets. Initial settlement and all
secondary trades will settle in same-day funds.
Secondary market trading between investors holding Global Securities
through Clearstream, Luxembourg and Euroclear will be conducted in the ordinary
way in accordance with their normal rules and operating procedures and in
accordance with conventional eurobond practice (i.e., seven calendar day
settlement).
Secondary market trading between investors holding Global Securities
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations and similar issues of mortgage pass-through
certificates.
Secondary cross-market trading between Clearstream, Luxembourg or Euroclear
and DTC participants holding Certificates will be effected on a
delivery-against-payment basis through the respective depositaries of
Clearstream, Luxembourg and Euroclear (in that capacity) and as DTC
participants.
Non-U.S. holders (as described below) of Global Securities will be subject
to U.S. withholding taxes unless the holders meet certain requirements and
deliver appropriate U.S. tax documents to the securities clearing organizations
or their participants.
Initial Settlement
All Global Securities will be held in book-entry form by DTC in the name of
Cede & Co. as nominee of DTC. Investors' interests in the Global Securities will
be represented through financial institutions acting on their behalf as direct
and indirect participants in DTC. As a result, Clearstream, Luxembourg and
Euroclear will hold positions on behalf of their participants through their
respective depositaries, which in turn will hold positions in accounts as DTC
participants.
Investors electing to hold their Global Securities through DTC will follow
the settlement practices applicable to similar issues of mortgage pass-through
certificates. Investor's securities custody accounts will be credited with their
holdings against payment in same-day funds on the settlement date.
Investors electing to hold their Global Securities through Clearstream,
Luxembourg or Euroclear accounts will follow the settlement procedures
applicable to conventional eurobonds, except that there will be no temporary
global security and no "lock-up" or restricted period. Global Securities will be
credited to the securities custody accounts on the settlement date against
payment in same-day funds.
Secondary Market Trading
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
Trading between DTC participants. Secondary market trading between DTC
participants will be settled using the procedures applicable to similar issues
of mortgage pass-through certificates in same-day funds.
A-1
Trading between Clearstream, Luxembourg and/or Euroclear participants.
Secondary market trading between Clearstream, Luxembourg participants or
Euroclear participants will be settled using the procedures applicable to
conventional eurobonds in same-day funds.
Trading between DTC seller and Clearstream, Luxembourg or Euroclear
purchaser. When Global Securities are to be transferred from the account of a
DTC participant to the account of a Clearstream, Luxembourg participant or a
Euroclear participant, the purchaser will send instructions to Clearstream,
Luxembourg or Euroclear through a Clearstream, Luxembourg participant or
Euroclear participant at least one business day before settlement. Clearstream,
Luxembourg or Euroclear will instruct its respective depositary, as the case may
be, to receive the Global Securities against payment. Payment will include
interest accrued on the Global Securities from and including the last
distribution date to but excluding the settlement date, on the basis of either
the actual number of days in that accrual period and a year assumed to consist
of 360 days or a 360-day year of twelve 30-day months as applicable to the
related class of Global Securities. For transactions settling on the 31st of the
month, payment will include interest accrued to but excluding the first day of
the following month. Payment will then be made by the respective depositary of
the DTC participant's account against delivery of the Global Securities. After
settlement has been completed, the Global Securities will be credited to the
respective clearing system and by the clearing system, in accordance with its
usual procedures, to the Clearstream, Luxembourg participant's or Euroclear
participant's account. The securities credit will appear the next day (European
time) and the cash debt will be back-valued to, and the interest on the Global
Securities will accrue from, the value date (which would be the preceding day
when settlement occurred in New York). If settlement is not completed on the
intended value date (i.e., the trade fails), the Clearstream, Luxembourg or
Euroclear cash debt will be valued instead as of the actual settlement date.
Clearstream, Luxembourg participants and Euroclear participants will need
to make available to the respective clearing systems the funds necessary to
process same-day funds settlement. The most direct means of doing so is to
pre-position funds for settlement, either from cash on hand or existing lines of
credit, as they would for any settlement occurring within Clearstream,
Luxembourg or Euroclear. Under this approach, they may take on credit exposure
to Clearstream, Luxembourg or Euroclear until the Global Securities are credited
to their accounts one day later.
As an alternative, if Clearstream, Luxembourg or Euroclear has extended a
line of credit to them, Clearstream, Luxembourg participants or Euroclear
participants can elect not to pre-position funds and allow that credit line to
be drawn upon to finance settlement. Under this procedure, Clearstream,
Luxembourg participants or Euroclear participants purchasing Global Securities
would incur overdraft charges for one day, assuming they cleared the overdraft
when the Global Securities were credited to their accounts. However, interest on
the Global Securities would accrue from the value date. Therefore, in many cases
the investment income on the Global Securities earned during that one-day period
may substantially reduce or offset the amount of the overdraft charges, although
this result will depend on each Clearstream, Luxembourg participant's or
Euroclear participant's particular cost of funds.
Since the settlement will take place during New York business hours, DTC
participants can employ their usual procedures for sending Global Securities to
the respective European depositary for the benefit of Clearstream, Luxembourg
participants or Euroclear participants. The sale proceeds will be available to
the DTC seller on the settlement date. Thus, to DTC participants a cross-market
transaction will settle no differently than a trade between two DTC
participants.
Trading between Clearstream, Luxembourg or Euroclear seller and DTC
purchaser. Due to time zone differences in their favor, Clearstream, Luxembourg
participants and Euroclear participants may employ their customary procedures
for transactions in which Global Securities are to be transferred by the
respective clearing system, through the respective depositary, to a DTC
participant. The seller will send instructions to Clearstream, Luxembourg or
Euroclear through a Clearstream, Luxembourg participant or Euroclear participant
at least one business day prior to settlement. In these cases Clearstream,
Luxembourg or Euroclear will instruct the respective depositary, as appropriate,
to deliver the Global Securities to the DTC participant's account against
payment. Payment will include interest accrued on the Global Securities from and
including the last distribution date to but excluding the settlement date, on
the basis of either the actual number of days in that accrual period and a year
assumed to consist of 360 days or a 360-day year of twelve 30-day months as
applicable to the related class of
A-2
Global Securities. For transactions settling on the 31st of the month, payment
will include interest accrued to but excluding the first day of the following
month. The payment will then be reflected in the account of the Clearstream,
Luxembourg participant or Euroclear participant the following day, and receipt
of the cash proceeds in the Clearstream, Luxembourg participant's or Euroclear
participant's account would be back-valued to the value date (which would be the
preceding day, when settlement occurred in New York). Should the Clearstream,
Luxembourg participant or Euroclear participant have a line of credit with its
respective clearing system and elect to be in debt in anticipation of receipt of
the sale proceeds in its account, the back-valuation will extinguish any
overdraft incurred over that one-day period. If settlement is not completed on
the intended value date (i.e., the trade fails), receipt of the cash proceeds in
the Clearstream, Luxembourg participant's or Euroclear participant's account
would instead be valued as of the actual settlement date.
Finally, day traders that use Clearstream, Luxembourg or Euroclear and that
purchase Global Securities from DTC participants for delivery to Clearstream,
Luxembourg participants or Euroclear participants should note that these trades
would automatically fail on the sale side unless affirmative action were taken.
At least three techniques should be readily available to eliminate this
potential problem:
(1) borrowing through Clearstream, Luxembourg or Euroclear for one
day (until the purchase side of the day trade is reflected in
their Clearstream, Luxembourg or Euroclear accounts) in
accordance with the clearing system's customary procedures;
(2) borrowing the Global Securities in the U.S. from a DTC
participant no later than one day prior to settlement, which
would give the Global Securities sufficient time to be reflected
in their Clearstream, Luxembourg or Euroclear account in order to
settle the sale side of the trade; or
(3) staggering the value dates for the buy and sell sides of the
trade so that the value date for the purchase from the DTC
participant is at least one day prior to the value date for the
sale to the Clearstream, Luxembourg participant or Euroclear
participant.
Certain U.S. Federal Income Tax Documentation Requirements
A Beneficial Owner of Global Securities holding securities through
Clearstream, Luxembourg 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) (or U.S. backup
withholding tax at a rate of 28%), unless (1) each clearing system, bank or
other financial institution that holds customers' securities in the ordinary
course of its trade or business in the chain of intermediaries between the
Beneficial Owner and the U.S. entity required to withhold tax complies with
applicable certification requirements and (2) the Beneficial Owner takes one of
the following steps to obtain an exemption or reduced tax rate:
Exemption for non-U.S. Persons (as defined below) (Form W-8BEN). Beneficial
Owners of Global Securities that are non-U.S. Persons may be able to 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). If the information shown on Form W-8BEN changes, a new Form W-8BEN
must be filed within 30 days of the change.
Exemption for non-U.S. Persons with effectively connected income (Form
W-8ECI). A non-U.S. Person, including a non-U.S. corporation or bank with a U.S.
branch, for which the interest income is effectively connected with its conduct
of a trade or business in the United States, may be able to obtain an exemption
from the withholding tax by filing Form W-8ECI (Certificate of Foreign Person's
Claim for Exemption From Withholding on Income Effectively Connected With the
Conduct of a Trade or Business in the United States).
Exemption or reduced rate for non-U.S. Persons resident in treaty countries
(Form W-8BEN). Non-U.S. Persons that are Beneficial Owners residing in a country
that has a tax treaty with the United States may be able to obtain an exemption
or reduced tax rate (depending on the treaty terms) by filing Form W-8BEN.
A-3
Exemption for U.S. Persons (Form W-9). U.S. Persons may be able to 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 files by submitting the appropriate form to the person through
whom it holds (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 generally
effective for three calendar years.
The term "U.S. Person" means:
(1) a citizen or resident of the United States;
(2) a corporation or partnership organized in or under the laws of
the United States, any state thereof or the District of Columbia
(other than a partnership that is not treated as a United States
person under any applicable Treasury regulations);
(3) an estate the income of which is includible in gross income for
United States tax purposes, regardless of its source; or
(4) a trust if a court within the United States is able to exercise
primary supervision over the administration of the trust and one
or more United States persons have authority to control all
substantial decisions of the trust.
This summary does not deal with all aspects of U.S. Federal income tax
withholding that may be relevant to foreign holders of the Global Securities or
with all aspects of Treasury regulations relating to tax documentation
requirements. Investors are advised to consult their own tax advisors for
specific tax advice concerning their holding and disposing of the Global
Securities, the right to receive any Net WAC Cap Carryover and the U.S. federal
income tax documentation requirements (described above) related to the same.
A-4
ANNEX II
PROJECTED PRINCIPAL BALANCES SCHEDULE
-------------------------------------
The Projected Principal Balances and Strike Prices relating to the Yield
Maintenance Agreement are expected to be determined pursuant to the following
schedule:
Projected AV-1 Projected AV-2
Distribution Principal AV-1 Principal AV-2
Date Balance Strike Price Balance Strike Price
- ------------------- ---------------- ----------------- ---------------- -----------------
May 2004 175,000,632 1.600% 76,443,020 1.600%
June 2004 171,149,438 1.600% 74,755,094 1.600%
July 2004 167,404,626 1.600% 73,113,795 1.600%
August 2004 162,747,878 1.600% 71,079,950 1.600%
September 2004 158,219,779 1.600% 69,102,292 1.600%
October 2004 153,816,792 1.600% 67,179,278 1.600%
November 2004 149,535,502 1.600% 65,309,405 1.600%
December 2004 145,372,539 1.600% 63,491,212 1.600%
January 2005 141,324,652 1.600% 61,723,279 1.600%
February 2005 137,388,675 1.600% 60,004,223 1.600%
March 2005 133,561,532 1.600% 58,332,701 1.600%
April 2005 129,840,229 1.600% 56,707,405 1.600%
May 2005 126,221,855 1.600% 55,127,064 1.600%
June 2005 122,703,579 1.600% 53,590,442 1.600%
July 2005 119,282,647 1.600% 52,096,334 1.600%
August 2005 115,956,381 1.600% 50,643,573 1.600%
September 2005 112,722,175 1.600% 49,231,019 1.600%
October 2005 109,577,496 1.600% 47,857,567 1.600%
November 2005 106,519,879 1.600% 46,522,140 1.600%
December 2005 103,546,992 1.600% 45,223,691 1.600%
January 2006 100,656,437 1.600% 43,962,490 1.600%
February 2006 11,164,026 1.600% 2,559,405 1.600%
March 2006 10,852,101 1.600% 2,487,751 1.600%
April 2006 10,548,823 1.600% 2,418,088 1.600%
May 2006 10,253,952 1.600% 2,350,359 1.600%
June 2006 9,967,259 1.600% 2,284,511 1.600%
July 2006 9,688,516 1.600% 2,220,494 1.600%
August 2006 9,417,506 1.600% 2,158,255 1.600%
September 2006 9,154,014 1.600% 2,097,746 1.600%
October 2006 8,897,834 1.600% 2,038,919 1.600%
November 2006 8,648,763 1.600% 1,981,727 1.600%
December 2006 8,406,606 1.600% 1,926,127 1.600%
January 2007 8,171,173 1.600% 1,872,072 1.600%
February 2007 7,942,294 1.600% 0 --
March 2007 0 -- 0 --
A-5
[THIS PAGE INTENTIONALLY LEFT BLANK]
Prospectus dated April 29, 2004
EQUITY ONE ABS, INC.
Depositor
Asset Backed Certificates
Asset Backed Notes
(Issuable in Series)
-------------------------------
Equity One ABS, Inc., as depositor, may offer from time to time under this
prospectus and related prospectus supplements securities that are asset-backed
certificates or asset-backed notes. The depositor will sell these securities
from time to time in one or more series, each of which will be issued in one or
more classes.
- --------------------------------
Before buying securities, The related prospectus supplement will set
consider carefully the risk forth the specific assets of the trust fund
factors beginning on page 5 of and the seller or sellers from whom the
this prospectus. assets are acquired.
Except as specified in the Each trust fund's assets may include--
related prospectus supplement,
neither the securities of any o one or more pools of
series nor the underlying
loans will be insured or o mortgage loans secured by first
guaranteed by any governmental and/or subordinate liens on one- to
agency or instrumentality, or four-family residential properties,
by any other entity.
o mortgage loans secured by first
The securities of each series and/or subordinate liens on mixed
will represent interests in commercial/residential use
the related trust fund only properties and other multi-family
and will not represent residential properties, and
interests in or be obligations
of any other entity. o closed-end and/or revolving home
equity loans or balances thereof
This prospectus may be used to secured by first and/or subordinate
offer and sell any series of liens on one- to four-family
securities only if it is residential properties,
accompanied by the prospectus
supplement for that series. o all monies due under the above assets,
which may be net of some of the amounts
payable to the servicer, and
o other funds, credit enhancements and
other assets.
The assets in the trust fund may be divided
into one or more asset groups and each class
of the related series will evidence
beneficial ownership of the corresponding
asset group.
The prospectus supplement will state if the
trust fund will make one or more REMIC or
FASIT elections for federal income tax
purposes.
- --------------------------------
The Securities and Exchange Commission and state securities regulators have not
approved or disapproved these securities or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
Information about the securities is presented in two separate documents
that progressively provide more detail:
o this prospectus, which provides general information, some of which may
not apply to your series of securities; and
o the accompanying prospectus supplement, which will describe the
specific terms of your series of securities, including:
o the principal balances and interest rates of each class;
o the timing and priority of interest and principal payments;
o statistical and other information about the loans;
o information about credit enhancement, if any, for each class;
o the ratings for each class; and
o the method for selling the securities.
We strongly encourage you to read both this prospectus and the accompanying
prospectus supplement in full. You should rely only on the information contained
or incorporated by reference in this prospectus and the accompanying prospectus
supplement. We have not authorized anyone to provide you with different
information.
If the description of the terms of your securities varies between this
prospectus and the accompanying prospectus supplement, you should rely on the
information in the prospectus supplement.
We are not offering securities in any state where the offer is not
permitted.
We do not claim that the information in this prospectus and the
accompanying prospectus supplement is accurate as of any date other than the
dates stated on the cover of each document.
We have made cross-references to captions in this prospectus and the
accompanying prospectus supplement under which you can find further related
discussions. The following table of contents and the table of contents in the
related prospectus supplement indicate where these captions are located.
--------------------------------
For means of acquiring additional information about us or a series of
securities, see "Available Information" and "Incorporation of Certain Documents
by Reference" beginning on page 101.
2
TABLE OF CONTENTS
RISK FACTORS......................................................................................................5
You will have only limited recourse to sellers, depositor and servicer.........................................5
The depositor has limited assets...............................................................................5
Limited liquidity may result in delays in liquidation or lower returns.........................................6
Credit enhancement may not be sufficient to protect you from losses............................................6
Prepayments of loans and other factors may result in a lower yield on the securities...........................6
Junior liens may result in losses in foreclosure proceedings...................................................7
Declines in property values may adversely affect you...........................................................7
Delays in liquidation may adversely affect you.................................................................7
The disproportionate impact of liquidation expenses on smaller loans may adversely affect you..................8
Consumer protection laws may adversely affect you..............................................................8
Balloon payment mortgages in the trust fund may pose a higher risk of loss.....................................8
The liquidation proceeds of mixed use loans may take longer to recover.........................................9
You could be adversely affected by violations of environmental laws............................................9
The ratings of the securities do not assure their payment......................................................9
Book-entry securities may pose limitations....................................................................10
Book-entry securities may result in delayed receipt of distributions..........................................10
Bankruptcy or insolvency may affect the timing and amount of distributions on the securities..................10
The principal amount of the securities may exceed the market value of the trust fund assets...................11
You may receive a prepayment of principal from unused amounts in any pre-funding account......................11
Some of the securities may be issued with original issue discount.............................................12
You may be adversely affected if the provider of any financial instrument defaults or is downgraded...........12
THE TRUST FUND...................................................................................................13
General.......................................................................................................13
The Loans.....................................................................................................14
Substitution of Trust Fund Assets.............................................................................17
USE OF PROCEEDS..................................................................................................18
THE DEPOSITOR....................................................................................................18
LOAN PROGRAM.....................................................................................................18
Underwriting Standards........................................................................................18
Specific Underwriting Criteria; Underwriting Programs.........................................................20
Summary of Underwriting Requirements by Program...............................................................20
Qualifications of Sellers and Servicer........................................................................23
Representations by Sellers; Repurchases.......................................................................23
DESCRIPTION OF THE SECURITIES....................................................................................24
General.......................................................................................................25
Distributions on Securities...................................................................................26
Advances......................................................................................................28
Reports to Securityholders....................................................................................29
Categories of Classes of Securities...........................................................................30
Indices Applicable to Floating Rate and Inverse Floating Rate Classes.........................................33
Book-Entry Registration of Securities.........................................................................35
CREDIT ENHANCEMENT...............................................................................................39
General.......................................................................................................39
Subordination.................................................................................................39
Letter of Credit..............................................................................................40
Insurance Policies, Surety Bonds and Guaranties...............................................................41
Over-Collateralization........................................................................................41
Reserve Accounts..............................................................................................41
Pool Insurance Policies.......................................................................................43
Cross-Collateralization.......................................................................................44
YIELD AND PREPAYMENT CONSIDERATIONS..............................................................................45
THE AGREEMENTS...................................................................................................47
Assignment of the Trust Fund Assets...........................................................................47
Payments on Loans; Deposits to Security Account...............................................................48
3
Pre-Funding Account...........................................................................................50
Sub-Servicing by Sellers......................................................................................51
Collection Procedures.........................................................................................51
Hazard Insurance..............................................................................................51
Realization Upon Defaulted Loans..............................................................................53
Servicing and Other Compensation and Payment of Expenses......................................................54
Evidence as to Compliance.....................................................................................54
Certain Matters Regarding the Servicer and the Depositor......................................................55
Events of Default; Rights Upon Event of Default...............................................................56
Amendment.....................................................................................................58
Termination; Optional Termination.............................................................................59
The Trustee...................................................................................................59
LEGAL ASPECTS OF THE LOANS.......................................................................................60
General.......................................................................................................60
Foreclosure/Repossession......................................................................................60
Environmental Risks...........................................................................................61
Rights of Redemption..........................................................................................63
Anti-Deficiency Legislation; Bankruptcy Laws; Tax Liens.......................................................63
Due-on-Sale Clauses...........................................................................................64
Enforceability of Prepayment and Late Payment Fees............................................................64
Equitable Limitations on Remedies.............................................................................64
Applicability of Usury Laws...................................................................................65
Service Members Civil Relief Act..............................................................................65
Junior Mortgages; Rights of Senior Mortgagees.................................................................65
The Title I Program...........................................................................................66
Consumer Protection Laws......................................................................................69
FEDERAL INCOME TAX CONSEQUENCES..................................................................................71
General.......................................................................................................71
Taxation of Debt Securities...................................................................................71
Taxation of the REMIC and its Holders.........................................................................76
REMIC Expenses; Single Class REMICs...........................................................................76
Taxation of the REMIC.........................................................................................77
Administrative Matters........................................................................................82
Financial Asset Securitization Investment Trust Qualification.................................................82
Qualification as a FASIT......................................................................................82
Consequences of Failing to Comply with FASIT Requirements.....................................................83
Taxation of the FASIT.........................................................................................83
Taxation of Regular Interest Holders..........................................................................83
Taxation of Ownership Interest Holders........................................................................84
Tax Status as a Grantor Trust.................................................................................84
Sale or Exchange..............................................................................................87
Miscellaneous Tax Aspects.....................................................................................87
Tax Treatment of Foreign Investors............................................................................88
Tax Characterization of the Trust Fund as a Partnership.......................................................89
Tax Consequences to Holders of the Notes......................................................................89
Tax Consequences to Holders of the Certificates Issued by a Partnership.......................................91
OTHER TAX CONSIDERATIONS.........................................................................................95
ERISA CONSIDERATIONS.............................................................................................96
LEGAL INVESTMENT.................................................................................................98
METHOD OF DISTRIBUTION...........................................................................................99
LEGAL MATTERS...................................................................................................100
FINANCIAL INFORMATION...........................................................................................100
RATING..........................................................................................................100
AVAILABLE INFORMATION...........................................................................................101
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE.................................................................101
INDEX OF DEFINED TERMS..........................................................................................103
4
RISK FACTORS
You should carefully consider the following risk factors prior to any
purchase of securities.
You will have only limited recourse to sellers, depositor and servicer.
The only obligations, if any, of the depositor to the securities of any
series will be pursuant to representations and warranties made by the depositor.
The depositor does not have, and is not expected in the future to have, any
significant assets with which to meet any obligation to repurchase primary
assets with respect to which there has been a breach of any representation or
warranty. If, for example, the depositor were required to repurchase a primary
asset, its only source of funds to make the repurchase would be funds obtained
from the enforcement of a corresponding obligation, if any, on the part of the
originator of the primary assets, the servicer or a seller, as the case may be,
or from a reserve fund established to provide funds for these repurchases.
The only obligations of the servicer, other than its servicing obligations,
to the assets of the trust fund or the securities of any series will be pursuant
to representations and warranties made by the servicer. The servicer may be
required to repurchase or replace any loan with respect to which its
representations and warranties are breached. There is no assurance, however,
that the servicer will have the financial ability to effect any repurchase or
substitution of loans.
The only obligations of any seller of loans (and Equity One, Inc., where
the seller is a subsidiary or affiliate of Equity One, Inc.) to assets of the
trust fund or the securities of any series will be pursuant to representations
and warranties made by the relevant entity and document delivery requirements. A
seller (and Equity One, Inc., where the seller is a subsidiary or affiliate of
Equity One, Inc.) may be required to repurchase or replace any loan with respect
to which its representations and warranties or document delivery requirements
are breached. There is no assurance, however, that a seller (and Equity One,
Inc., where the seller is a subsidiary or affiliate of Equity One, Inc.) will
have the financial ability to effect a repurchase or substitution.
We refer you to "Loan Program--Representations by Sellers; Repurchases."
The depositor has limited assets.
The depositor does not have, nor is it expected to have, any significant
assets. The securities of a series will be payable solely from the assets of the
trust fund for those securities. There will be no recourse to the depositor or
any other person for any default on the notes or any failure to receive
distributions on the certificates.
Further, unless otherwise stated in the related prospectus supplement, at
the times set forth in the related prospectus supplement, some of the primary
assets and any balance remaining in the security account or distribution account
immediately after making all payments due on the securities of the related
series and other payments specified in the related prospectus supplement, may be
promptly released or remitted to the depositor, the servicer, the provider of
any credit enhancement or any other person entitled thereto and will no longer
be available for making payments to holders of securities. Consequently, holders
of securities of each series must rely solely upon payments from the primary
assets and the other assets constituting the trust fund for a series of
securities, including, if applicable, any amounts available pursuant to any
credit enhancement for that series, for the payment of principal of and interest
on the securities of that series.
Holders of notes will be required under the indenture for their series to
proceed only against the primary assets and other assets constituting the
related trust fund in the case of a default on the notes and may not proceed
against any assets of the depositor. If payments from the assets securing a
series of notes, including any credit enhancement, were to become insufficient
to make payments on those notes, no other assets would be available for payment
of the deficiency and you may experience a loss.
5
Limited liquidity may result in delays in liquidation or lower returns.
There will be no market for the securities of any series prior to their
issuance, and there can be no assurance that a secondary market will develop or,
if it does develop, that it will provide holders with liquidity of investment or
that any market will continue for the life of the securities of any series. Any
underwriter(s) specified in the related prospectus supplement may make a
secondary market in the securities, but have no obligation to do so. Absent a
secondary market for the securities you may experience a delay if you choose to
sell your securities or the price you receive may be less than that which is
offered for a comparable liquid security.
Credit enhancement may not be sufficient to protect you from losses.
Credit enhancement is intended to reduce the effect of loan losses. Credit
enhancements may benefit only some classes of a series of securities, however,
and the amount of any credit enhancement will be limited as described in the
applicable prospectus supplement. The amount of a credit enhancement may decline
over time pursuant to a schedule or formula or otherwise, and could be depleted
from payments or for other reasons before the securities covered by the credit
enhancement are paid in full. In addition, a credit enhancement may not cover
all potential sources of loss. For example, a credit enhancement may or may not
cover fraud or negligence by a loan originator or other parties. Also, the
trustee may be permitted to reduce, substitute for, or even eliminate all or a
portion of a credit enhancement so long as the rating agencies that have rated
the securities at the request of the depositor indicate that that would not
cause them to change adversely their rating of the securities. Consequently,
securityholders may suffer losses even though a credit enhancement exists and
its provider does not default.
We refer you to "Credit Enhancement."
Prepayments of loans and other factors may result in a lower yield on the
securities.
The timing of principal payments of the securities of a series will be
affected by a number of factors, including:
o the extent of prepayments of the loans underlying that series of
securities, which may be influenced by a variety of factors (including
prepayments resulting from refinancing or liquidations of loans due to
defaults, casualties, condemnations and repurchases by the depositor,
the servicer or a seller due to material breaches of their
representations and warranties regarding the loans);
o the manner of allocating principal payments among the classes of
securities of a series as specified in the related prospectus
supplement;
o the exercise by the party entitled thereto of any right of optional
termination of a series of securities; and
o the rate and timing of payment defaults and losses incurred on the
assets underlying the series.
The yields to maturity and weighted average lives of a series of securities will
be affected primarily by the rate and timing of prepayment of the loans
representing assets underlying a series. The yields to maturity and weighted
average lives of securities will also be affected by the distribution of amounts
remaining in any pre-funding account following the end of the related funding
period. Any reinvestment risks resulting from a faster or slower incidence of
prepayments of loans held by a trust fund will be borne entirely by the holders
of one or more classes of a related series of securities.
We refer you to "Loan Program--Representations by Sellers; Repurchases,"
"Yield and Prepayment Considerations" and "The Agreements--Pre-Funding Account."
Interest payable on the securities of a series on each distribution date
will include all interest accrued during the period specified in the related
prospectus supplement. If interest accrues during the calendar month prior to a
distribution date, the effective yield to holders will be reduced from the yield
that would otherwise be obtainable if
6
interest payable on the security were to accrue through the day immediately
preceding each distribution date, and the effective yield (at par) to holders
will be less than the indicated coupon rate.
We refer you to "Description of the Securities--Distributions on
Securities--Distributions of Interest."
Junior liens may result in losses in foreclosure proceedings.
Some of the mortgages serving as collateral for your series of securities
may be junior liens subordinate to the rights of the mortgagee under the related
senior mortgage or mortgages. The proceeds from any liquidation, insurance or
condemnation proceedings in connection with a mortgage will be available to
satisfy the outstanding balance of the junior mortgage only after the claims of
all senior mortgagees have been satisfied in full, including any related
foreclosure costs. In addition, a junior mortgagee may not foreclose on the
property securing a junior mortgage unless it forecloses subject to the senior
mortgages, in which case it must either pay the entire amount due on the senior
mortgages to the senior mortgagees at or prior to the foreclosure sale or
undertake the obligation to make payments on the senior mortgages in the event
the mortgagor is in default thereunder. The trust fund will not have any source
of funds to satisfy any senior mortgages or make payments due to any senior
mortgagees and may therefore be prevented from foreclosing on the related
underlying property.
We refer you to "Legal Aspects of the Loans--Junior Mortgages; Rights of
Senior Mortgagees."
Declines in property values may adversely affect you.
The value of the properties underlying the loans held in the trust fund may
decline over time. Among the factors that could adversely affect the value of
the properties are:
o an overall decline in the residential real estate market in the areas
in which they are located;
o a decline in their general condition from the failure of borrowers to
maintain their property adequately; and
o natural disasters that are not covered by insurance like earthquakes
and floods.
In the case of home equity loans, declining property values could diminish or
extinguish the value of a junior mortgage before reducing the value of a senior
mortgage on the same property.
If property values decline, the actual rates of delinquencies,
foreclosures, and losses on all underlying loans could be higher than those
currently experienced in the mortgage lending industry in general. These losses,
to the extent not otherwise covered by credit enhancement, will be borne by the
holder of one or more classes of securities.
We refer you to "The Trust Fund--The Loans--Additional Information."
Delays in liquidation may adversely affect you.
Even if the properties underlying the loans held in the trust fund provide
adequate security for the loans, substantial delays could occur before defaulted
loans are liquidated and their proceeds are forwarded to investors. Property
foreclosure actions are regulated by state statutes and rules and are subject to
many of the delays and expenses of other lawsuits if defenses or counterclaims
are made, sometimes requiring several years to complete. Furthermore, in some
states if the proceeds of the foreclosure are insufficient to repay the loan,
the borrower is not liable for the deficit. Thus, if a borrower defaults, these
restrictions may impede the trust's ability to dispose of the property and
obtain sufficient proceeds to repay the loan in full. In addition, the servicer
will be entitled to deduct from liquidation proceeds all expenses reasonably
incurred in attempting to recover on the defaulted loan, including legal fees
and costs, real estate taxes, and property maintenance and preservation
expenses.
We refer you to "Yield and Prepayment Considerations."
7
The disproportionate impact of liquidation expenses on smaller loans may
adversely affect you.
Liquidation expenses of defaulted loans generally do not vary directly with
the outstanding principal balance of the loan at the time of default. Therefore,
if a servicer takes the same steps for a defaulted loan having a small remaining
principal balance as it does for a defaulted loan having a large remaining
principal balance, the amount realized after expenses is smaller as a percentage
of the outstanding principal balance of the small loan than it is for the
defaulted loan having a large remaining principal balance.
Consumer protection laws may adversely affect you.
State laws generally regulate interest rates and other charges, require
specified disclosures, and require licensing of mortgage loan originators and
servicers. In addition, most states have other laws and public policies for the
protection of consumers that prohibit unfair and deceptive practices in the
origination, servicing, and collection of mortgage loans. Depending on the
particular law and the specific facts involved, violations may limit the ability
to collect all or part of the principal or interest on the underlying loans held
in the trust fund. In some cases, the borrower may even be entitled to a refund
of amounts previously paid.
The loans held in the trust fund may also be subject to federal laws,
including:
o the Federal Truth in Lending Act and its regulations, which require
disclosures to the borrowers regarding the terms of any mortgage loan;
o the Equal Credit Opportunity Act and its regulations, which prohibit
discrimination in the extension of credit on the basis of age, race,
color, sex, religion, marital status, national origin, receipt of
public assistance, or the exercise of any right under the Consumer
Credit Protection Act; and
o the Fair Credit Reporting Act, which regulates the use and reporting
of information related to the borrower's credit experience.
Home Equity Loan Consumer Protection Act. For loans that were originated or
closed after November 7, 1989, the Home Equity Loan Consumer Protection Act of
1988, which requires additional application disclosures, limits changes that may
be made to the loan documents without the borrower's consent and restricts a
lender's ability to declare a default or to suspend or reduce a borrower's
credit limit.
The Riegle Act. Some loans may be subject to the Riegle Community
Development and Regulatory Improvement Act of 1994, known as the Riegle Act,
which incorporates the Home Ownership and Equity Protection Act of 1994. These
provisions impose additional disclosure and other requirements on creditors with
respect to non-purchase money mortgage loans with high interest rates or high
up-front fees and charges. The provisions of the Riegle Act apply on a mandatory
basis to all mortgage loans originated on or after October 1, 1995. These
provisions can impose specific statutory liabilities upon creditors who fail to
comply with their provisions and may affect the enforceability of the related
loans. In addition, any assignee of the creditor would generally be subject to
all claims and defenses that the consumer could assert against the creditor,
including the right to rescind the mortgage loan.
Some violations of these federal laws may limit the ability to collect the
principal or interest on the loans held in the trust fund, and in addition could
subject the trust fund to damages and administrative enforcement. Violations may
also result in a rescission of the mortgage loan and a refund by the trust fund
to the respective borrower of all finance charges and interest paid by the
borrower in connection with the underlying mortgage loan. Losses on loans from
the application of those laws that are not otherwise covered by a credit
enhancement will be borne by the holders of one or more classes of securities.
We refer you to "Legal Aspects of the Loans."
Balloon payment mortgages in the trust fund may pose a higher risk of loss.
8
Some of the mortgage loans held in the trust fund may not be fully
amortizing over their terms to maturity and, thus, will require substantial
principal payments (that is, balloon payments) at their stated maturity. Loans
with balloon payments involve a greater degree of risk than fully amortizing
loans because typically the borrower must be able to refinance the loan or sell
the property to make the balloon payment at maturity. The ability of a borrower
to do this will depend on various factors including mortgage rates at the time
of sale or refinancing, the borrower's equity in the property, the relative
strength of the local housing market, the financial condition of the borrower,
and tax laws. Losses on these loans that are not otherwise covered by a credit
enhancement will be borne by the holders of one or more classes of certificates.
The liquidation proceeds of mixed use loans may take longer to recover.
Mixed use loans are mortgage loans secured by multi-family properties and
structures that include both residential dwelling units and space used for
retail, professional or other commercial uses. Due to the limited market for the
type of properties securing mixed use loans, in the event of a foreclosure we
expect that it will take longer to recover proceeds from the liquidation of a
mixed use loan than it would for a mortgage loan secured by a one- to
four-family dwelling.
We refer you to "The Trust Fund--The Loans--General."
You could be adversely affected by violations of environmental laws.
Federal, state, and local laws and regulations impose a wide range of
requirements on activities that may affect the environment, health, and safety.
In certain circumstances, these laws and regulations impose obligations on
owners or operators of residential properties like those that secure the loans
held in the trust fund. Failure to comply with these laws and regulations can
result in fines and penalties that could be assessed against the trust fund as
owner of the related property. In some states, a lien on the property due to
contamination has priority over the lien of an existing mortgage. Also, a
mortgage lender may be held liable as an 'owner' or 'operator' for costs
associated with the release of petroleum from an underground storage tank under
certain circumstances. If the trust is considered the owner or operator of a
property, it will suffer losses as a result of any liability imposed for
environmental hazards on the property.
We refer you to "Legal Aspects of the Loans--Environmental Risks."
The ratings of the securities do not assure their payment.
Any class of securities issued under this prospectus and the accompanying
prospectus supplement may be rated by one or more nationally recognized rating
agencies. A rating is based on the adequacy of the value of the trust assets and
any credit enhancement for that class, and reflects the rating agency's
assessment of how likely it is that holders of the class of securities will
receive the payments to which they are entitled. A rating does not constitute an
assessment of how likely it is that principal prepayments on the underlying
loans will be made, the degree to which the rate of prepayments might differ
from that originally anticipated, or the likelihood that the securities will be
redeemed early. A rating is not a recommendation to purchase, hold, or sell
securities because it does not address the market price of the securities or the
suitability of the securities for any particular investor.
A rating may not remain in effect for any given period of time and the
rating agency could lower or withdraw the rating entirely in the future. For
example, the rating agency could lower or withdraw its rating due to:
o a decrease in the adequacy of the value of the trust assets or any
related credit enhancement;
o an adverse change in the financial or other condition of a credit
enhancement provider; or
o a change in the rating of the credit enhancement provider's long-term
debt.
The amount, type, and nature of credit enhancement established for a class
of securities will be determined on the basis of criteria established by each
rating agency rating classes of the securities. These criteria are sometimes
9
based upon an actuarial analysis of the behavior of similar loans in a larger
group. That analysis is often the basis upon which each rating agency determines
the amount of credit enhancement required for a class. The historical data
supporting any actuarial analysis may not accurately reflect future experience,
and the data derived from a large pool of similar loans may not accurately
predict the delinquency, foreclosure, or loss experience of any particular pool
of mortgage loans. Mortgaged properties may not retain their values. If
residential real estate markets experience an overall decline in property values
such that the outstanding principal balances of the loans held in a particular
trust fund and any secondary financing on the related mortgaged properties
become equal to or greater than the value of the mortgaged properties, the rates
of delinquencies, foreclosures, and losses could be higher than those now
generally experienced in the mortgage lending industry. In addition, adverse
economic conditions may affect timely payment by mortgagors on their loans
whether or not the conditions affect real property values and, accordingly, the
rates of delinquencies, foreclosures, and losses in any trust fund. Losses from
this that are not covered by a credit enhancement will be borne, at least in
part, by the holders of one or more classes of securities.
We refer you to "Rating."
Book-entry securities may pose limitations.
If the securities are issued in book-entry form, you may have difficulty
selling your securities in the secondary trading market since investors may be
unwilling to purchase securities for which they cannot obtain physical
certificates. In addition, since transactions in book-entry securities can be
effected only through The Depository Trust Company's participating
organizations, indirect participants and some banks, your ability to pledge your
securities to persons or entities that do not participate in The Depository
Trust Company system may be limited due to lack of a physical certificate
representing your securities.
We refer you to "Description of the Securities--Book-Entry Registration of
Securities."
Book-entry securities may result in delayed receipt of distributions.
As a beneficial owner of book-entry securities, you may experience some
delay in receiving payments on your securities since these payments will be:
o forwarded by the trustee to The Depository Trust Company;
o credited by The Depository Trust Company to the accounts of The
Depository Trust Company's participants; and
o ultimately credited to your account by one of The Depository Trust
Company's participants.
We refer you to "Description of the Securities--Book-Entry Registration of
Securities."
Bankruptcy or insolvency may affect the timing and amount of distributions on
the securities.
The servicer, the sellers and the depositor will treat each conveyance of
loans by the sellers to the depositor or, in the case of subsequently conveyed
loans, the trust fund as a sale of those loans. The depositor will treat each
conveyance of loans from the depositor to the trust fund as a sale of those
loans. If the conveyance of the loans by the sellers to the depositor or, in the
case of subsequently conveyed loans, the trust fund is treated as a sale, those
loans would not be part of the related seller's bankruptcy estate and would not
be available to that seller's creditors. If a seller becomes bankrupt or
insolvent, however, the bankruptcy trustee, a conservator or a receiver of the
seller or another person may attempt to recharacterize the sale of the loans as
a borrowing by the seller, secured by a pledge of the loans. Similarly, if the
conveyance of the loans by the depositor to the trust fund is treated as a sale,
those loans would not be part of the depositor's bankruptcy estate and would not
be available to the depositor's creditors. In the event of the bankruptcy or
insolvency of the depositor, however, the bankruptcy trustee, a conservator or a
receiver of the depositor or another person may attempt to recharacterize the
sale of the loans as a borrowing by the depositor, secured by a pledge of the
loans. In either case, this position, if argued before or
10
accepted by a court, could prevent timely payments of amounts due on your
securities and result in a reduction of payments due on your securities.
In addition, we anticipate that the trustee will hold original promissory
notes for each of the loans, together with assignments of each of the mortgages,
and the assignments of mortgages will be filed of public record.
In the event of a bankruptcy or insolvency of the servicer, the bankruptcy
trustee or a conservator or receiver of the servicer may have the power to
prevent the trustee or the securityholders from appointing a successor servicer.
In addition, federal and state statutory provisions, including the
Bankruptcy Reform Act of 1978, as amended, and state laws affording relief to
debtors, may interfere with or affect the ability of a secured mortgage lender
to realize upon its security. For example, in a proceeding under the Bankruptcy
Reform Act of 1978, as amended, a lender may not foreclose on a mortgaged
property without the permission of the bankruptcy court. If the mortgaged
property is not the debtor's principal residence and the court determines that
the value of the mortgaged property is less than the principal balance of the
mortgage loan, the debtor's proposed rehabilitation plan may provide for the
reduction of the secured indebtedness to the value of the mortgaged property as
of the date of the commencement of the bankruptcy, rendering the lender a
general unsecured creditor for the difference. The debtor's proposed plan may
also reduce the monthly payments due under the mortgage loan, change the rate of
interest and/or alter the mortgage loan repayment schedule. These proceedings
under the Bankruptcy Reform Act of 1978, as amended, including but not limited
to any automatic stay, could cause delays in receiving payments on the loans
underlying a series of securities and possible reductions in, or eliminations
of, the aggregate amount of these payments.
The principal amount of the securities may exceed the market value of the trust
fund assets.
There is no assurance that the market value of the primary assets or any
other assets for a series of securities will at any time be equal to or greater
than the aggregate principal amount of the securities of that series then
outstanding, plus accrued interest thereon. In addition, upon an event of
default under the indenture for a series of notes and a sale of the assets in
the trust fund or upon a sale of the assets of a trust fund for a series of
certificates, the trustee, the servicer, if any, the credit enhancer and any
other service provider specified in the related prospectus supplement generally
will be entitled to receive the proceeds of the sale to the extent of unpaid
fees and other amounts owing to those persons under the related agreement prior
to distributions to holders of securities. Upon any sale of trust fund assets,
the proceeds from the sale may be insufficient to pay in full the principal of
and interest on the securities of the related series.
Liquidation expenses for defaulted loans do not vary directly with the
outstanding principal balance of the loan at the time of default. Therefore,
assuming that a servicer took the same steps in realizing upon a defaulted loan
having a small remaining principal balance as it would in the case of a
defaulted loan having a larger principal balance, the amount realized after
expenses of liquidation would be smaller as a percentage of the outstanding
principal balance of the smaller loan than would be the case with a larger loan.
Because the average outstanding principal balances of the loans are small
relative to the size of the loans in a typical pool of first mortgages,
realizations net of liquidation expenses on defaulted loans may also be smaller
as a percentage of the principal amount of the loans than in the case of a
typical pool of first mortgage loans. The payment of these expenses will reduce
the portion of the amount realized that will be available to make payments on
the securities and may result in the related securityholders suffering a loss.
We refer you to "Yield and Prepayment Considerations."
You may receive a prepayment of principal from unused amounts in any pre-funding
account.
If the prospectus supplement relating to your series of securities provides
for pre-funding, on the closing date the depositor will deposit a specified
amount of cash into a pre-funding account. The amount of cash deposited will not
exceed 25% of the initial aggregate principal amount of the related series of
securities. The deposited cash will be used to purchase loans from the seller or
sellers specified in the related prospectus supplement, or from the
11
depositor (which, in turn, will acquire these loans from the seller or sellers
specified in the related prospectus supplement), during the funding period,
which is a period which will begin on the related closing date and will end on
the date specified in the related prospectus supplement, which in no event will
be later than the earliest to occur of:
o the date the amount on deposit in the pre-funding account is less than
the minimum dollar amount, if any, specified in the agreement(s)
relating to that series;
o the date an event of default occurs under the related agreement(s); or
o the date which is the later of three months or 90 days after the
related closing date.
These subsequently purchased loans will be required to conform to the
requirements set forth in the related agreement(s) and described in the related
prospectus supplement. The trustee will maintain the pre-funding account for the
related series of securities for the sole purpose of holding funds to be paid by
the trustee during the above-described funding period to the depositor or the
applicable seller(s) to cover the purchase price of these loans. Monies on
deposit in the pre-funding account will not be available to cover losses on or
in respect of the related loans. To the extent that the entire amount of cash in
the pre-funding account has not been used to purchase loans by the end of the
related funding period, any amounts remaining in the pre-funding account will be
distributed as a prepayment of principal to holders of securities on the
distribution date immediately following the end of the funding period, in the
amounts and pursuant to the priorities set forth in the related prospectus
supplement. The holders of the related class of securities will bear any
reinvestment risk resulting from this prepayment.
Some of the securities may be issued with original issue discount.
Some classes of securities may be issued with original issue discount for
federal income tax purposes. If you hold securities issued with original issue
discount, you will be required to include original issue discount in ordinary
gross income for federal income tax purposes as it accrues, in advance of
receipt of the cash attributable to that income. Accrued but unpaid interest on
securities that are accrual securities generally will be treated as original
issue discount for this purpose.
We refer you to "Federal Income Tax Consequences--Taxation of Debt
Securities--Interest and Acquisition Discount" and "--Market Discount."
You may be adversely affected if the provider of any financial instrument
defaults or is downgraded.
The trust fund may include one or more financial instruments including
interest rate or other swap agreements and interest rate cap or floor
agreements. These financial instruments may provide protection against some
types of risks or provide specific cashflow characteristics for one or more
classes of a series of securities. The protection or benefit to be provided by
any specific financial instrument will be dependent on, among other things, the
credit strength of the provider of that financial instrument. If that provider
were to be unable or unwilling to perform its obligations under the financial
instrument, the securityholders of the applicable class or classes would bear
that credit risk. This could cause a material adverse effect on the yield to
maturity, the rating or the market price and liquidity for that class. For
example, if a financial instrument is designed to cover the risk that the
interest rates on the mortgage assets that adjust based on one index will be
less than the interest rate payable on the securities based on another index and
that financial instrument does not perform, then the securityholders of the
applicable class or classes of a series of securities will bear basis risk, or
the risk that their yield will be reduced if the first index declines relative
to the second. Even if the provider of a financial instrument performs its
obligations under that financial instrument, a withdrawal or reduction in a
credit rating assigned to that provider may adversely affect the rating or the
market price and liquidity of the applicable class or classes of a series of
securities.
12
THE TRUST FUND
General
The certificates of each series will represent interests in the assets of a
related trust fund, and the notes of each series will be secured by the pledge
of the assets of a related trust fund. The entity named in the related
prospectus supplement as trustee will hold the trust fund for a series of
securities for the benefit of the related securityholders. Each trust fund will
consist of a group of assets (the "Trust Fund Assets"), including a pool of
loans and payments in respect of these loans, as specified in the related
prospectus supplement.1 The pool of loans will be created on the first day of
the month of the issuance of the related series of securities or another date
specified in the related prospectus supplement. The securities will be entitled
to payment from the assets of the related trust fund or funds or other assets
pledged for the benefit of the securityholders, as specified in the related
prospectus supplement, and will not be entitled to payments in respect of the
assets of any other trust fund established by the depositor.
The depositor will acquire the Trust Fund Assets, either directly or
through affiliates, from originators or sellers that may be affiliates of the
depositor pursuant to a pooling and servicing agreement (each, a "Pooling and
Servicing Agreement") for a series consisting solely of certificates, or a
purchase agreement (each, a "Purchase Agreement") for a series consisting of
certificates and notes. The depositor will then convey the Trust Fund Assets
without recourse to the related trust fund. The depositor will acquire loans
that were either originated or acquired by affiliates of the depositor in
accordance with the underwriting criteria specified below under "Loan
Program--Underwriting Standards," "--Specific Underwriting Criteria;
Underwriting Programs" and "--Summary of Underwriting Requirements by Program."
We refer you to "Loan Program--Underwriting Standards," "--Specific Underwriting
Criteria; Underwriting Programs" and "--Summary of Underwriting Requirements by
Program."
The depositor will cause the Trust Fund Assets to be conveyed to the
trustee for the benefit of the holders of the securities of the related series.
The entity named as servicer in the related prospectus supplement, which may be
an affiliate of the depositor, will service the Trust Fund Assets, either
directly or through other servicing institutions called sub-servicers, pursuant
to a Pooling and Servicing Agreement for a series consisting solely of
certificates, or a master servicing agreement (each, a "Master Servicing
Agreement") between the trust fund and the servicer for a series consisting of
certificates and notes. The servicer will receive a fee for these services. We
refer you to "Loan Program" and "The Agreements." If the servicer services Trust
Fund Assets through a sub-servicer, the servicer will remain liable for its
servicing obligations under the related Agreement as if the servicer alone were
servicing the Trust Fund Assets.
As used herein, "Agreement" means, for a series consisting solely of
certificates, the Pooling and Servicing Agreement, and for a series consisting
of certificates and notes, the Purchase Agreement, the Trust Agreement, the
Indenture and the Master Servicing Agreement, as the context requires.
If so specified in the related prospectus supplement, a trust fund relating
to a series of securities may be a business trust formed under the laws of the
state specified in the related prospectus supplement pursuant to a trust
agreement (each, a "Trust Agreement") between the depositor and the trustee of
the trust fund.
No trust fund will have any assets or liabilities prior to the initial
offering of the related series of securities. No trust fund is expected to
engage in any activities other than purchasing, managing and holding the related
Trust Fund Assets and other assets contemplated herein or specified in the
related prospectus supplement and the proceeds
- ----------
* Whenever the terms "pool," "certificates," "notes" and "securities" are used
in this prospectus, they will be deemed to apply, unless the context indicates
otherwise, to one specific pool and the securities of one series including the
certificates representing certain undivided interests in, and/or notes secured
by the assets of, a single trust fund consisting primarily of the loans in such
pool. Similarly, the term "Pass-Through Rate" will refer to the Pass-Through
Rate borne by the certificates and the term "interest rate" will refer to the
interest rate borne by the notes of one specific series, as applicable, and the
term "trust fund" will refer to one specific trust fund.
13
thereof, issuing securities, making payments and distributions on securities and
related activities. No trust fund is expected to have any source of capital
other than its assets and any related credit enhancement.
Unless otherwise specified in the applicable prospectus supplement, the
depositor's only obligations with respect to a series of securities will be to
obtain specific representations and warranties from Equity One, Inc., a Delaware
corporation ("Equity One"), and the sellers and to assign to the trustee for
that series of securities the depositor's rights relating to those
representations and warranties. We refer you to "Loan Program--Representations
by Sellers; Repurchases" and "The Agreements--Assignment of the Trust Fund
Assets." The servicer's obligations with respect to the Trust Fund Assets will
consist principally of its contractual servicing obligations under the related
Agreement (including its obligation to enforce the obligations of the
sub-servicers or sellers, or both, as more fully described herein under "Loan
Program--Representations by Sellers; Repurchases" and "The
Agreements--Sub-Servicing by Sellers" and "--Assignment of the Trust Fund
Assets") and its obligation, if any, to make cash advances in the event of
delinquencies in payments on or with respect to the loans in the amounts
described herein under "Description of the Securities--Advances." The servicer's
obligation to make advances may be subject to limitations, to the extent
provided herein and in the related prospectus supplement.
The following is a brief description of the assets expected to be included
in the trust funds. If specific information respecting the Trust Fund Assets is
not known at the time the related series of securities initially is offered,
more general information of the nature described below will be provided in the
related prospectus supplement, and specific information will be set forth in a
report on Form 8-K to be filed with the Securities and Exchange Commission
("SEC") within fifteen days after the initial issuance of the securities. A copy
of the Agreement for each series of securities will be attached to the Form 8-K
and will be available for inspection at the corporate trust office of the
trustee specified in the related prospectus supplement. A schedule of the loans
relating to that series will be attached to the Agreement delivered to the
trustee upon delivery of the securities.
The Loans
General. Loans will consist of
o mortgage loans secured by first and/or subordinate liens on one- to
four-family residential properties,
o mortgage loans secured by first and/or subordinate liens on mixed
commercial/residential use properties and other multi-family
residential properties, and
o closed-end and/or revolving home equity loans or balances thereof
secured by first and/or subordinate liens on one- to four-family
residential properties.
Except with respect to Subsequent Loans, as described herein under "The
Agreements--Pre-Funding Account," all loans will be purchased by the depositor,
either directly or through an affiliate, from one or more sellers. The sellers
will have either originated the loans or purchased the loans from other lenders.
As more fully described in the related prospectus supplement, the loans may be
"conventional" loans or loans that are insured or guaranteed by a governmental
agency like the Federal Housing Administration ("FHA") or Department of Veterans
Affairs ("VA").
All of the loans will have monthly payments due on a set day, but not
necessarily the first day, of each month. The payment terms of the loans to be
included in a trust fund will be described in the related prospectus supplement
and may include any of the following features (or a combination thereof), all as
described below or in the related prospectus supplement:
o Interest may be payable at a fixed rate, a rate adjustable from time
to time in relation to an index (which will be specified in the
related prospectus supplement), a rate that is fixed for a period of
time or under specific circumstances and is followed by an adjustable
rate, a rate that otherwise varies from time to time, or a rate that
is convertible from an adjustable rate to a fixed rate. Changes to an
adjustable rate may be subject to periodic limitations, maximum rates,
minimum rates or a combination of these limitations. Accrued interest
may be deferred and added to the
14
principal of a loan for the periods and under the circumstances as may
be specified in the related prospectus supplement. Loans may provide
for the payment of interest at a rate lower than the specified
interest rate of the loan for a period of time or for the life of the
loan, and the amount of any difference may be contributed from funds
supplied by the seller of the mortgaged property or another source.
o Principal may be payable in equal installments over the term of the
loan, may be calculated on the basis of an assumed term to maturity
that is significantly longer than the actual term to maturity
(resulting in the need to make a larger "balloon" payment upon final
maturity) or on an interest rate that is different from the loan's
specified interest rate, or may not be payable during all or a portion
of the original term. Payment of all or a substantial portion of the
principal may be due on maturity, called a balloon payment. Principal
may include interest that has been deferred and added to the principal
balance of the loan.
o Monthly payments of principal and interest may be fixed for the life
of the loan, may increase over a specified period of time or may
change from period to period. Loans may include limits on periodic
increases or decreases in the amount of monthly payments and may
include maximum or minimum amounts of monthly payments. Certain loans
may provide for monthly payments that consist of interest only for a
specified period of time.
o The loans generally may be prepaid at any time. Prepayments of
principal may be subject to a prepayment fee, which may be fixed for
the life of the loan or may decline over time, and may be prohibited
for the life of the loan or for specific periods, which are called
lockout periods. Some loans may permit prepayments after expiration of
the applicable lockout period and may require the payment of a
prepayment fee in connection with any subsequent prepayment. Other
loans may permit prepayments without payment of a fee unless the
prepayment occurs during specified time periods. The loans may include
"due on sale" clauses which permit the mortgagee to demand payment of
the entire loan in connection with the sale or transfer of the related
mortgaged property. Other loans may be assumable by persons meeting
the then applicable underwriting standards of the related seller.
The loans will be secured by mortgages or deeds of trust or other similar
security instruments creating a lien on the related mortgaged property. In the
case of home equity loans, these liens generally will be subordinated to one or
more senior liens on the related mortgaged properties as described in the
related prospectus supplement.
Loans with specified Combined Loan-to-Value Ratios and/or principal
balances may be covered wholly or partially by primary mortgage guaranty
insurance policies. The existence, extent and duration of any coverage will be
described in the applicable prospectus supplement.
The aggregate principal balance of loans secured by mortgaged properties
that are owner-occupied will be disclosed in the related prospectus supplement.
The applicable prospectus supplement may provide for the basis for
representations relating to Single Family Properties, but if it does not, the
sole basis for a representation that a given percentage of the loans is secured
by Single Family Properties that are owner-occupied will be either
o the making of a representation by the borrower at origination of the
loan that the underlying mortgaged property will be used by the
borrower for a period of at least six months every year, or that the
borrower intends to use the mortgaged property as a primary residence,
or
o a finding that the address of the underlying mortgaged property is the
borrower's mailing address.
The mortgaged properties relating to residential loans and home equity
loans will consist of detached or semi-detached one- to four-family dwelling
units, townhouses, rowhouses, individual condominium units, individual units in
planned unit developments, and other types of one- to four-family dwelling units
("Single Family Properties"). The mortgaged properties relating to mixed use
loans will consist of other multi-family properties and structures which include
residential dwelling units and space used for retail, professional or other
commercial uses
15
("Mixed Use Properties"). Mortgaged properties may include vacation and second
homes and investment properties and may be located in any one of the fifty
states, the District of Columbia, Puerto Rico or any territory of the United
States.
Home Equity Loans. Some of the loans may be non-purchase money loans
secured by the borrower's equity in his or her home. These home equity loans may
consist of closed-end loans and/or revolving credit line loans. As more fully
described in the related prospectus supplement, interest on each revolving
credit line loan, excluding introductory rates offered from time to time during
promotional periods, is computed and payable monthly on the average daily
outstanding principal balance of the loan. Principal amounts on a revolving
credit line loan may be drawn down (up to a maximum amount as set forth in the
related prospectus supplement) or repaid under each revolving credit line loan
from time to time, but may be subject to a minimum periodic payment. The full
amount of a closed-end loan is advanced at the inception of the loan and, except
to the extent provided in the related prospectus supplement, generally is
repayable in equal (or substantially equal) installments of an amount to fully
amortize the loan by its stated maturity. Except to the extent provided in the
related prospectus supplement, the original terms to stated maturity of
closed-end loans will not exceed 360 months. Under some circumstances, under
either a revolving credit line loan or a closed-end loan, a borrower may choose
an interest-only payment option and is obligated to pay only the amount of
interest which accrues on the loan during the billing cycle. An interest-only
payment option may be available for a specified period before the borrower must
begin paying at least the minimum monthly payment of a specified percentage of
the average outstanding principal balance of the loan.
Additional Information. Each prospectus supplement will contain
information, as of the date of that prospectus supplement and to the extent then
specifically known to the depositor, regarding the loans constituting Trust Fund
Assets of the related trust fund, including among other things:
o the aggregate outstanding principal balance and the average
outstanding principal balance of the loans as of the applicable
cut-off date;
o the type of property securing the loan (e.g., Single Family
Properties, Mixed Use Properties, or other real property);
o the range of remaining terms to maturity of the loans;
o the range of principal balances of the loans as of the applicable
cut-off date;
o the earliest origination date and latest maturity date of any of the
loans;
o the Combined Loan-to-Value Ratios of the loans;
o the stated interest rates or annual percentage rates ("APR"), or range
of stated interest rates or APRs, of the loans;
o the range of maximum and minimum per annum interest rates of the
adjustable rate loans, if any; and
o the geographic location of the mortgaged properties.
If specific information respecting the loans is not known to the depositor at
the time the related securities are initially offered, more general information
of the nature described above will be provided in the related prospectus
supplement, and specific information will be set forth in a report on Form 8-K
to be filed with the SEC fifteen days after the initial issuance of the
securities.
The "Combined Loan-to-Value Ratio" of a loan at any given time is the
fraction, expressed as a percentage,
o the numerator of which is the sum of
16
o the principal balance of that loan at the date of origination
(or, in the case of a revolving credit line loan, the maximum
amount thereof available) plus
o the outstanding principal balance, at the date of origination of
the loan, of any senior mortgage loan(s) or, in the case of any
open-ended senior mortgage loan, the maximum available line of
credit for that mortgage loan, regardless of any lesser amount
actually outstanding at the date of origination of the loan, and
o the denominator of which is the Collateral Value of the related
mortgaged property.
The "Collateral Value" of the mortgaged property, other than for some loans
the proceeds of which were used to refinance an existing mortgage loan (each, a
"Refinance Loan"), is the lesser of
o the appraised value of that mortgaged property based on an appraisal
obtained by the originator at origination of that loan, and,
o if the loan was originated either in connection with the acquisition
of the mortgaged property by the borrower or within one year after
acquisition of the mortgaged property by the borrower, the purchase
price paid by the borrower for the mortgaged property.
In the case of Refinance Loans, the "Collateral Value" of the related
mortgaged property is the appraised value thereof determined in an appraisal
obtained at the time of refinancing.
No assurance can be given that values of the mortgaged properties have
remained or will remain at their levels on the dates of origination of the
related loans. If the residential real estate market experiences an overall
decline in property values causing the sum of the outstanding principal balances
of the loans and any primary or secondary financing on the mortgaged properties,
as applicable, in a particular trust fund to become equal to or greater than the
value of the mortgaged properties, the actual rates of delinquencies,
foreclosures and losses could be higher than those now generally experienced in
the mortgage lending industry. In addition, adverse economic conditions and
other factors (which may or may not affect real property values), including
without limitation, loss of employment, illness or other personal difficulties
suffered by obligors on the loans, may affect the timely payment by borrowers of
scheduled payments of principal and interest on the loans and, accordingly, the
actual rates of delinquencies, foreclosures and losses on any group of loans. To
the extent that these losses are not covered by subordination provisions or
alternative arrangements, the losses will be borne, at least in part, by the
holders of the securities of the related series.
Substitution of Trust Fund Assets
Substitution of Trust Fund Assets will be permitted if the representations
and warranties regarding any original Trust Fund Asset are breached or if the
documentation regarding any Trust Fund Asset is determined by the trustee to be
incomplete. The related prospectus supplement will generally set forth the
period during which substitution will be permitted. Substituted Trust Fund
Assets generally will comply with all of the representations and warranties and
satisfy the criteria set forth in the related Agreement and described in the
related prospectus supplement as of the date of substitution. We refer you to
"Loan Program--Representations by Sellers; Repurchases" and "The
Agreements--Assignment of the Trust Fund Assets."
17
USE OF PROCEEDS
The depositor will use all or substantially all of the net proceeds from
the sale of each series of securities for one or more of the following purposes:
o to purchase the related Trust Fund Assets and to repay any financing
to which those Trust Fund Assets were subject prior to their sale to
the depositor;
o to establish any pre-funding account, capitalized interest account or
reserve accounts described in the related prospectus supplement;
o to pay costs of structuring and issuing the securities, including the
costs of obtaining credit enhancement, if any; and
o to serve any other corporate purpose specifically permitted by its
certificate of incorporation.
The depositor expects to sell securities in series from time to time, but the
timing and amount of offerings of securities will depend on a number of factors,
including the volume of Trust Fund Assets acquired by the depositor, prevailing
interest rates, availability of funds and general market conditions.
THE DEPOSITOR
Equity One ABS, Inc., a Delaware corporation, the depositor, was
incorporated in March of 1997 for the limited purpose of acquiring, owning and
transferring Trust Fund Assets and selling interests therein or bonds secured
thereby. The depositor is a limited purpose wholly-owned finance subsidiary of
Equity One. Equity One is a wholly-owned operating subsidiary of Popular North
America, Inc., a Delaware corporation ("PNA"). PNA is an indirect wholly-owned
subsidiary of Popular, Inc., a diversified, publicly owned bank holding company
incorporated under the General Corporation Law of Puerto Rico ("Popular"). The
depositor and Equity One are subject to comprehensive regulation by the Board of
Governors of the Federal Reserve System ("Federal Reserve"). No obligations of
the depositor are insured by any governmental agency. The depositor maintains
its principal office at 103 Springer Building, 3411 Silverside Road, Wilmington,
Delaware 19810. Its telephone number is (302) 478-6160.
Neither the depositor nor any of the depositor's affiliates will insure or
guarantee distributions on the securities of any series.
LOAN PROGRAM
Except with respect to Subsequent Loans, as described herein under "The
Agreements--Pre-Funding Account," the loans will have been purchased by the
depositor, either directly or through affiliates, from the sellers. The
applicable prospectus supplement may provide for the underwriting criteria used
in originating the loans, but if it does not, the loans so purchased by the
depositor will have been either originated or acquired by the sellers in
accordance with the underwriting criteria specified below under "Underwriting
Standards," "Specific Underwriting Criteria; Underwriting Programs" and "Summary
of Underwriting Requirements by Program." All of the loans will be underwritten
by Equity One's central credit office.
Underwriting Standards
Each seller operates under underwriting standards that have been approved
by Equity One and are consistent with those utilized by mortgage lenders
generally during the period of origination for similar types of loans (the
"Equity One Standards"). Equity One and each seller will represent and warrant
that all loans conveyed by it to the depositor or one of its affiliates have
been underwritten in accordance with the Equity One Standards. As to any loan
insured by the FHA or partially guaranteed by the VA, each seller will represent
that it has complied with underwriting policies of the FHA or the VA, as the
case may be.
18
Underwriting standards are applied by or on behalf of a lender to evaluate
the borrower's credit standing and repayment ability, and the value and adequacy
of the related mortgaged property as collateral. In general, a prospective
borrower applying for a loan is required to fill out a detailed application
designed to provide to the underwriting officer pertinent information regarding
the applicant's liabilities, income, credit history, including the principal
balance and payment history regarding any senior mortgage, and employment
history, as well as other personal information which, to the extent specified in
the related prospectus supplement, has been verified by the related seller. In
addition, to the extent specified in the related prospectus supplement, each
seller, as part of its quality control system, will have reverified information
regarding the foregoing matters that has been provided by a mortgage brokerage
company prior to funding a loan and periodically audit files based on a random
sample of closed loans. Each borrower is generally required to provide an
authorization to apply for a credit report which summarizes the borrower's
credit history with local and national merchants and lenders, installment debt
payments and any record of defaults, bankruptcies, repossessions, suits or
judgments. In most cases, an employment verification is obtained either in
writing or verbally from the borrower's employer, which verification reports,
among other things, the length of employment with that organization and the
borrower's current salary. If a prospective borrower is self-employed, the
borrower may be required to submit copies of signed tax returns.
In determining the adequacy of the property to be used as collateral, a
full or drive by appraisal will generally be made of each property considered
for financing in an amount in excess of $15,000. The appraiser is generally
required to inspect the property, issue a report on its condition and, if
applicable, verify construction, if new, has been completed. The appraisal is
based on the market value of comparable homes, the estimated rental income (if
considered applicable by the appraiser) and the cost of replacing the home. The
value of the property being financed, as indicated by the appraisal, must be
high enough to currently support, and be anticipated to support in the future,
the outstanding loan balance.
Once all applicable employment, credit and property information is
received, a determination generally is made, with the assistance of a
Debt-to-Income Ratio, as to whether the prospective borrower has sufficient
monthly income available
o to meet the borrower'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 property
(such as property taxes and hazard insurance), and
o to meet other financial obligations and monthly living expenses.
The "Debt-to-Income Ratio" is the ratio of the borrower's total monthly payments
to the borrower's gross monthly income. The maximum monthly Debt-to-Income Ratio
varies depending upon a borrower's credit grade and loan documentation level (as
described below) but does not generally exceed 50%. Variations in the monthly
Debt-to-Income Ratio limit are permitted based on compensating factors. The
underwriting standards applied by sellers, particularly regarding the level of
loan documentation and the borrower's income and credit history, may be varied
in appropriate cases where factors such as a low Combined Loan-to-Value Ratio or
other favorable credit factors exist.
Some of the types of loans that may be included in a trust fund are
recently developed and may involve additional uncertainties not present in
traditional types of loans. For example, some loans may provide for escalating
or variable payments by the borrower. These types of loans are underwritten on
the basis of a judgment that the borrowers have the ability to make the monthly
payments required initially. In some instances, a borrower's income may not be
sufficient to permit continued loan payments as payment amounts increase. These
types of loans may also be underwritten primarily upon the basis of low Combined
Loan-to-Value Ratios or other favorable credit factors. A trust fund may also
include both first and second lien loans made to a borrower at the same time on
the same mortgaged property, provided that each of those loans must separately
satisfy the Equity One Standards.
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Specific Underwriting Criteria; Underwriting Programs
The Equity One Standards allow for the origination and purchase of loans
generally under three underwriting programs, known as Grade A Credits, Grade B
Credits and Grade C Credits, all of which are summarized below. These programs
and their underwriting criteria may change from time to time. Deviations from
the specific criteria of an underwriting program are permitted to reflect local
economic trends and real estate valuations, as well as other credit factors
specific to each loan application and/or each portfolio acquired. Some loans may
be to borrowers whose creditworthiness may not coincide with all program
criteria. Overall, the goal is to maintain the integrity of these programs and
simultaneously provide lending officers and correspondent networks with the
flexibility to consider the specific circumstances of each loan.
Under the Equity One Standards, the following four types of income
documentation programs are used:
o full income documentation ("Full Doc");
o stated income ("SI");
o alternative income verification ("AIV"); and
o light income documentation ("Lite Doc").
Under the Full Doc program, income is verified by reviewing the borrower's
W-2s for the past two years and two of the borrower's current paystubs. Under
the SI program, the borrower is not required to submit any income documentation.
Under the AIV program, the borrower must submit bank statements for the past
twenty-four months to verify the average monthly income used to qualify the
borrower. Under the Lite Doc program, the borrower must submit bank statements
for the past six months. Tax returns are generally not required under any income
documentation program, however, each lender always has the right to require tax
returns if that is the only means of verifying income or cash flow.
Underwriting with the SI, AIV or Lite Doc program is reserved for Grade A
Credits and Grade B Credits, as well as Grade C Credits that meet the criteria
described under "--Grade C Credits" below, and offers an alternative for
self-employed and employed applicants with supplemental income, who are either
unable to or do not wish to produce income documentation to substantiate all of
their income. For loans underwritten pursuant to the SI or Lite Doc program, the
Debt-to-Income Ratio is based on a maximum of 50% of stated income as disclosed
on the loan application. For loans underwritten pursuant to the AIV program, the
Debt-to-Income Ratio is based on a maximum of 50% of average monthly income over
the past twenty-four months, as verified through monthly bank statements.
Summary of Underwriting Requirements by Program
Grade A Credits. For Grade A Credits, the following criteria generally
apply:
o An in-file credit report on the borrower by an independent credit
reporting agency reflecting the borrower's complete credit history is
required. Typically, a good to excellent credit history of at least
one year is required, and prior credit history may be rated on a
case-by-case basis. The credit history should reflect that existing
and previous debts were paid in a timely manner. A Chapter 7
bankruptcy that has been discharged for a minimum of four years is
acceptable if the borrower has since established a payment history,
notwithstanding the bankruptcy, consistent with this underwriting
program. A Chapter 13 bankruptcy that has been discharged for a
minimum of two years is acceptable if the borrower has since
established a payment history, notwithstanding the bankruptcy,
consistent with this underwriting program. Unpaid charge-offs,
collections, liens or judgments not on title may not exceed $3,000 in
the aggregate. During the most recent 12 month period, the borrower
may not have more than one 30 day delinquency in his or her mortgage
payment history (consecutive 30 day delinquencies are treated as one
30 day account).
20
o Generally, the borrower must have
o been employed for not less than two years with the same employer
or
o established comparable stability in a particular field of work.
o Combined Loan-to-Value Ratios and Debt-to-Income Ratios must conform
to the following criteria (except that the Combined Loan-to-Value
Ratio may exceed the maximum indicated below up to a maximum of 100%
solely as a result of including credit insurance premiums and discount
points financed as part of the loan in the calculation of the ratio):
Maximum Combined Maximum Debt-
Property Type Loan-to-Value-Ratio to-Income Ratio
------------- ------------------- ---------------
Owner occupied one- to four-family
dwellings, townhouses, condominiums,
true second homes 100% 50%
Non-owner occupied single family
dwellings, townhouses, condominiums 85% 50%
Non-owner occupied two- to
four-family dwellings 85% 50%
Mixed use: Purchase 80% Minimum Debt
Refinance 75% Service Coverage 1.00
Grade B Credits. For Grade B Credits, the following criteria generally
apply:
o An in-file credit report on the borrower by an independent credit
reporting agency reflecting the borrower's complete credit history is
required. Typically, a satisfactory to good credit history of at least
one year is required, and prior credit history may be rated on a
case-by-case basis. The credit history should reflect that existing
and previous debts were paid in a predominately timely manner. A
Chapter 7 bankruptcy, if discharged for two years, is acceptable if
there are two years of re-established credit and a satisfactory
written explanation. A Chapter 13 bankruptcy with a minimum of a one
year satisfactory payment plan and one year of reestablished credit is
acceptable. Unpaid charge-offs, collections, liens or judgments not on
title may not exceed $3,000 in the aggregate. During the most recent
twelve month period, the borrower may not have more than three 30 day
delinquencies in his or her mortgage payment history (consecutive 30
day delinquencies are treated as one 30 day account).
o Generally, the borrower must have
o been employed for not less than two years with the same employer
or
o established comparable stability in a particular field of work.
21
o Combined Loan-to-Value Ratios and Debt-to-Income Ratios must conform
to the following criteria (except that the Combined Loan-to-Value
Ratio may exceed the maximum indicated below up to a maximum of 100%
solely as a result of including credit insurance premiums and discount
points financed as part of the loan in the calculation of the ratio):
Maximum Combined Maximum Debt-
Property Type Loan-to-Value-Ratio to-Income Ratio
------------- ------------------- ---------------
Owner occupied one- to four-family
dwellings, townhouses, condominiums 90% 50%
True second homes 90% 50%
Non-owner occupied single family
dwellings, townhouses, condominiums 80% 50%
Non-owner occupied two- to
four-family dwellings 75% 50%
Mixed use: Purchase 75% Minimum Debt
Refinance 70% Service Coverage 1.00
Grade C Credits. For Grade C Credits, the following criteria generally
apply:
o An in-file credit report on the borrower by an independent credit
reporting agency reflecting the borrower's complete credit history is
required. Typically, a fair to satisfactory credit history of at least
one year is required. A discharged Chapter 7 bankruptcy is acceptable
with one year of re-established credit. A non-discharged Chapter 13
bankruptcy will be considered with a minimum of a two year
satisfactory payment plan. Mortgage payment history may not reflect
any more than three 30 day delinquencies and one 60 day delinquency
during the most recent 12 months (consecutive 30 day delinquencies are
treated as one 30 day account). In addition, all accounts that are
delinquent for 60 days or longer may be paid current or paid in full
from the proceeds.
o Generally, the borrower must have
o been employed for not less than two years with the same employer
or
o established comparable stability in a particular field of work.
o Combined Loan-to-Value Ratios and Debt-to-Income Ratios must conform
to the following criteria (except that the Combined Loan-to-Value
Ratio may exceed the maximum indicated below up to a maximum of 100%
solely as a result of including credit insurance premiums and discount
points financed as part of the loan in the calculation of the ratio):
22
Maximum Combined Maximum Debt-
Property Type Loan-to-Value-Ratio to-Income Ratio
------------- ------------------- ---------------
Owner occupied single family
dwellings, townhouses, condominiums 90% 50%
Owner occupied two- to four-family
dwellings 85% 50%
True second homes N/A 50%
In determining the credit grade of the borrower's loan each seller will
also analyze standardized credit history data available from credit bureaus in
the form of a credit "score" of the borrower based on the borrower's past credit
history. Generally, a higher credit score signifies that a borrower has a better
credit history. Currently, the sellers employ the credit scoring system of the
Fair Isaac Credit Bureau, known as FICO scores, in assessing borrowers under
these circumstances. If a borrower's credit score becomes relevant because the
borrower's loan has a high Combined Loan-to-Value Ratio, the borrower's loan may
receive a lower credit grade from a seller if his or her credit score does not
meet a minimum threshold. The sellers also periodically analyze the FICO scores
of borrowers after their loans have been underwritten together with the payment
history of the borrowers on their loans as part of the continuing assessment of
the accuracy and effectiveness of the Equity One Standards. Generally, a Grade C
Credit may be underwritten using the SI, AIV or Lite Doc program only if that
Grade C Credit has a FICO score above a minimum level, and a maximum loan amount
below a maximum level, specified in the Equity One Standards.
Qualifications of Sellers and Servicer
Each seller is required to be an institution experienced in originating
loans of the type contained in the related trust fund in accordance with
accepted practices and prudent guidelines and must maintain satisfactory
facilities to originate those loans. The servicer is required to be an
institution experienced in originating and servicing loans of the type contained
in the related trust fund in accordance with accepted practices and prudent
guidelines and must maintain satisfactory facilities to originate and service
those loans. Each seller must maintain all of the licenses necessary for the
conduct of its business.
Representations by Sellers; Repurchases
Each seller (and Equity One, where a seller is a subsidiary or affiliate of
Equity One) will make representations and warranties in respect of the loans
sold by the seller to a trust fund. These representations and warranties may
include, among other things:
o that (except for certain loans specified in the applicable Agreement)
title insurance (or in the case of mortgaged properties located in
areas where these policies are generally not available, an attorney's
certificate of title) and any required hazard insurance policy were
effective at origination of each loan and that the title insurance (or
certificate of title as applicable) remained in effect on the date of
purchase of the loan from the seller by or on behalf of the depositor;
o that the seller had good title to each loan and that each loan was
subject to no offsets, defenses, counterclaims or rights of rescission
except to the extent that any buydown agreement may forgive some
indebtedness of a borrower;
o that each loan constituted a valid lien on, or a perfected security
interest attaching to the mortgaged property (subject only to
permissible liens disclosed, if applicable, title insurance
exceptions, if
23
applicable, and other exceptions described in the Agreement) and that
the mortgaged property was free from damage and was in acceptable
condition;
o that there were no delinquent tax or assessment liens against the
mortgaged property;
o that no required payment on a loan was contractually delinquent more
than the number of days specified in the related prospectus
supplement; and
o that each loan was made in compliance with all applicable local, state
and federal laws and regulations in all material respects.
The servicer or the trustee, if the servicer is the seller, will promptly
notify the relevant seller (and Equity One, if it is not the servicer or the
seller) of any breach of any representation or warranty made by it in respect of
a loan which materially and adversely affects the interests of holders of the
securities secured by the loan. If the seller cannot cure a breach within 90
days following notice from the servicer or the trustee, as the case may be, then
the seller will be obligated either to
o repurchase the loan from the trust fund at a price (the "Purchase
Price") equal to 100% of the unpaid principal balance thereof as of
the date of the repurchase plus accrued interest thereon to the first
day of the month following the month of repurchase at the loan's
stated interest rate plus any costs and damages incurred by the trust
fund in connection with such loan prior to its repurchase (less any
advances or amount payable as related servicing compensation if the
seller is the servicer) or
o substitute for the loan a replacement loan that satisfies the criteria
specified in the related Agreement and described in the related
prospectus supplement.
If a REMIC or FASIT election is to be made for a trust fund, the servicer or a
holder of the related residual certificate generally will be obligated to pay
any prohibited transaction tax which may arise in connection with any repurchase
or substitution and the trustee must have received a satisfactory opinion of
counsel that the repurchase or substitution will not cause the trust fund to
lose its status as a REMIC or FASIT or otherwise subject the trust fund to a
prohibited transaction tax. The servicer may be entitled to reimbursement for
any payment from the assets of the related trust fund or from any holder of the
related residual certificate. We refer you to "Description of the
Securities--General." Except in those cases in which the servicer is the seller,
the servicer will be required under the applicable Agreement to enforce this
obligation for the benefit of the trustee and the holders of the securities,
following the practices it would employ in its good faith business judgment were
it the owner of the loan. This repurchase or substitution obligation will
constitute the sole remedy available to holders of securities or the trustee for
a breach of representation by a seller.
If Equity One makes a representation or warranty on behalf of a seller,
Equity One will be obligated to purchase or substitute a loan if a seller
defaults on its obligation to do so, but no assurance can be given that Equity
One will carry out its purchase or substitution obligations for loans. Neither
the depositor nor the servicer (unless the servicer is a seller) will be
obligated to purchase or substitute a loan if a seller defaults on its
obligation to do so, and no assurance can be given that sellers will carry out
their respective repurchase or substitution obligations for loans.
DESCRIPTION OF THE SECURITIES
Each series of certificates will be issued pursuant to either
o a Pooling and Servicing Agreement among the depositor, the servicer,
the trustee and the sellers, or
o a Trust Agreement between the depositor and the trustee.
Forms of Pooling and Servicing Agreement and Trust Agreement have been filed as
exhibits to the registration statement of which this prospectus forms a part.
Each series of notes will be issued pursuant to an indenture (an
24
"Indenture") between the related trust fund established by the depositor and the
trustee, and the related loans will be serviced by the servicer pursuant to a
Master Servicing Agreement. Forms of Indenture and Master Servicing Agreement
have been filed as exhibits to the registration statement of which this
prospectus forms a part. A series of securities may consist of both notes and
certificates. Each Agreement, dated as of the related cut-off date, will be
among various parties which may include, without limitation, the depositor, the
servicer, the sellers and/or the trustee for the benefit of the holders of the
securities of that series. The provisions of each Agreement will vary depending
upon the nature of the securities to be issued thereunder and the nature of the
related trust fund. The following are descriptions of the material provisions
which may appear in each Agreement. The descriptions are subject to, and are
qualified in their entirety by reference to, all of the provisions of the
Agreement for each series of securities and the applicable prospectus
supplement.
General
The securities of each series will be issued in book-entry or fully
registered form as specified in the related prospectus supplement, in the
authorized denominations specified in the related prospectus supplement, and
will, in the case of asset-backed certificates, evidence specified beneficial
ownership interests in, and in the case of asset-backed notes, be secured by the
assets of the related trust fund created pursuant to each Agreement and will not
be entitled to payments in respect of the assets included in any other trust
fund established by the depositor. The securities will not represent obligations
of the depositor or any affiliate of the depositor. Some of the loans may be
guaranteed or insured as set forth in the related prospectus supplement. To the
extent provided in the related Agreement, each trust fund will consist of, among
other things:
o the Trust Fund Assets, as from time to time are subject to the related
Agreement (exclusive of any amounts specified in the related
prospectus supplement (each, a "Retained Interest")), including all
payments of interest and principal received on the loans after the
cut-off date (to the extent not applied in computing the principal
balance of the loans as of the cut-off date (the "Cut-off Date
Principal Balance"));
o assets that from time to time are required to be deposited in the
various accounts maintained by the servicer and the trustee for the
benefit of the holders of securities of the related series;
o property which secured a loan and which is acquired on behalf of the
holders of securities of the related series by foreclosure or deed in
lieu of foreclosure; and
o any insurance policies or other forms of credit enhancement required
to be maintained pursuant to the related Agreement.
If so specified in the related prospectus supplement, a trust fund may also
include reinvestment income on payments received on the Trust Fund Assets.
Each series of securities will be issued in one or more classes. Each class
of asset-backed certificates of a series will evidence beneficial ownership of a
specified percentage (which may be 0%) or portion of future interest payments
and a specified percentage (which may be 0%) or portion of future principal
payments on, and each class of asset-backed notes of a series will be secured
by, the related Trust Fund Assets. A series of securities may include one or
more classes that are senior in right to payment to one or more other classes of
securities of that series. Some series or classes of securities may be covered
by insurance policies, surety bonds or other forms of credit enhancement, in
each case as described under "Credit Enhancement" herein and in the related
prospectus supplement. One or more classes of securities of a series may be
entitled to receive distributions of principal, interest or any combination
thereof. Distributions on one or more classes of a series of securities may be
made prior to one or more other classes, after the occurrence of specified
events, in accordance with a schedule or formula or on the basis of collections
from designated portions of the related Trust Fund Assets, in each case as
specified in the related prospectus supplement. The timing and amounts of
distributions may vary among classes or over time as specified in the related
prospectus supplement.
25
Distributions of principal and interest (or, where applicable, of principal
only or interest only) on the related securities will be made by the trustee on
each distribution date (i.e., monthly, quarterly, semi-annually or at other
intervals and on other dates as specified in the related prospectus supplement)
in proportion to the percentages specified in the related prospectus supplement.
Distributions will be made to the persons in whose names the securities are
registered at the close of business on the dates specified in the related
prospectus supplement (each, a "Record Date"). Distributions will be made in the
manner specified in the related prospectus supplement to the persons entitled
thereto at the address appearing in the register maintained for holders of
securities; provided, however, that the final distribution in retirement of the
securities will be made only upon presentation and surrender of the securities
at the office or agency of the trustee or other person specified in the notice
to securityholders of the final distribution.
The securities will be freely transferable and exchangeable at the
corporate trust office of the trustee as set forth in the related prospectus
supplement. No service charge will be made for any registration of exchange or
transfer of securities of any series, but the trustee may require payment of a
sum sufficient to cover any related tax or other governmental charge.
An election may be made to treat the trust fund related to each series
or designated portions thereof as a "real estate mortgage investment conduit" or
"REMIC" or as a "financial asset securitization investment trust" or "FASIT,"
each as defined in the Code. The related prospectus supplement will specify
whether a REMIC or FASIT election is to be made. Alternatively, the Agreement
for a series may provide that a REMIC or FASIT election may be made at the
discretion of the depositor or the servicer and may only be made if specific
conditions are satisfied. The terms and provisions applicable to the making of a
REMIC or FASIT election for a particular series will be set forth in the related
prospectus supplement. If a REMIC or FASIT election is made for a series, one of
the classes will be designated as evidencing the sole class of "residual
interests" in the related REMIC or the sole ownership interest in the FASIT,
each as defined in the Code. All other classes of securities in that series will
constitute "regular interests" in the related REMIC or FASIT, as defined in the
Code. If a REMIC or FASIT election is made for a particular series, the servicer
or a holder of the related residual certificate, as specified in the related
Agreement, will be obligated to take all actions required in order to comply
with applicable laws and regulations and will be obligated to pay any prohibited
transaction taxes. The servicer, unless otherwise provided in the related
prospectus supplement, will be entitled to reimbursement for any payment from
the assets of the trust fund or from any holder of the related residual
certificate.
Distributions on Securities
General. In general, the method of determining the amount of distributions
on a particular series of securities will depend on the type of credit
enhancement, if any, that is used for that series. We refer you to "Credit
Enhancement."
Set forth below are descriptions of various methods that may be used to
determine the amount of distributions on the securities of a particular series.
The prospectus supplement for each series of securities will describe the method
to be used in determining the amount of distributions on the securities of that
series.
Except as otherwise provided in the related prospectus supplement,
distributions allocable to principal and interest on the securities will be made
by the trustee out of, and only to the extent of, funds in the related Security
Account, including any funds transferred from any reserve account or other cash
account established and available therefor. The related prospectus supplement
will describe the method for allocating distributions made on any distribution
date among securities of different classes and between distributions of
principal (and, if applicable, between distributions of Principal Prepayments,
as defined below, and scheduled payments of principal) and interest. The
prospectus supplement will also describe the method for allocating distributions
among securities of a particular class.
Available Funds. All distributions on the securities of each series on each
distribution date will be made from the Available Funds described below, in
accordance with the terms described in the related prospectus supplement and
specified in the Agreement. "Available Funds" for each distribution date will
generally equal the
26
amount on deposit in the related Security Account on that distribution date (net
of related fees and expenses payable by the related trust fund) other than
amounts to be held therein for distribution on future distribution dates.
Distributions of Interest. Interest will accrue on the aggregate principal
balance (or, in the case of securities entitled only to distributions allocable
to interest, the aggregate notional amount) of each class of securities entitled
to interest from the date, at the Pass-Through Rate or interest rate, as
applicable (which in either case may be a fixed rate or rate adjustable as
specified in the related prospectus supplement), and for the periods specified
in the related prospectus supplement. "Pass-Through Rate" means a rate equal to
the interest rate borne by the underlying loans net of the aggregate servicing
fees and any other amounts specified in the related prospectus supplement. To
the extent funds are available therefor, interest accrued during each specified
period on each class of securities entitled to interest (other than a class of
securities that provides for interest that accrues, but is not currently
payable, referred to hereafter as "Accrual Securities") will be distributable on
the distribution dates specified in the related prospectus supplement until the
aggregate principal balance of that class of securities has been distributed in
full or, in the case of securities entitled only to distributions allocable to
interest, until the aggregate notional amount of those securities is reduced to
zero or for the period of time designated in the related prospectus supplement.
The original aggregate principal balance of each class of securities will equal
the aggregate distributions allocable to principal to which that security is
entitled. Distributions allocable to interest on each security that is not
entitled to distributions allocable to principal will be calculated based on the
notional amount of that security. The notional amount of a security will not
evidence an interest in or entitlement to distributions allocable to principal
but will be used solely for convenience in expressing the calculation of
interest and for other specified purposes.
Interest payable on the securities of a series on a distribution date will
include all interest accrued during the period specified in the related
prospectus supplement. In the event interest accrues over a period ending two or
more days prior to a distribution date, the effective yield to securityholders
will be reduced from the yield that would otherwise be obtainable if interest
payable on the security were to accrue through the day immediately preceding
that distribution date, and the effective yield (at par) to securityholders will
be less than the indicated coupon rate.
If specified in the related prospectus supplement, any interest that has
accrued on a class of Accrual Securities but is not paid on a given distribution
date will be added to the aggregate principal balance of that class of Accrual
Securities on that distribution date. Distributions of interest on any class of
Accrual Securities will commence only after the occurrence of the events
specified in the related prospectus supplement. Until distribution of interest
commences, the beneficial ownership interest in the trust fund or the principal
balance, as applicable, of that class of Accrual Securities, will increase on
each distribution date by the amount of interest that accrued on that class of
securities during the preceding interest accrual period but was not distributed
to that class on that distribution date. Each class of Accrual Securities will
thereafter accrue interest on its outstanding aggregate principal balance as so
adjusted.
Distributions of Principal. The related prospectus supplement will specify
the method by which the amount of principal to be distributed on the securities
on each distribution date will be calculated and the manner in which principal
will be allocated among the classes of securities entitled to distributions of
principal. The aggregate principal balance of any class of securities entitled
to distributions of principal generally will be the initial aggregate principal
balance of that class of securities specified in the related prospectus
supplement, reduced by all distributions reported to the holders of those
securities as allocable to principal and,
o in the case of Accrual Securities, increased by all interest accrued
but not then distributable on the Accrual Securities, and
o in the case of adjustable rate securities, subject to the effect of
negative amortization, if applicable.
If so provided in the related prospectus supplement, one or more classes of
securities will be entitled to receive all or a disproportionate percentage of
the payments of principal which are received from borrowers in advance of their
scheduled due dates and are not accompanied by amounts representing scheduled
interest due after the month of these payments ("Principal Prepayments") in the
percentages and under the circumstances or for the periods specified in the
related prospectus supplement. Any allocation of Principal Prepayments to a
class or classes
27
of securities will have the effect of accelerating the amortization of those
securities while increasing the interests evidenced by one or more other classes
of securities in the trust fund. Increasing the interests of the other classes
of securities relative to that of specific securities is intended to preserve
the availability of the subordination provided by the other securities. See
"Credit Enhancement--Subordination."
Unscheduled Distributions. If specified in the related prospectus
supplement, the securities will be subject to receipt of distributions before
the next scheduled distribution date under the circumstances and in the manner
described below and in the prospectus supplement. If applicable, the trustee
will be required to make unscheduled distributions on the day and in the amount
specified in the related prospectus supplement if, due to substantial payments
of principal (including Principal Prepayments) on the Trust Fund Assets, the
trustee or the servicer determines that the funds available or anticipated to be
available from the Security Account and, if applicable, any reserve account, may
be insufficient to make required distributions on the securities on that
distribution date. The applicable prospectus supplement may provide for limits
on the amount of any unscheduled distribution, but if it does not, the amount of
any unscheduled distribution that is allocable to principal will not exceed the
amount that would otherwise have been required to be distributed as principal on
the securities on the next distribution date. The applicable prospectus
supplement may specify whether unscheduled distributions will include interest,
but if it does not, unscheduled distributions will include interest at the
applicable Pass-Through Rate (if any) or interest rate (if any) on the amount of
the unscheduled distribution allocable to principal for the period and to the
date specified in the related prospectus supplement.
Advances
To the extent provided in the related prospectus supplement, the servicer
will be required to advance on or before each distribution date (from its own
funds, funds advanced by sub-servicers or funds held in the Security Account for
future distributions to the holders of securities of the related series), an
amount equal to the aggregate of payments of interest and/or principal that were
delinquent on the related Determination Date (as that term is defined in the
related prospectus supplement), subject to the servicer's determination that the
advances may be recoverable out of late payments by borrowers, Liquidation
Proceeds, Insurance Proceeds or otherwise.
In making advances, the servicer will endeavor to maintain a regular flow
of scheduled interest and principal payments to holders of the securities,
rather than to guarantee or insure against losses. If advances are made by the
servicer from cash being held for future distribution to securityholders, the
servicer will replace these funds on or before any future distribution date to
the extent that funds in the applicable Security Account on that distribution
date would be less than the amount required to be available for distributions to
securityholders on that date. Each advance will be reimbursable to the servicer
out of recoveries on the specific loans with respect to which the advances were
made (e.g., late payments made by the related borrower, any related Insurance
Proceeds, Liquidation Proceeds or proceeds of any loan purchased by the
depositor, a sub-servicer or a seller pursuant to the related Agreement).
Advances also will be reimbursable to the servicer from cash otherwise
distributable to securityholders (including the holders of Senior Securities) to
the extent that the servicer determines that any advances previously made are
not ultimately recoverable as described above. To the extent provided in the
related prospectus supplement, the servicer also will be obligated to make
advances, to the extent recoverable out of Insurance Proceeds, Liquidation
Proceeds or otherwise, for some taxes and insurance premiums not paid by
borrowers on a timely basis. These advances are reimbursable to the servicer to
the extent permitted by the related Agreement. The obligations of the servicer
to make advances may be supported by a cash advance reserve fund, a surety bond
or other arrangement of the type described herein under "Credit Enhancement," in
each case as described in the related prospectus supplement.
In the event the servicer fails to make a required advance, the applicable
prospectus supplement may specify whether another party will have advancing
obligations, but if it does not, the trustee will be obligated to make the
advance in its capacity as successor servicer. If the trustee makes an advance,
it will be entitled to be reimbursed for the advance to the same extent and
degree as the servicer is entitled to be reimbursed for advances. We refer you
to "Description of the Securities--Distributions on Securities."
28
Reports to Securityholders
Prior to or concurrently with the distribution of funds on a distribution
date, the servicer or the trustee will furnish to each securityholder of record
of the related series (if applicable to that series of securities) a statement
setting forth certain specified information that may include, among other
things:
o the amount of the distribution allocable to principal, separately
identifying the aggregate amount of any Principal Prepayments and if
so specified in the related prospectus supplement, any applicable
prepayment penalties included therein;
o the amount of the distribution allocable to interest;
o the amount of any advance;
o the aggregate amount
o otherwise allocable to Subordinated Securities on that
distribution date, and
o withdrawn from the reserve account, if any, that is included in
the amounts distributed to the Senior Securities;
o the outstanding principal balance or notional amount of each class of
the related series after giving effect to the distribution of
principal on that distribution date;
o the percentage of principal payments on the loans (excluding Principal
Prepayments), if any, which each class will be entitled to receive on
the following distribution date;
o the percentage of Principal Prepayments on the loans, if any, which
each class will be entitled to receive on the following distribution
date;
o the related amount of the servicing compensation retained or withdrawn
from the Security Account by the servicer, and the amount of
additional servicing compensation received by the servicer
attributable to penalties, fees, excess Liquidation Proceeds and other
similar charges and items;
o the number and aggregate principal balances of loans
o contractually delinquent (exclusive of loans in foreclosure)
o 1 to 30 days,
o 31 to 60 days,
o 61 to 90 days, and
o 91 or more days, and
o in foreclosure and contractually delinquent
o 1 to 30 days,
o 31 to 60 days,
o 61 to 90 days, and
o 91 or more days,
as of the close of business on the last day of the calendar month
preceding that distribution date;
o the book value of any real estate acquired through foreclosure or
grant of a deed in lieu of foreclosure;
o the Pass-Through Rate or interest rate, as applicable, if adjusted
from the date of the last statement, of any class expected to be
applicable to the next distribution to that class;
o if applicable, the amount remaining in any reserve account at the
close of business on the distribution date;
29
o the Pass-Through Rate or interest rate, as applicable, as of the day
prior to the immediately preceding distribution date; and
o any amounts remaining under letters of credit, pool policies or other
forms of credit enhancement.
Where applicable, any amount set forth above may be expressed as a dollar
amount per single security of the relevant class having the Percentage Interest
specified in the related prospectus supplement. The report to securityholders
for any series of securities may include additional or other information of a
similar nature to that specified above.
In addition, within a reasonable period of time after the end of each
calendar year, the servicer or the trustee will furnish to each securityholder
of record at any time during that calendar year a report
o as to the aggregate of amounts reported pursuant to the first two
items above for that calendar year or, in the event that person was a
securityholder of record during a portion of that calendar year, for
the applicable portion of that year, and
o other customary information deemed necessary or desirable for
securityholders to prepare their tax returns.
Categories of Classes of Securities
The securities of any series may be comprised of one or more classes. The
different classes of securities in a series, in general, will fall into
different categories. The following chart identifies and generally defines some
of the more typical categories. The prospectus supplement for a series of
securities may identify the classes which comprise that series by reference to
the following categories.
Categories of Classes Definition
PRINCIPAL TYPES
Accretion Directed Class............ A class that receives principal payments
from the accreted interest from
specified Accrual Classes. An accretion
directed class also may receive
principal payments from principal paid
on the underlying Trust Fund Assets for
the related series.
Component Class..................... A class consisting of "components." The
components of a component class may have
different principal and/or interest
payment characteristics but together
constitute a single class. Each
component of a component class may be
identified as falling into one or more
of the categories in this chart.
Notional Amount Class............... A class having no principal balance and
bearing interest on the related notional
amount. The notional amount is used for
purposes of the determination of
interest distributions.
Planned Principal Class
(also sometimes referred to as
a "PAC").... ..................... A class that is designed to receive
principal payments using a predetermined
principal balance schedule derived by
assuming two constant prepayment rates
for the underlying Trust Fund Assets.
These two rates are the endpoints for
the
30
"structuring range" for the planned
principal class. The planned principal
classes in any series of securities may
be subdivided into different categories
(e.g., primary planned principal
classes, secondary planned principal
classes and so forth) having different
effective structuring ranges and
different principal payment priorities.
The structuring range for the secondary
planned principal class of a series of
securities will be narrower than that
for the primary planned principal class
of that series. The prospectus
supplement relating to each planned
principal class will disclose the
principal balance schedule pertaining to
that class and the pricing and
prepayment assumptions based upon which
the schedule will have been prepared,
including the actual characteristics of
the underlying loans, the assumptions
regarding original terms to maturity,
the remaining terms to maturity, and
interest rates of the underlying loans,
and the assumptions some the rate of
prepayment on the underlying loans.
Scheduled Principal Class........... A class that is designed to receive
principal payments using a predetermined
principal balance schedule but is not
designated as a planned principal class
or targeted principal class. In many
cases, the schedule is derived by
assuming two constant prepayment rates
for the underlying Trust Fund Assets.
These two rates are the endpoints for
the "structuring range" for the
scheduled principal class.
Sequential Pay Class................ Classes that receive principal payments
in a prescribed sequence, that do not
have predetermined principal balance
schedules and that under all
circumstances receive payments of
principal continuously from the first
distribution date on which they receive
principal until they are retired. A
single class that receives principal
payments before or after all other
classes in the same series of securities
may be identified as a sequential pay
class.
Strip Class......................... A class that receives a constant
proportion, or "strip," of the principal
payments on the underlying Trust Fund
Assets.
Support Class (also
sometimes referred to
as a "Companion Class")............. A class that receives principal payments
on any distribution date only if
scheduled payments have been made on
specified planned principal classes,
targeted principal classes and/or
scheduled principal classes.
Targeted Principal Class
31
(also sometimes
referred to as a "TAC")............. A class that is designed to receive
principal payments using a predetermined
principal balance schedule derived by
assuming a single constant prepayment
rate for the underlying Trust Fund
Assets. The prospectus supplement
relating to each targeted principal
class will disclose the principal
balance schedule pertaining to that
class and the pricing and prepayment
assumptions based upon which the
schedule will have been prepared,
including the actual characteristics of
the underlying loans, the assumptions
regarding original terms to maturity,
the remaining terms to maturity, and
interest rates of the underlying loans,
and the assumptions regarding the rate
of prepayment on the underlying loans.
Non-amortizing Sequential Class..... A class that generally receives no
principal payments for a designated
number of distribution dates and then
receives a disproportionately small or
large portion of the funds available for
principal payments on subsequent
distribution dates.
INTEREST TYPES
Fixed Rate Class.................... A class with an interest rate that is
fixed throughout the life of the class.
Floating Rate Class................. A class with an interest rate that
resets periodically based upon a
designated index and that varies
directly with changes in that index.
Inverse Floating Rate Class......... A class with an interest rate that
resets periodically based upon a
designated index and that varies
inversely with changes in that index.
Variable Rate Class................. A class with an interest rate that
resets periodically and is calculated by
reference to the rate or rates of
interest applicable to specified assets
or instruments (e.g., the interest rates
borne by the underlying loans).
Interest Only Class................. A class that receives some or all of the
interest payments made on the underlying
Trust Fund Assets and little or no
principal. Interest only classes have
either a nominal principal balance or a
notional amount. A nominal principal
balance represents actual principal that
will be paid on the class. It is
referred to as nominal since it is
extremely small compared to other
classes. A notional amount is the amount
used as a reference to calculate the
amount of interest due on an interest
only class that is not entitled to any
distributions in respect of principal.
32
Principal Only Class................ A class that does not bear interest and
is entitled to receive only
distributions in respect of principal.
Partial Accrual Class............... A class that accretes a portion of the
amount of accrued interest thereon,
which amount will be added to the
principal balance of that class on each
applicable distribution date, with the
remainder of accrued interest to be
distributed currently as interest to
that class. This accretion may continue
until a specified event has occurred or
until the partial accrual class is
retired.
Accrual Class....................... A class that accretes the amount of
accrued interest otherwise distributable
on the class, which amount will be added
as principal to the principal balance of
the class on each applicable
distribution date. This accretion may
continue until some specified event has
occurred or until the accrual class is
retired.
Indices Applicable to Floating Rate and Inverse Floating Rate Classes
General. Except as otherwise specified in the related prospectus
supplement, the indices applicable to Floating Rate and Inverse Floating Rate
Classes will be limited to the indices described below.
LIBOR. The applicable prospectus supplement may specify some other basis
for determining LIBOR, but if it does not, on the LIBOR Determination Date (as
this term is defined in the related prospectus supplement) for each class of
securities of a series as to which the applicable interest rate or Pass-Through
Rate is determined by reference to an index denominated as LIBOR, the person
designated in the related Agreement as the calculation agent will determine
LIBOR in accordance with one of the two methods described below (which method
will be specified in the related prospectus supplement):
LIBO Method. If using this method to calculate LIBOR, the calculation agent
will determine LIBOR by reference to the quotations, as set forth on the Reuters
Screen LIBO Page (as defined in the International Swaps and Derivatives
Association, Inc. Code of Standard Wording, Assumptions and Provisions for
Swaps, 1986 Edition), offered by the principal London office of each of the
designated reference banks meeting the criteria set forth herein for making
United States dollar deposits of the applicable duration in leading banks in the
London Interbank market, as of 11:00 a.m. (London time) on the LIBOR
Determination Date. In lieu of relying on the quotations for those reference
banks that appear at that time on the Reuters Screen LIBO Page, the calculation
agent will request each of the reference banks to provide the offered quotations
at that time.
LIBOR will be established by the calculation agent on each LIBOR
Determination Date as follows:
o If on any LIBOR Determination Date two or more reference banks provide
offered quotations, LIBOR for the next interest accrual period shall
be the arithmetic mean of the offered quotations (rounded upwards if
necessary to the nearest whole multiple of 1/32%).
o If on any LIBOR Determination Date only one or none of the reference
banks provides offered quotations, LIBOR for the next interest accrual
period shall be whichever is the higher of
o LIBOR as determined on the previous LIBOR Determination Date, or
o the reserve interest rate.
The reserve interest rate shall be the rate per annum which the calculation
agent determines to be either
33
o the arithmetic mean (rounded upwards if necessary to the nearest
whole multiple of 1/32%) of the one-month United States dollar
lending rates that New York City banks selected by the
calculation agent are quoting, on the relevant LIBOR
Determination Date, to the principal London offices of at least
two of the reference banks to which these quotations are, in the
opinion of the calculation agent, being so made, or
o if the calculation agent can not determine the arithmetic mean,
the lowest one-month United States dollar lending rate which New
York City banks selected by the calculation agent are quoting on
that LIBOR Determination Date to leading European banks.
o If on any LIBOR Determination Date for a class specified in the
related prospectus supplement, the calculation agent is required but
is unable to determine the reserve interest rate in the manner
provided above, LIBOR for the next interest accrual period shall be
LIBOR as determined on the preceding LIBOR Determination Date, or, in
the case of the first LIBOR Determination Date, LIBOR shall be deemed
to be the per annum rate specified in the related prospectus
supplement.
Each reference bank
o must be a leading bank engaged in transactions in Eurodollar deposits
in the international Eurocurrency market,
o may not control, be controlled by, or be under common control with the
calculation agent, and
o must have an established place of business in London.
If any reference bank is unwilling or unable to act in that capacity or if
appointment of any reference bank is terminated, another leading bank meeting
the criteria specified above will be appointed.
BBA Method. If using this method of determining LIBOR, the calculation
agent will determine LIBOR on the basis of the British Bankers' Association
"Interest Settlement Rate" for one-month deposits in United States dollars as
found on Telerate page 3750 as of 11:00 a.m. London time on each LIBOR
Determination Date. Interest Settlement Rates currently are based on rates
quoted by eight British Bankers' Association designated banks as being, in the
view of those banks, the offered rate at which deposits are being quoted to
prime banks in the London interbank market. Interest Settlement Rates are
calculated by eliminating the two highest rates and the two lowest rates,
averaging the four remaining rates, carrying the result (expressed as a
percentage) out to six decimal places, and rounding to five decimal places.
If on any LIBOR Determination Date, the calculation agent is unable to
calculate LIBOR in accordance with the method set forth in the immediately
preceding paragraph, LIBOR for the next interest accrual period shall be
calculated in accordance with the LIBOR method described above under "--LIBO
Method."
The establishment of LIBOR on each LIBOR Determination Date by the
calculation agent and its calculation of the rate of interest for the applicable
classes for the related interest accrual period shall (in the absence of
manifest error) be final and binding.
Treasury Index. The applicable prospectus supplement may specify some other
basis for determining and defining the Treasury Index, but if it does not, on
the Treasury Index Determination Date (as this term is defined in the related
prospectus supplement) for each class of securities of a series as to which the
applicable interest rate is determined by reference to an index denominated as a
"Treasury Index," the calculation agent will ascertain the Treasury Index for
U.S. Treasury securities of the maturity and for the period (or, if applicable,
date) specified in the related prospectus supplement. The Treasury Index for any
period means the average of the yield for each business day during the period
specified therein (and for any date means the yield for that date), expressed as
a per annum percentage rate, on U.S. Treasury securities adjusted to the
"constant maturity" (as further described below) specified in the related
prospectus supplement or if no "constant maturity" is so specified, U.S.
Treasury securities trading on the secondary market having the maturity
specified in the related prospectus supplement, in each case as published by the
Federal Reserve Board in its Statistical Release No. H.15 (519). Statistical
Release No. H.15 (519) is published on Monday or Tuesday of each week and may be
obtained by writing or calling the Publications Department at the Board of
Governors of the Federal Reserve System, 21st and C Streets, Washington, D.C.
20551
34
(202) 452-3244. If the calculation agent has not yet received Statistical
Release No. H.15 (519) for that week, then it will use the Statistical Release
from the immediately preceding week.
Yields on U.S. Treasury securities at "constant maturity" are derived from
the U.S. Treasury's daily yield curve. This curve, which relates the yield on a
security to its time to maturity, is based on the closing market bid yields on
actively traded U.S. Treasury securities in the over-the-counter market. These
market yields are calculated from composites of quotations reported by five
leading U.S. government securities dealers to the Federal Reserve Bank of New
York. This method provides a yield for a given maturity even if no security with
that exact maturity is outstanding. If the Treasury Index is no longer
published, a new index based upon comparable data and methodology will be
designated in accordance with the Agreement relating to the particular series of
securities. The calculation agent's determination of the Treasury Index, and its
calculation of the rates of interest for the applicable classes for the related
interest accrual period shall (in the absence of manifest error) be final and
binding.
Prime Rate. The applicable prospectus supplement may specify the party
responsible for determining the Prime Rate, but if it does not, on the Prime
Rate Determination Date (as this term is defined in the related prospectus
supplement) for each class of securities of a series as to which the applicable
interest rate is determined by reference to an index denominated as the Prime
Rate, the calculation agent will ascertain the Prime Rate for the related
interest accrual period. The applicable prospectus supplement may provide for
the means for determining the Prime Rate, but if it does not, the Prime Rate for
an interest accrual period will be the "Prime Rate" as published in the "Money
Rates" section of The Wall Street Journal (or if not so published, the "Prime
Rate" as published in a newspaper of general circulation selected by the
calculation agent in its sole discretion) on the related Prime Rate
Determination Date. If a prime rate range is given, then the average of the
range will be used. If the Prime Rate is no longer published, a new index based
upon comparable data and methodology will be designated in accordance with the
Agreement relating to the particular series of securities. The calculation
agent's determination of the Prime Rate and its calculation of the rates of
interest for the related interest accrual period shall (in the absence of
manifest error) be final and binding.
The interest rate index or indices applicable to floating rate and inverse
floating rate classes of any series (the "Securities Index") may not be equal to
the actual index or indices employed under applicable loan documents in
calculating the interest rates on loans in the relevant class or classes of
securities (the "Loan Indices"). If this type of interest rate mismatch occurs,
the amounts available for payment of interest on the relevant class or classes
of securities may increase or decrease depending upon the divergence between
performance of the applicable Securities Index and the composite performance of
the applicable Loan Indices. While it might be possible, through the use of a
reserve account, interest rate swaps, financial derivative contracts or other
means, to hedge against the risk that divergences between the Securities Index
and the Loan Indices might result in insufficient interest payments being
generated from loans backing the relevant class or classes of securities to pay
the interest accruing on those class or classes of securities, the availability
of interest rate hedging protection, if any, will only be as disclosed in the
related prospectus supplement.
Book-Entry Registration of Securities
As described in the related prospectus supplement, if not issued in fully
registered form, each class of securities will be registered as book-entry
securities. Persons acquiring beneficial ownership interests in book-entry
securities ("Beneficial Owners") will hold their book-entry securities through
The Depository Trust Company ("DTC") in the United States, or Clearstream
Banking, Luxembourg, S.A. ("Clearstream, Luxembourg") or Euroclear System
("Euroclear") in Europe, if they are participants of those systems, or
indirectly through organizations which are participants in those systems.
Book-entry securities will be issued in one or more certificates which equal the
aggregate principal balance of the relevant class of securities and will
initially be registered in the name of Cede & Co., the nominee of DTC.
Clearstream, Luxembourg and Euroclear will hold omnibus positions on behalf of
their participants through customers' securities accounts in Clearstream,
Luxembourg's and Euroclear's names on the books of their respective depositories
which in turn will hold omnibus positions in customers' securities accounts in
the depositories' names on the books of DTC. Citibank, N.A., will act as
depository for Clearstream, Luxembourg and JPMorgan Chase Bank will act as
depository for Euroclear. Except as described below, no Beneficial Owner will be
entitled to receive a physical certificate representing his or her security.
Unless and until physical certificates are issued, it is anticipated that the
only record holder of book-entry
35
securities will be Cede & Co., as nominee of DTC. Beneficial Owners are only
permitted to exercise their rights in book-entry securities indirectly through
DTC participants and DTC.
Each Beneficial Owner's ownership of a book-entry security will be recorded
on the records of the brokerage firm, bank, Thrift Institution or other
financial intermediary (each, a "Financial Intermediary") that maintains the
Beneficial Owner's account for that purpose. In turn, the Financial
Intermediary's ownership of a book-entry security will be recorded on the
records of DTC (or of a participating firm that acts as agent for the Financial
Intermediary, whose interest will in turn be recorded on the records of DTC, if
the Beneficial Owner's Financial Intermediary is not a DTC participant, and on
the records of Clearstream, Luxembourg or Euroclear, as appropriate).
Beneficial Owners will receive all distributions of principal of, and
interest on, book-entry securities from the trustee through DTC and DTC
participants. While the securities are outstanding (except under the
circumstances described below), under the rules, regulations and procedures
creating and affecting DTC and its operations (the "Rules"), DTC is required to
make book-entry transfers among DTC participants on whose behalf it acts for
book-entry securities and is required to receive and transmit distributions of
principal of, and interest on, book-entry securities. DTC participants and
indirect participants with whom Beneficial Owners have accounts for their
book-entry securities are similarly required to make book-entry transfers and
receive and transmit distributions on behalf of their respective Beneficial
Owners. Accordingly, although Beneficial Owners will not possess physical
certificates, the Rules provide a mechanism by which Beneficial Owners will
receive distributions and will be able to transfer their interest. The Rules are
on file with the SEC.
Beneficial Owners will not receive or be entitled to receive physical
certificates representing their respective interests in the securities, except
under the limited circumstances described below. Unless and until certificated
securities are issued, Beneficial Owners who are not DTC participants may
transfer ownership of securities only through DTC participants and indirect
participants by instructing DTC participants and indirect participants to
transfer securities, by book-entry transfer, through DTC for the account of the
purchasers of the securities, which account is maintained with their respective
DTC participants. Under the Rules and in accordance with DTC's normal
procedures, transfers of ownership of securities will be executed through DTC
and the accounts of the respective DTC participants will be debited and
credited. Similarly, the DTC participants and indirect participants will make
debits or credits, as the case may be, on their records on behalf of the selling
and purchasing Beneficial Owners.
Because of time zone differences, credits of securities received in
Clearstream, Luxembourg or Euroclear as a result of a transaction with a DTC
participant will be made during subsequent securities settlement processing and
dated the business day following the DTC settlement date. These credits or any
transactions in the securities settled during processing will be reported to the
relevant Euroclear participants or Clearstream, Luxembourg customers on that
business day. Cash received in Clearstream, Luxembourg or Euroclear as a result
of sales of securities by or through a Clearstream, Luxembourg customer or
Euroclear participant to a DTC participant will be received with value on the
DTC settlement date but will be available in the relevant Clearstream,
Luxembourg or Euroclear cash account only as of the business day following
settlement in DTC.
Transfers between DTC participants will occur in accordance with the Rules.
Transfers between Clearstream, Luxembourg customers and Euroclear participants
will occur in accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Clearstream,
Luxembourg customers or Euroclear participants, on the other, will be effected
by DTC in accordance with the Rules on behalf of Clearstream, Luxembourg or
Euroclear, as the case may be, by its depository. However, these cross-market
transactions will require delivery of instructions to Clearstream, Luxembourg or
Euroclear, as the case may be, by the counterparty in that system in accordance
with its rules and procedures and within its established deadlines (European
time). If the transaction meets its settlement requirements, Clearstream,
Luxembourg or Euroclear, as the case may be, will deliver instructions to its
depository to take action to effect final settlement on its behalf by delivering
or receiving securities in DTC, and making or receiving payment in accordance
with normal procedures for same day funds settlement applicable to DTC.
36
Clearstream, Luxembourg customers and Euroclear participants may not deliver
instructions directly to the depositories.
DTC is a limited purpose trust company organized under the laws of the
State of New York, and is a member of the Federal Reserve System. DTC is a
"clearing corporation" within the meaning of the New York Uniform Commercial
Code and a "clearing agency" registered pursuant to Section 17A of the
Securities and Exchange Act of 1934, as amended. DTC was created to hold
securities for its participants and to facilitate the clearance and settlement
of securities transactions between participants through electronic book-entry
changes in participants' accounts, thereby eliminating the need for physical
movement of securities. Direct participants of DTC include securities brokers
and dealers (who may include the underwriters of any series), banks, trust
companies, clearing corporations and some other organizations. DTC is owned by a
number of its direct participants and by the New York Stock Exchange, Inc., the
Nasdaq-Amex Market Group and the National Association of Securities Dealers,
Inc. Indirect access to the DTC system is also available to others including
Financial Intermediaries that clear through or maintain a custodial relationship
with a direct DTC participant, either directly or indirectly.
Clearstream, Luxembourg holds securities for its customers and facilitates
the clearance and settlement of securities transactions between Clearstream,
Luxembourg customers through electronic book-entry changes in accounts of
Clearstream, Luxembourg customers, thereby eliminating the need for physical
movement of securities. Transactions may be settled by Clearstream, Luxembourg
in any of over 40 currencies, including United States dollars. Clearstream,
Luxembourg provides to its customers, among other things, services for
safekeeping, administration, clearance and settlement of internationally traded
securities and securities lending and borrowing. Clearstream, Luxembourg also
deals with domestic securities markets in over 30 countries through established
depository and custodial relationships. Clearstream, Luxembourg is registered as
a bank in Luxembourg, subject to regulation by the Commission de Surveillance du
Secteur Financier, which supervises Luxembourg banks. Clearstream, Luxembourg's
customers are world-wide financial institutions including underwriters,
securities brokers and dealers, banks, trust companies and clearing
corporations. Clearstream, Luxembourg's United States customers are limited to
securities brokers and dealers and banks. Currently, Clearstream, Luxembourg has
approximately 2,500 customers located in over 80 countries, including all major
European countries, Canada, and the United States. Indirect access to
Clearstream, Luxembourg is available to other institutions that clear through or
maintain a custodial relationship with an account holder of Clearstream,
Luxembourg. Clearstream, Luxembourg has established an electronic bridge with
Euroclear Bank S.A./N.V. in Brussels as the operator of the Euroclear System
(the "Euroclear Operator") to facilitate settlement of trades between
Clearstream, Luxembourg and Euroclear.
Clearstream, Luxembourg and Euroclear customers are world-wide financial
institutions, including underwriters, securities brokers and dealers, banks,
trust companies and clearing corporations. Indirect access to Clearstream,
Luxembourg and Euroclear is available to other institutions that clear through
or maintain a custodial relationship with an account holder of either system.
Euroclear was created in 1968 to hold securities for its participants and
to clear and settle transactions between Euroclear participants through
simultaneous electronic book-entry delivery against payment, thereby eliminating
the need for physical movement of securities and any risk from lack of
simultaneous transfers of securities and cash. Transactions may be settled in
any of over 40 currencies, including United States dollars. Euroclear includes
various other services, including securities lending and borrowing and
interfaces with domestic markets in several countries generally similar to the
arrangements for cross-market transfers with DTC described above. The Euroclear
Operator, a market owned bank incorporated under the laws of the Kingdom of
Belgium and licensed by the Belgian Banking and Finance Commission, assumed the
operating and banking functions of the Euroclear System as of January 1, 2001.
All operations are conducted by the Euroclear Operator, and all Euroclear
securities clearance accounts and Euroclear cash accounts are accounts with the
Euroclear Operator. The Euroclear Operator establishes policy for Euroclear on
behalf of Euroclear participants. Euroclear participants include central banks,
commercial banks, securities brokers and dealers and other professional
financial intermediaries. Indirect access to Euroclear is also available to
other firms that clear through or maintain a custodial relationship with a
Euroclear participant, either directly or indirectly.
37
Securities clearance accounts and cash accounts with the Euroclear Operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of the Euroclear System and applicable Belgian law
(collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities and
cash from Euroclear, and receipts of payments on securities in Euroclear. All
securities in Euroclear are held on a fungible basis without attribution of
specific certificates to specific securities clearance accounts. The Euroclear
Operator acts under the Terms and Conditions only on behalf of Euroclear
participants, and has no record of or relationship with persons holding through
Euroclear participants.
Distributions on the book-entry securities will be made on each
distribution date by the trustee to DTC. DTC will be responsible for crediting
the amount of those payments to the accounts of the applicable DTC participants
in accordance with DTC's normal procedures. Each DTC participant will be
responsible for disbursing payments to the Beneficial Owners of the book-entry
securities that it represents and to each Financial Intermediary for which it
acts as agent. Each Financial Intermediary will be responsible for disbursing
funds to the Beneficial Owners of the book-entry securities that it represents.
Under a book-entry format, Beneficial Owners of the book-entry securities
may experience some delay in their receipt of payments, since these payments
will be forwarded by the trustee to Cede & Co., as nominee of DTC. Distributions
on securities held through Clearstream, Luxembourg or Euroclear will be credited
to the cash accounts of Clearstream, Luxembourg customers or Euroclear
participants in accordance with the relevant system's rules and procedures, to
the extent received by the applicable depository. These distributions will be
subject to tax reporting in accordance with relevant United States tax laws and
regulations. See "Federal Income Tax Consequences--Tax Treatment of Foreign
Investors" and "--Tax Consequences to Holders of the Notes--Backup Withholding."
Because DTC can only act on behalf of Financial Intermediaries, the ability of a
Beneficial Owner to pledge book-entry securities to persons or entities that do
not participate in the Depository system may be limited due to the lack of
physical certificates for book-entry securities. In addition, issuance of the
book-entry securities in book-entry form may reduce the liquidity of these
securities in the secondary market since some potential investors may be
unwilling to purchase securities for which they cannot obtain physical
certificates.
Monthly and annual reports on the trust fund will be provided to Cede &
Co., as nominee of DTC, and may be made available by Cede & Co. to Beneficial
Owners upon request, in accordance with the Rules, and to the Financial
Intermediaries to whose DTC accounts the book-entry securities of the Beneficial
Owners are credited.
DTC has advised the trustee that, unless and until certificated securities
are issued, DTC will take any action permitted to be taken by the holders of the
book-entry securities under the applicable Agreement only at the direction of
one or more Financial Intermediaries to whose DTC accounts the book-entry
securities are credited, to the extent that these actions are taken on behalf of
Financial Intermediaries whose holdings include book-entry securities.
Clearstream, Luxembourg or the Euroclear Operator, as the case may be, will take
any other action permitted to be taken by a securityholder under the Agreement
on behalf of a Clearstream, Luxembourg customer or Euroclear participant only in
accordance with its relevant rules and procedures and subject to the ability of
its depository to effect these actions on its behalf through DTC. DTC may take
actions, at the direction of the related DTC participants, for some securities
which conflict with actions taken for other securities.
Certificated securities will be issued to securityholders only if
o the servicer advises the applicable trustee in writing that DTC is no
longer willing or able to discharge properly its responsibilities as
depository for the securities and the trustee is unable to locate a
qualified successor,
o the servicer at its option, elects to terminate the book-entry system
through DTC, or
o after the occurrence of an Event of Default or the resignation or
removal of the servicer for these securities, holders representing at
least a majority of the outstanding principal amount of the related
securities of that series advise DTC, either directly or through DTC
participants, in writing (with instructions to notify the applicable
trustee in writing) that the continuation of a book-entry system
38
through DTC (or a successor thereto) for those securities is no longer
in the best interest of the holders of the securities.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the trustee will be required to notify all Beneficial
Owners of the occurrence of the event and the availability through DTC of
certificated securities. Upon surrender by DTC of the global certificate or
certificates representing the book-entry securities and instructions for
re-registration, the trustee will issue certificated securities, and thereafter
the trustee will recognize the holders of the certificated securities as
securityholders under the applicable Agreement.
Although DTC, Clearstream, Luxembourg and Euroclear have agreed to the
foregoing procedures in order to facilitate transfers of securities among
participants of DTC, Clearstream, Luxembourg and Euroclear, they are under no
obligation to perform or continue to perform these procedures and they may be
discontinued at any time.
None of the servicer, the depositor or the trustee will have any
responsibility for any aspect of the records relating to or payments made on
account of beneficial ownership interests of the book-entry securities held by
Cede & Co., as nominee of DTC, or for maintaining, supervising or reviewing any
records relating to beneficial ownership interests.
CREDIT ENHANCEMENT
General
Credit enhancement may be provided for one or more classes of a series of
securities or for the related Trust Fund Assets. Credit enhancement may be in
the form of a limited financial guaranty policy issued by an entity named in the
related prospectus supplement, the subordination of one or more classes of the
securities of that series, the establishment of one or more reserve accounts,
the use of a cross-collateralization feature, use of a mortgage pool insurance
policy, FHA insurance, VA guaranty, bankruptcy bond, special hazard insurance
policy, surety bond, letter of credit, guaranteed investment contract,
over-collateralization, or another method of credit enhancement contemplated
herein and described in the related prospectus supplement, or any combination of
the foregoing. To the extent described in the related prospectus supplement,
credit enhancement will not provide protection against all risks of loss and
will not guarantee repayment of the entire principal balance of the securities
and interest thereon. If losses occur which exceed the amount covered by credit
enhancement or which are not covered by the credit enhancement, securityholders
will bear their allocable share of any deficiencies.
Subordination
If so specified in the related prospectus supplement, one or more classes
of a series of securities (the "Senior Securities") may be credit enhanced by
granting Senior Securities the preferential right to receive distributions of
scheduled principal, Principal Prepayments, interest or any combination thereof
prior to holders of one or more other classes of that series ("Subordinated
Securities") as specified in the related prospectus supplement. Protection may
also be afforded to the holders of Senior Securities of a series by:
o reducing the ownership interest (if applicable) of the related
Subordinated Securities;
o a combination of the immediately preceding sentence and the first
bullet above; or
o as further described in the related prospectus supplement.
If so specified in the related prospectus supplement, delays in receipt of
scheduled payments on the loans and losses on defaulted loans may be borne first
by the various classes of Subordinated Securities and thereafter by the various
classes of Senior Securities, in each case under the circumstances and subject
to the limitations specified in the related prospectus supplement. The aggregate
distributions in respect of delinquent payments on the loans over the lives of
the securities or at any time, the aggregate losses in respect of defaulted
loans which must be borne by the Subordinated Securities by virtue of
subordination and the amount of the distributions otherwise distributable to the
holders of Subordinated Securities that will be distributable to holders of
Senior Securities on any distribution date may be limited as specified in the
related prospectus supplement. If aggregate distributions in respect of
delinquent
39
payments on the loans or aggregate losses in respect of the loans were to exceed
an amount specified in the related prospectus supplement, holders of Senior
Securities would experience losses on the securities.
In addition to or in lieu of the foregoing, if so specified in the related
prospectus supplement, all or any portion of distributions otherwise payable to
holders of Subordinated Securities on any distribution date may instead be
deposited into one or more reserve accounts established with the trustee or
distributed to holders of Senior Securities. These deposits may be made on each
distribution date, for specified periods or until the balance in the reserve
account has reached a specified amount and, following payments from the reserve
account to holders of Senior Securities or otherwise, thereafter to the extent
necessary to restore the balance in the reserve account to required levels, in
each case as specified in the related prospectus supplement. Amounts on deposit
in the reserve account may be released to the holders of some classes of
securities at the times and under the circumstances specified in the related
prospectus supplement.
If specified in the related prospectus supplement, various classes of
Senior Securities and Subordinated Securities may themselves be subordinate in
their right to receive some distributions to other classes of Senior and
Subordinated Securities, respectively, through a cross-collateralization
mechanism or otherwise.
Distributions may be allocated among classes of Senior Securities and among
classes of Subordinated Securities
o in the order of their scheduled final distribution dates,
o in accordance with a schedule or formula,
o in relation to the occurrence of events, or
o otherwise, in each case as specified in the related prospectus
supplement.
Letter of Credit
The letter of credit, if any, for a series of securities will be issued by
the bank or financial institution specified in the related prospectus supplement
(the "L/C Bank"). Under the letter of credit, the L/C Bank will be obligated to
honor drawings thereunder in an aggregate fixed dollar amount, net of
unreimbursed payments thereunder, equal to the percentage specified in the
related prospectus supplement of the aggregate principal balance of the loans on
the related cut-off date or of one or more classes of securities (the "L/C
Percentage"). If so specified in the related prospectus supplement, the letter
of credit may permit drawings in the event of losses not covered by insurance
policies or other credit support, including losses arising from damage not
covered by standard hazard insurance policies, losses resulting from the
bankruptcy of a borrower and the application of some provisions of the
Bankruptcy Reform Act of 1978, as amended, and related rules promulgated
thereunder (collectively, the "Bankruptcy Code"), or losses resulting from
denial of insurance coverage due to misrepresentations in connection with the
origination of a loan. The amount available under the letter of credit will, in
all cases, be reduced to the extent of the unreimbursed payments thereunder. The
obligations of the L/C Bank under the letter of credit for each series of
securities will expire at the earlier of the date specified in the related
prospectus supplement or the termination of the related trust fund. We refer you
to "The Agreements--Termination; Optional Termination." A copy of the letter of
credit for a series, if any, will be filed with the SEC as an exhibit to a
Current Report on Form 8-K to be filed within 15 days of issuance of the
securities of the related series.
40
Insurance Policies, Surety Bonds and Guaranties
If so provided in the prospectus supplement for a series of securities,
deficiencies in amounts otherwise payable on those securities or some classes
thereof will be covered by insurance policies and/or surety bonds provided by
one or more insurance companies or sureties. These instruments may cover timely
distributions of interest and/or full distributions of principal for one or more
classes of securities of the related series on the basis of a schedule of
principal distributions set forth in or determined in the manner specified in
the related prospectus supplement. In addition, if specified in the related
prospectus supplement, a trust fund may also include bankruptcy bonds, special
hazard insurance policies, other insurance or guaranties for the purpose of
o maintaining timely payments or providing additional protection against
losses on the assets included in the trust fund,
o paying administrative expenses, or
o establishing a minimum reinvestment rate on the payments made in
respect of those assets or principal payment rate on those assets.
These arrangements may include agreements under which securityholders are
entitled to receive amounts deposited in various accounts held by the trustee
upon the terms specified in the related prospectus supplement. A copy of any
instrument for a series will be filed with the SEC as an exhibit to a Current
Report on Form 8-K to be filed with the SEC within 15 days of issuance of the
securities of the related series.
Over-Collateralization
If so provided in the prospectus supplement for a series of securities, a
portion of the interest payment on each loan may be applied as an additional
distribution in respect of principal to reduce the principal balance of a
specific class or classes of securities and, thus, accelerate the rate of
payment of principal on those securities. Reducing the principal balance of the
securities without a corresponding reduction in the principal balance of the
underlying Trust Fund Assets will result in over-collateralization.
Reserve Accounts
If specified in the related prospectus supplement, credit enhancement for a
series of securities will be provided by the establishment and maintenance with
the trustee for that series of securities, in trust, of one or more reserve
accounts for that series. The related prospectus supplement will specify whether
or not any reserve accounts will be included in the trust fund for that series.
The reserve account for a series will be funded
o by the deposit therein of cash, U.S. Treasury securities, instruments
evidencing ownership of principal or interest payments thereon,
letters of credit, demand notes, certificates of deposit or a
combination thereof in the aggregate amount specified in the related
prospectus supplement,
o by the deposit therein from time to time of amounts, as specified in
the related prospectus supplement to which the holders of Subordinated
Securities, if any, would otherwise be entitled, or
o in another manner specified in the related prospectus supplement.
Any amounts on deposit in the reserve account and the proceeds of any other
instrument upon maturity will be held in cash or will be invested in "Permitted
Investments" which may include
o obligations of the United States or any agency thereof, provided these
obligations are backed by the full faith and credit of the United
States,
o general obligations of or obligations guaranteed by any state of the
United States or the District of Columbia receiving the highest
long-term debt rating of each Rating Agency rating the related series
of
41
securities, or a lower rating that will not result in the downgrading
or withdrawal of the ratings then assigned to the securities by each
Rating Agency,
o commercial or finance company paper which is then receiving the
highest commercial or finance company paper rating of each Rating
Agency, or a lower rating that will not result in the downgrading or
withdrawal of the ratings then assigned to that securities by each
Rating Agency,
o certificates of deposit, demand or time deposits, or bankers'
acceptances issued by any depository institution or trust company
incorporated under the laws of the United States or of any state
thereof and subject to supervision and examination by federal and/or
state banking authorities, provided that the commercial paper and/or
long term unsecured debt obligations of that depository institution or
trust company (or in the case of the principal depository institution
in a holding company system, the commercial paper or long-term
unsecured debt obligations of that holding company, but only if
Moody's Investors Service, Inc. ("Moody's") is not a Rating Agency for
that series of securities) are then rated one of the two highest
long-term and the highest short-term ratings of each Rating Agency for
those securities, or any lower ratings that will not result in the
downgrading or withdrawal of the rating then assigned to those
securities by any Rating Agency,
o demand or time deposits or certificates of deposit issued by any bank
or trust company or savings institution to the extent that the
deposits are fully insured by the FDIC,
o guaranteed reinvestment agreements issued by any bank, insurance
company or other corporation containing, at the time of the issuance
of the agreements, terms and conditions that will not result in the
downgrading or withdrawal of the rating then assigned to those
securities by any Rating Agency,
o repurchase obligations for any security described in the first two
bullets above, in either case entered into with a depository
institution or trust company (acting as principal) described in the
fourth bullet above,
o securities (other than stripped bonds, stripped coupons or instruments
sold at a purchase price in excess of 115% of the face amount thereof)
bearing interest or sold at a discount issued by any corporation
incorporated under the laws of the United States or any state thereof
which, at the time of that investment, have one of the two highest
ratings of each Rating Agency (except if the Rating Agency is Moody's
or Standard & Poor's Ratings Services, a division of The McGraw-Hill
Companies ("S&P"), the rating shall be the highest commercial paper
rating of Moody's or S&P, as applicable, for those securities), or a
lower rating that will not result in the downgrading or withdrawal of
the rating then assigned to those securities by any Rating Agency, as
evidenced by a signed writing delivered by each Rating Agency,
o interests in any money market fund which at the date of acquisition of
the interests in the fund and throughout the time those interests are
held in the fund has the highest applicable rating by each Rating
Agency or a lower rating that will not result in the downgrading or
withdrawal of the ratings then assigned to those securities by each
Rating Agency,
o short term investment funds sponsored by any trust company or national
banking association incorporated under the laws of the United States
or any state thereof which on the date of acquisition has been rated
by each Rating Agency in their respective highest applicable rating
category or a lower rating that will not result in the downgrading or
withdrawal of the ratings then assigned to those securities by each
Rating Agency, and
o other investments having a specified stated maturity and bearing
interest or sold at a discount acceptable to each Rating Agency as
will not result in the downgrading or withdrawal of the rating then
assigned to those securities by any Rating Agency, as evidenced by a
signed writing delivered by each Rating Agency; provided that no
instrument shall be a Permitted Investment if the instrument evidences
the right to receive interest-only payments on the obligations
underlying that instrument; and provided further, that no investment
specified in the ninth or tenth bullet above will be a Permitted
Investment for any pre-funding account or any related capitalized
interest account.
If a letter of credit is deposited with the trustee, the letter of credit will
be irrevocable. Any instrument deposited therein will name the trustee, in its
capacity as trustee for the holders of the securities, as beneficiary and will
be
42
issued by an entity acceptable to each Rating Agency that rates the securities
of the related series. Additional information regarding instruments deposited in
the reserve accounts will be set forth in the related prospectus supplement.
Any amounts so deposited and payments on instruments so deposited will be
available for withdrawal from the reserve account for distribution to the
holders of securities of the related series for the purposes, in the manner and
at the times specified in the related prospectus supplement.
Pool Insurance Policies
If specified in the related prospectus supplement, a separate pool
insurance policy will be obtained for the loans in a particular trust fund and
issued by the insurer (the "Pool Insurer") named in the related prospectus
supplement. Each pool insurance policy will, subject to the limitations
described below, cover loss by reason of default in payment on loans in the
trust fund in an amount equal to a percentage specified in the related
prospectus supplement of the aggregate principal balance of the loans on the
cut-off date which are not covered as to the entire outstanding principal
balances by primary mortgage insurance policies. As more fully described below,
the servicer will present claims thereunder to the Pool Insurer on behalf of
itself, the trustee and the holders of the securities of the related series. The
pool insurance policies, however, are not blanket policies against loss, since
claims thereunder may only be made respecting particular defaulted loans and
only upon satisfaction of the conditions precedent described below.
The applicable prospectus supplement may provide for the extent of coverage
provided by the related pool insurance policy, but if it does not, the pool
insurance policies will not cover losses due to a failure to pay or denial of a
claim under a primary mortgage insurance policy. The applicable prospectus
supplement may provide for the conditions for the presentation of claims under a
pool insurance policy, but if it does not, the pool insurance policy will
provide that no claims may be validly presented unless
o any required primary mortgage insurance policy is in effect for the
defaulted loan and a claim thereunder has been submitted and settled,
o hazard insurance on the related mortgaged property has been kept in
force and real estate taxes and other protection and preservation
expenses have been paid,
o if there has been physical loss or damage to the mortgaged property,
it has been restored to its physical condition (reasonable wear and
tear excepted) at the time of issuance of the policy, and
o the insured has acquired good and merchantable title to the mortgaged
property free and clear of liens except specific permitted
encumbrances.
Upon satisfaction of these conditions, the Pool Insurer will have the option
either
o to purchase the property securing the defaulted loan at a price equal
to the principal balance thereof plus accrued and unpaid interest at
the loan's interest rate to the date of the purchase and specified
expenses incurred by the servicer on behalf of the trustee and
securityholders, or
o to pay the amount by which the sum of the principal balance of the
defaulted loan plus accrued and unpaid interest at the loan's interest
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 specified amounts paid or assumed to have been paid under
the related primary mortgage insurance policy. If any mortgaged property
securing a defaulted loan is damaged and proceeds, if any, from the related
hazard insurance policy or the applicable special hazard insurance policy are
insufficient to restore the damaged mortgaged property to a condition sufficient
to permit recovery under the pool insurance policy, the servicer will not be
required to expend its own funds to restore the damaged mortgaged property
unless it determines that
o restoration will increase the proceeds to securityholders on
liquidation of the loan after reimbursement of the servicer for its
expenses, and
43
o these expenses will be recoverable by it through proceeds of the sale
of the mortgaged property or proceeds of the related pool insurance
policy or any related primary mortgage insurance policy.
The applicable prospectus supplement may provide for a pool insurance
policy covering losses resulting from defaults, but if it does not, the pool
insurance policy will not insure (and many primary mortgage insurance policies
do not insure) against losses sustained by reason of a default arising from,
among other things,
o fraud or negligence in the origination or servicing of a loan,
including misrepresentation by the borrower, the originator or persons
involved in the origination thereof, or
o failure to construct any building or structure located on a mortgaged
property in accordance with plans and specifications.
A failure of coverage attributable to one of the foregoing events might result
in a breach of the related seller's representations described above and might
give rise to an obligation on the part of the seller to repurchase the defaulted
loan if the breach cannot be cured by the seller. No pool insurance policy will
cover (and many primary mortgage insurance policies do not cover) a claim in
respect of a defaulted loan occurring when the servicer of that loan, at the
time of default or thereafter, was not approved by the applicable insurer.
The applicable prospectus supplement may provide for a pool insurance
policy featuring a fixed amount of coverage over the life of the policy, but if
it does not, the original amount of coverage under each pool insurance policy
will be reduced over the life of the related securities by the aggregate dollar
amount of claims paid less the aggregate of the net amounts realized by the Pool
Insurer upon disposition of all foreclosed properties. The amount of claims paid
will include some expenses incurred by the servicer as well as accrued interest
on delinquent loans to the date of payment of the claim. Accordingly, if
aggregate net claims paid under any pool insurance policy reach the original
policy limit, coverage under that pool insurance policy will be exhausted and
any further losses will be home by the related securityholders.
Cross-Collateralization
If specified in the related prospectus supplement, different classes of the
related series of securities may hold the sole beneficial ownership interest in
separate groups of Trust Fund Assets. In this case, credit enhancement may be
provided by a cross-collateralization feature requiring that distributions be
made on securities evidencing a beneficial ownership interest in, or secured by,
one or more asset groups within the same trust fund prior to distributions to
Subordinated Securities evidencing a beneficial ownership interest in, or
secured by, one or more other asset groups within that trust fund.
Cross-collateralization may be provided by
o the allocation of some excess amounts generated by one or more asset
groups to one or more other asset groups within the same trust fund or
o the allocation of losses on one or more asset groups to one or more
other asset groups within the same trust fund.
These excess amounts will be applied and/or these losses will be allocated to
the class or classes of Subordinated Securities of the related series then
outstanding having the lowest rating assigned by any Rating Agency or the lowest
payment priority, in each case to the extent and in the manner more specifically
described in the related prospectus supplement. The prospectus supplement for a
series which includes a cross-collateralization feature will describe the manner
and conditions for applying this cross-collateralization feature.
If specified in the related prospectus supplement, the coverage provided by
one or more of the forms of credit enhancement described in this prospectus may
apply concurrently to two or more separate trust funds. If applicable, the
related prospectus supplement will identify the trust funds to which the credit
enhancement relates and the manner of determining the amount of coverage
provided to those trust funds thereby and of the application of that coverage to
the identified trust funds.
44
YIELD AND PREPAYMENT CONSIDERATIONS
The yields to maturity and weighted average lives of the securities will be
affected primarily by the amount and timing of principal payments received on or
in respect of the Trust Fund Assets included in the related trust fund. The
original terms to maturity of the loans in a given trust fund will vary
depending upon the type of loans included therein. Each prospectus supplement
will contain information regarding the type and maturities of the loans in the
related trust fund. The related prospectus supplement will specify the
circumstances, if any, under which the related loans will be subject to
prepayment penalties. The prepayment experience on the loans in a trust fund
will affect the weighted average life of the related series of securities.
The rate of prepayment on the loans cannot be predicted. The prepayment
experience of the related trust fund may be affected by a wide variety of
factors, including general economic conditions, prevailing interest rate levels,
the availability of alternative financing and homeowner mobility. Other factors
that might be expected to affect the prepayment rate of a pool of home equity
loans include the amounts of, and interest rates on, the underlying senior
mortgage loans, and the use of first mortgage loans as long-term financing for
home purchase and subordinate mortgage loans as shorter-term financing for a
variety of purposes, including home improvement, education expenses and
purchases of consumer durables such as automobiles. Accordingly, these loans may
experience a higher rate of prepayment than traditional fixed-rate mortgage
loans. In addition, any future limitations on the right of borrowers to deduct
interest payments on home equity loans for federal income tax purposes may
further increase the rate of prepayments of the loans. The enforcement of a
"due-on-sale" provision (as described below) will have the same effect as a
prepayment of the related loan. We refer you to "Legal Aspects of the
Loans--Due-on-Sale Clauses." In addition, the servicer and its affiliates
periodically conduct mass mailings to their existing customers with respect to
the refinancing of existing mortgage loans. Although these marketing efforts are
not specifically directed to customers who have mortgage loans included in a
trust fund, these customers may receive the marketing materials as part of a
broader mailing, which may result in an increase in the rate of prepayments of
mortgage loans included in a trust fund through refinancings. The yield to an
investor who purchases securities in the secondary market at a price other than
par will vary from the anticipated yield if the rate of prepayment on the loans
is actually different than the rate anticipated by the investor at the time the
securities were purchased.
Collections on revolving credit line loans may vary because, among other
things, borrowers may
o make payments during any month as low as the minimum monthly payment
for that month or, during the interest-only period for some revolving
credit line loans with respect to which an interest-only payment
option has been selected, the interest and the fees and charges for
that month, or
o make payments as high as the entire outstanding principal balance plus
accrued interest and the fees and charges thereon.
It is possible that borrowers may fail to make the required periodic payments.
In addition, collections on the loans may vary due to seasonal purchasing and
the payment habits of borrowers.
To the extent specified in the related prospectus supplement, conventional
loans will contain due-on-sale provisions permitting the mortgagee to accelerate
the maturity of the loan upon sale or some transfers by the borrower of the
related mortgaged property. Loans insured by the FHA, and loans on Single Family
Properties partially guaranteed by the VA, are assumable with the consent of the
FHA and the VA, respectively. Thus, the rate of prepayments on these loans may
be lower than that of conventional loans bearing comparable interest rates. The
servicer generally will enforce any due-on-sale or due-on-encumbrance clause, to
the extent it has knowledge of the conveyance or further encumbrance or the
proposed conveyance or proposed further encumbrance of the mortgaged property
and reasonably believes that it is entitled to do so under applicable law;
provided, however, that the servicer will not take any enforcement action that
would impair or threaten to impair any recovery under any related insurance
policy. We refer you to "The Agreements--Collection Procedures" and "Legal
Aspects of the Loans" for a description of some provisions of each Agreement and
some legal developments that may affect the prepayment experience on the loans.
The rate of prepayments on conventional mortgage loans has fluctuated
significantly in recent years. In general, if prevailing rates fall
significantly below the interest rates borne by the loans, the loans are more
likely to be subject to higher prepayment rates than if prevailing interest
rates remain at or above those interest rates.
45
Conversely, if prevailing interest rates rise appreciably above the interest
rates borne by the loans, the loans are more likely to experience a lower
prepayment rate than if prevailing rates remain at or below those loan interest
rates. However, there can be no assurance that this will be the case.
When a full prepayment is made on a loan, the borrower is charged interest
on the principal amount of the loan so prepaid only for the number of days in
the month actually elapsed up to the date of the prepayment, rather than for a
full month. The effect of prepayments in full will be to reduce the amount of
interest passed through or paid in the following month to holders of securities
because interest on the principal amount of any loan so prepaid will generally
be paid only to the date of prepayment. Partial prepayments in a given month may
be applied to the outstanding principal balances of the loans so prepaid on the
first day of the month of receipt or the month following receipt. In the latter
case, partial prepayments will not reduce the amount of interest passed through
or paid in that month. Prepayments will be passed through or paid as described
in the related prospectus supplement.
Even assuming that the mortgaged properties provide adequate security for
the loans, substantial delays could be encountered in connection with the
liquidation of defaulted loans and corresponding delays in the receipt of
related proceeds by securityholders could occur. An action to foreclose on a
mortgaged property securing a loan is regulated by state statutes and rules and
is subject to many of the delays and expenses of other lawsuits if defenses or
counterclaims are interposed, sometimes requiring several years to complete.
Furthermore, in some states an action to obtain a deficiency judgment is not
permitted following a nonjudicial sale of a property. In the event of a default
by a borrower, these restrictions among other things, may impede the ability of
the servicer to foreclose on or sell the mortgaged property or to obtain
Liquidation Proceeds sufficient to repay all amounts due on the related loan. In
addition, the servicer will be entitled to deduct from related Liquidation
Proceeds all expenses reasonably incurred in attempting to recover amounts due
on defaulted loans and not yet repaid, including payments to senior lienholders,
legal fees and costs of legal action, real estate taxes and maintenance and
preservation expenses.
Liquidation expenses for defaulted mortgage loans do not vary directly with
the outstanding principal balance of the loan at the time of default. Therefore,
assuming that a servicer took the same steps in realizing upon a defaulted
mortgage loan having a small remaining principal balance as it would in the case
of a defaulted mortgage loan having a large remaining principal balance, the
amount realized after expenses of liquidation would be smaller as a percentage
of the remaining principal balance of the small mortgage loan than would be the
case with the other defaulted mortgage loan having a large remaining principal
balance.
Applicable state laws generally regulate interest rates and other charges,
require specified disclosures, and require licensing of some originators and
servicers of loans. In addition, most have other laws, public policy and general
principles of equity relating to the protection of consumers, unfair and
deceptive practices and practices which may apply to the origination, servicing
and collection of the loans. Depending on the provisions of the applicable law
and the specific facts and circumstances involved, violations of these laws,
policies and principles may limit the ability of the servicer to collect all or
part of the principal of or interest on the loans, may entitle the borrower to a
refund of amounts previously paid and, in addition, could subject the servicer
to damages and administrative sanctions.
If the rate at which interest is passed through or paid to the holders of
securities of a series is calculated on a loan-by-loan basis, disproportionate
principal prepayments among loans with different interest rates will affect the
yield on those securities. In most cases, the effective yield to securityholders
will be lower than the yield otherwise produced by the applicable Pass-Through
Rate or interest rate and purchase price, because while interest will accrue on
each loan in each month, the distribution of interest will not be made earlier
than the month following the month of accrual.
Under some circumstances, the servicer, the holders of the residual
interests in a REMIC or ownership interest in a FASIT or any person specified in
the related prospectus supplement may have the option to purchase the assets of
a trust fund thereby causing earlier retirement of the related series of
securities. We refer you to "The Agreements--Termination; Optional Termination."
46
The relative contribution of the various factors affecting prepayment may
vary from time to time. There can be no assurance as to the rate of payment of
principal of the Trust Fund Assets at any time or over the lives of the
securities.
The prospectus supplement relating to a series of securities will discuss
in greater detail the effect of the rate and timing of principal payments
(including prepayments), delinquencies and losses on the yield, weighted average
lives and maturities of those securities.
THE AGREEMENTS
Set forth below is a description of the material provisions of each
Agreement which is not described elsewhere in this prospectus. The description
is subject to, and qualified in its entirety by reference to, the provisions of
each Agreement. Where particular provisions or terms used in the Agreements are
referred to, the provisions or terms are as specified in the Agreements.
Assignment of the Trust Fund Assets
Conveyance of the Loans. At the time of issuance of the securities of a
series, the depositor will cause the loans comprising the related trust fund to
be conveyed to the trustee, without recourse, together with all principal and
interest received by or on behalf of the depositor on or with respect to those
loans after the cut-off date, other than principal and interest due on or before
the cut-off date and other than any Retained Interest specified in the related
prospectus supplement. The trustee will, concurrently with the conveyance,
deliver the securities to the depositor in exchange for the loans. Each loan
will be identified in a schedule appearing as an exhibit to the related
Agreement. This schedule will include information as to the outstanding
principal balance of each loan after application of payments due on or before
the cut-off date, as well as information regarding the interest rate or APR, the
maturity of the loan, the Combined Loan-to-Value Ratio at origination and other
specified information.
If stated in the accompanying prospectus supplement, and in accordance with
the rules of membership of MERSCORP, Inc. and/or Mortgage Electronic
Registration Systems, Inc. or, MERS(R), assignments of mortgages for any loans
in the related trust fund will be registered electronically through the MERS(R)
system. For mortgages registered through the MERS(R) system, MERS(R) shall serve
as mortgagee of record solely as a nominee in an administrative capacity on
behalf of the trustee and shall not have any interest in any of those mortgages
or the related loans.
The Agreement will require that, within the time period specified therein,
the depositor will also deliver or cause to be delivered to the trustee (or to
the custodian hereinafter referred to) as to each loan, among other things:
o the mortgage note or contract endorsed without recourse in blank or to
the order of the trustee;
o the mortgage, deed of trust or similar instrument (a "Mortgage") with
evidence of recording indicated thereon (except for any Mortgage not
returned from the public recording office, in which case the depositor
will deliver or cause to be delivered a copy of the Mortgage together
with a certificate stating that the original of the Mortgage was
delivered to that recording office);
o except in the case of a mortgage registered with MERS(R), an
assignment of the Mortgage to the trustee, which assignment will be in
recordable form;
o other assignments deemed necessary by the trustee, including
assignments of title insurance policies covering the mortgaged
properties; and
o any other security documents, including those relating to any senior
interests in the mortgaged property, as may be specified in the
related prospectus supplement or the related Agreement.
The trustee (or the custodian hereinafter referred to) will review these
loan documents within the time period specified in the related prospectus
supplement after receipt thereof, and the trustee will hold those documents in
trust for the benefit of the related securityholders. If certain loan documents
are found to be missing or defective in any material respect, the trustee (or
the custodian) will notify the servicer and the depositor, and the servicer will
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notify the related seller. If the seller cannot cure the omission or defect
within the time period specified in the related prospectus supplement after
receipt of the notice, the seller will be obligated to either
o purchase the related loan from the trust fund at the Purchase Price,
or
o if so specified in the related prospectus supplement, remove the loan
from the trust fund and substitute in its place one or more other
loans that meets the requirements set forth in the related Agreement
and described in the related prospectus supplement.
There can be no assurance that a seller will fulfill this purchase or
substitution obligation. Although the servicer may be obligated to enforce this
obligation to the extent described above under "Loan Program--Representations by
Sellers; Repurchases," neither the servicer nor the depositor will be obligated
to purchase or replace the loan if the seller defaults on its obligation. The
applicable prospectus supplement may provide other remedies, but if it does not,
this obligation to cure, purchase or substitute constitutes the sole remedy
available to the securityholders or the trustee for omission of, or a material
defect in, a loan document.
The trustee will be authorized to appoint a custodian pursuant to a
custodial agreement to maintain possession of and, if applicable, to review the
documents relating to the loans as agent of the trustee.
Notwithstanding the foregoing provisions, no purchase or substitution of a
loan will be made for a trust fund which has made a REMIC or FASIT election if
the purchase or substitution would result in a prohibited transaction tax under
the Code.
No Recourse to Sellers, Depositor or Servicer. As described above under
"--Conveyance of the Loans," the depositor will cause the loans comprising the
related trust fund to be conveyed to the trustee, without recourse. However,
each seller (and Equity One, where the seller is a subsidiary or affiliate of
Equity One) will be obligated to repurchase or substitute for any loan as to
which certain representations and warranties are breached or for failure to
deliver certain documents relating to the loans as described herein under
"--Conveyance of the Loans" and "Loan Program--Representations by Sellers;
Repurchases." The applicable prospectus supplement may provide other remedies,
but if it does not, these obligations to purchase or substitute constitute the
sole remedy available to the securityholders of the related series or the
trustee for a breach of any representation or failure to deliver a loan
document.
Payments on Loans; Deposits to Security Account
The servicer will establish and maintain or cause to be established and
maintained for the related trust fund a separate account or accounts for the
collection of payments on the related Trust Fund Assets in the trust fund (the
"Security Account"). The applicable prospectus supplement may provide for other
requirements for the Security Account, but if it does not, the Security Account
must be one of the following:
o maintained with a depository institution the debt obligations of which
(or in the case of a depository institution that is the principal
subsidiary of a holding company, the obligations of which) are rated
in one of the two highest rating categories by the Rating Agency or
Rating Agencies that rated one or more classes of the related series
of securities;
o an account or accounts the deposits in which are fully insured by the
Bank Insurance Fund (the "BIF") of the FDIC or the Savings Association
Insurance Fund (as successor to the Federal Savings and Loan Insurance
Corporation (the "SAIF"));
o an account or accounts the deposits in which are insured by the BIF or
the SAIF (to the limits established by the FDIC), and the uninsured
deposits in which are otherwise secured so that, as evidenced by an
opinion of counsel, the securityholders have a claim on the funds in
the Security Account or a perfected first priority security interest
against any collateral securing these funds that is superior to the
claims of any other depositors or general creditors of the depository
institution with which the Security Account is maintained; or
o an account or accounts otherwise acceptable to each Rating Agency.
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The collateral eligible to secure amounts in the Security Account is limited to
Permitted Investments. A Security Account may be maintained as an
interest-bearing account or the funds held therein may be invested pending each
succeeding distribution date in Permitted Investments. The servicer or its
designee will be entitled to receive any interest or other income earned on
funds in the Security Account as additional compensation and will be obligated
to deposit in the Security Account the amount of any loss immediately as
realized. The Security Account may be maintained with the servicer or with a
depository institution that is an affiliate of the servicer, provided it meets
the standards set forth above.
The servicer will deposit or cause to be deposited in the Security Account
for each trust fund, to the extent applicable and provided in the Agreement, the
following payments and collections received or advances made by or on behalf of
it subsequent to the cut-off date (other than payments due on or before the
cut-off date and exclusive of any amounts representing Retained Interest):
o all payments on account of principal, including Principal Prepayments
and, if specified in the related prospectus supplement, any applicable
prepayment penalties, on the loans;
o all payments on account of interest on the loans, net of applicable
servicing compensation;
o all proceeds (net of unreimbursed payments of property taxes,
insurance premiums and similar items ("Insured Expenses") incurred,
and unreimbursed advances made, by the servicer, if any) of the hazard
insurance policies and any primary mortgage insurance policies, to the
extent these proceeds are not applied to the restoration of the
property or released to the mortgagor in accordance with the
servicer's normal servicing procedures (collectively, "Insurance
Proceeds") and all other cash amounts (net of unreimbursed expenses
incurred in connection with liquidation or foreclosure ("Liquidation
Expenses") and unreimbursed advances made, by the servicer, if any)
received and retained in connection with the liquidation of defaulted
loans, by foreclosure or otherwise ("Liquidation Proceeds"), together
with any net proceeds received on a monthly basis on any properties
acquired on behalf of the securityholders by foreclosure or deed in
lieu of foreclosure;
o all proceeds of any loan or property in respect thereof purchased by
the servicer, the depositor or any seller as described under "Loan
Program--Representations by Sellers; Repurchases" or "--Assignment of
the Trust Fund Assets" and all proceeds of any loan repurchased as
described under "--Termination; Optional Termination";
o all payments required to be deposited in the Security Account in order
to satisfy any deductible clause in any blanket insurance policy
described under "--Hazard Insurance";
o any amount required to be deposited by the servicer in connection with
losses realized on investments for the benefit of the servicer of
funds held in the Security Account and, to the extent specified in the
related prospectus supplement, any payments required to be made by the
servicer in connection with prepayment interest shortfalls; and
o all other amounts required to be deposited in the Security Account
pursuant to the Agreement.
The servicer (or the depositor, as applicable) may from time to time direct
the institution that maintains the Security Account to withdraw funds from the
Security Account for the following purposes:
o to pay to the servicer the servicing fees described in the related
prospectus supplement (subject to reduction) and, as additional
servicing compensation, earnings on or investment income on funds in
the amounts in the Security Account credited thereto;
o to reimburse the servicer for advances, this right of reimbursement
for any loan being limited to amounts received that represent late
recoveries of payments of principal and/or interest on the loan (or
Insurance Proceeds or Liquidation Proceeds with respect thereto) with
respect to which that advance was made;
o to reimburse the servicer for any advances previously made which the
servicer has determined to be nonrecoverable;
49
o to reimburse the servicer from Insurance Proceeds for expenses
incurred by the servicer and covered by the related insurance
policies;
o to reimburse the servicer for unpaid servicing fees and unreimbursed
out-of-pocket costs and expenses incurred by the servicer in the
performance of its servicing obligations, the right of reimbursement
being limited to amounts received representing late recoveries of the
payments for which the advances were made;
o to pay to the servicer, for each loan or property acquired in respect
thereof that has been purchased by the servicer pursuant to the
Agreement, all amounts received thereon and not taken into account in
determining the principal balance of the repurchased loan;
o to reimburse the servicer or the depositor for expenses incurred and
reimbursable pursuant to the Agreement;
o to withdraw any amount deposited in the Security Account and not
required to be deposited therein; and
o to clear and terminate the Security Account upon termination of the
Agreement.
In addition, on or prior to the business day immediately preceding each
distribution date, the servicer shall withdraw from the Security Account the
amount of Available Funds, to the extent on deposit, for deposit in an account
maintained by the trustee for the related series of securities.
Pre-Funding Account
If so provided in the related prospectus supplement, the servicer will
establish and maintain a pre-funding account, in the name of the related trustee
on behalf of the related securityholders, into which the depositor will deposit
cash in an amount (the "Pre-Funded Amount") specified in the related prospectus
supplement on the related closing date. The pre-funding account will be
maintained with the trustee for the related series of securities and is designed
solely to hold funds to be applied by the trustee during the period from the
related closing date to a date specified in the related prospectus supplement
(the "Funding Period") to pay to the depositor or the applicable sellers, as the
case may be, the purchase price for subsequent loans ("Subsequent Loans")
acquired as Trust Fund Assets. Subsequent Loans will be required to conform to
the requirements set forth in the related Agreement and described in the related
prospectus supplement. Monies on deposit in the pre-funding account will not be
available to cover losses on or in respect of the related loans. The Pre-Funded
Amount will not exceed 25% of the initial aggregate principal amount of the
certificates and notes of the related series. The Pre-Funded Amount will be used
by the related trustee to purchase Subsequent Loans from the depositor or the
applicable sellers, as the case may be, from time to time during the Funding
Period. The Funding Period, if any, for a trust fund will begin on the related
closing date and will end on the date specified in the related prospectus
supplement, which in no event will be later than the date that is the earliest
to occur of
o the date the amount on deposit in the pre-funding account is less than
the minimum dollar amount, if any, specified in the related Agreement;
o the date on which an event of default occurs under the related
Agreement, or
o the date which is the later of three months or 90 days after the
related closing date.
Monies on deposit in the pre-funding account may be invested in Permitted
Investments under the circumstances and in the manner described in the related
Agreement. Earnings on investment of funds in the pre-funding account will be
deposited into the related Security Account or another trust account specified
in the related prospectus supplement and losses will be charged against the
funds on deposit in the pre-funding account. Any amounts remaining in the
pre-funding account at the end of the Funding Period will be distributed to the
related securityholders in the manner and priority specified in the related
prospectus supplement, as a prepayment of principal of the related securities.
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In addition, if so provided in the related prospectus supplement, on the
related closing date the depositor will deposit in a capitalized interest
account cash in the amount necessary to cover shortfalls in interest on the
related series of securities that may arise as a result of utilization of the
pre-funding account as described above. The capitalized interest account shall
be maintained with the trustee for the related series of securities and is
designed solely to cover the above-mentioned interest shortfalls. Monies on
deposit in the capitalized interest account will not be available to cover
losses on or in respect of the related loans. To the extent that the entire
amount on deposit in the capitalized interest account has not been applied to
cover shortfalls in interest on the related series of securities by the end of
the Funding Period any amounts remaining in the capitalized interest account
will be paid to the depositor.
Sub-Servicing by Sellers
Each seller of a loan or any other servicing entity may act as the
sub-servicer for the loan pursuant to a sub-servicing agreement, which will not
contain any terms inconsistent with the related Agreement. While each
sub-servicing agreement will be a contract solely between the servicer and the
sub-servicer, the Agreement pursuant to which a series of securities is issued
will provide that, if for any reason the servicer for the series of securities
is no longer the servicer of the related loans, the trustee or any successor
servicer must recognize the sub-servicer's rights and obligations under the
sub-servicing agreement. Notwithstanding any sub-servicing arrangement, unless
otherwise provided in the related prospectus supplement, the servicer will
remain liable for its servicing duties and obligations under the Master
Servicing Agreement as if the servicer alone were servicing the loans.
Collection Procedures
The servicer, directly or through one or more sub-servicers, will make
reasonable efforts to collect all payments called for under the loans and will,
consistent with each Agreement and any pool insurance policy, primary mortgage
insurance policy, FHA insurance, VA guaranty, bankruptcy bond or alternative
arrangements, follow collection procedures that are customary for loans
comparable to the loans. Consistent with the above, the servicer may, in its
discretion, waive any assumption fee, late payment or other charge in connection
with a loan and, to the extent not inconsistent with the coverage of the loan by
a pool insurance policy, primary mortgage insurance policy, FHA insurance, VA
bond or alternative arrangements, if applicable, arrange with a borrower a
schedule for the liquidation of delinquencies running for no more than 125 days
after the applicable due date for each payment. To the extent the servicer is
obligated to make or cause to be made advances, the obligation will remain
during any period of this arrangement.
In any case in which property securing a loan has been, or is about to be,
conveyed by the mortgagor or obligor, the servicer will, to the extent it has
knowledge of the conveyance or proposed conveyance, exercise or cause to be
exercised its rights to accelerate the maturity of the loan under any
due-on-sale clause applicable thereto, but only if the exercise of these rights
is permitted by applicable law and will not impair or threaten to impair any
recovery under any primary mortgage insurance policy. If these conditions are
not met or if the servicer reasonably believes it is unable under applicable law
to enforce the due-on-sale clause or if the loan is a mortgage loan insured by
the FHA or partially guaranteed by the VA, the servicer will enter into or cause
to be entered into an assumption and modification agreement with the person to
whom the property has been or is about to be conveyed, pursuant to which that
person becomes liable for repayment of the loan and, to the extent permitted by
applicable law, the mortgagor remains liable thereon. Any fee collected by or on
behalf of the servicer for entering into an assumption agreement will be
retained by or on behalf of the servicer as additional servicing compensation.
We refer you to "Legal Aspects of the Loans--Due-on-Sale Clauses." In connection
with any assumption of this type, the terms of the related loan may not be
changed.
Hazard Insurance
Except as otherwise specified in the related prospectus supplement, the
servicer will require the mortgagor or obligor on each loan to maintain a hazard
insurance policy providing for no less than the coverage of the standard form of
fire insurance policy with extended coverage customary for the type of mortgaged
property in the state in which that mortgaged property is located. Except as
otherwise specified in the related prospectus supplement, this coverage will be
in an amount equal to at least the lesser of
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o the sum of the original principal balance of the loan and the original
principal balance of any other loan on the mortgaged property having
lien priority over the loan, if any, and
o the greater of
o the maximum insurable value of the improvements on the mortgaged
property and
o an amount sufficient to ensure that the proceeds of the policy
will prevent the mortgagor and/or the mortgagee from becoming a
co-insurer.
All amounts collected by the servicer under any hazard policy (except for
amounts to be applied to the restoration or repair of the mortgaged property or
released to the mortgagor or obligor in accordance with the servicer's normal
servicing procedures) will be deposited in the related Security Account. In the
event that the servicer maintains a blanket policy insuring against hazard
losses on all the loans comprising part of a trust fund, it will conclusively be
deemed to have satisfied its obligation relating to the maintenance of hazard
insurance. This blanket policy may contain a deductible clause, in which case
the servicer will be required to deposit from its own funds into the related
Security Account the amounts which would have been deposited therein but for
this clause.
In general, the standard form of fire and extended coverage policy covers
physical damage to or destruction of the improvements securing a loan by fire,
lightning, explosion, smoke, windstorm and hail, riot, strike and civil
commotion, subject to the conditions and exclusions particularized in each
policy. Although the policies relating to the loans may have been underwritten
by different insurers under different state laws in accordance with different
applicable forms and therefore may not contain identical terms and conditions,
the basic terms thereof are dictated by respective state laws, and most of these
policies do not cover any physical damage resulting from the following: war,
revolution, governmental actions, floods and other water-related causes, earth
movement (including earthquakes, landslides and mud flows), nuclear reactions,
wet or dry rot, vermin, rodents, insects or domestic animals, theft and, in some
cases, vandalism. The foregoing list is merely indicative of some kinds of
uninsured risks and is not intended to be all inclusive. If the mortgaged
property securing a loan is located in a federally designated special flood area
at the time of origination, the servicer will require the mortgagor or obligor
to obtain and maintain flood insurance.
The hazard insurance policy covering each mortgaged property securing each
loan typically contains a clause which in effect requires the insured at all
times to carry insurance in an amount which is the lesser of
o the replacement value of the mortgaged property, or
o the principal amount of the loan.
Most insurance policies provide that if the insured's coverage falls below a
specified percentage (usually 80% to 90%), then the insurer's liability in the
event of partial loss will not exceed the larger of
o the actual cash value (generally defined as replacement cost at the
time and place of loss, less physical depreciation) of the
improvements damaged or destroyed, or
o the same proportion of the loss as the amount of insurance carried
bears to the specified percentage of the full replacement cost of
these improvements.
Since the amount of hazard insurance the servicer may cause to be maintained on
the improvements securing the loans declines as the principal balances owing
thereon decrease, and since improved real estate generally has appreciated in
value over time in the past, the effect of this requirement in the event of
partial loss may be that hazard insurance proceeds will be insufficient to
restore fully the damaged property. If specified in the related prospectus
supplement, a special hazard insurance policy will be obtained to insure against
some of the uninsured risks described above. We refer you to "Credit
Enhancement."
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If the mortgaged property securing a defaulted loan is damaged and
proceeds, if any, from the related hazard insurance policy are insufficient to
restore the damaged mortgaged property, the servicer is not required to expend
its own funds to restore the damaged mortgaged property unless it determines
o that the restoration will increase the proceeds to securityholders on
liquidation of the loan after reimbursement of the servicer for its
expenses, and
o that these expenses will be recoverable by it from related Insurance
Proceeds or Liquidation Proceeds.
If recovery on a defaulted loan under any related insurance policy is not
available for the reasons set forth in the preceding paragraph, or if the
defaulted loan is not covered by an insurance policy, the servicer will be
obligated to follow or cause to be followed normal practices and procedures that
it deems necessary or advisable to realize upon the defaulted loan. If the
proceeds of any liquidation of the mortgaged property securing the defaulted
loan are less than the principal balance of the loan plus interest accrued
thereon that is payable to securityholders, the trust fund will realize a loss
in the amount of the difference plus the aggregate of expenses incurred by the
servicer in connection with these proceedings and which are reimbursable under
the Agreement. In the unlikely event that any proceedings result in a total
recovery which is, after reimbursement to the servicer of its expenses, in
excess of the principal balance of the loan plus interest accrued thereon that
is payable to securityholders, the servicer will be entitled to withdraw or
retain from the Security Account amounts representing its normal servicing
compensation for the loan and amounts representing the balance of the excess,
exclusive of any amount required by law to be forwarded to the related borrower,
as additional servicing compensation.
If the servicer or its designee recovers Insurance Proceeds which, when
added to any related Liquidation Proceeds and after deduction of certain
expenses reimbursable to the servicer, exceed the principal balance of a loan
plus interest accrued thereon that is payable to securityholders, the servicer
will be entitled to withdraw or retain from the Security Account amounts
representing its normal servicing compensation resulting from that loan. In the
event that the servicer has expended its own funds to restore the damaged
mortgaged property and these funds have not been reimbursed under the related
hazard insurance policy, it will be entitled to withdraw from the Security
Account out of related Liquidation Proceeds or Insurance Proceeds an amount
equal to the expenses incurred by it, in which event the trust fund may realize
a loss up to the amount so charged. Since Insurance Proceeds cannot exceed
deficiency claims and certain expenses incurred by the servicer, no payment or
recovery will result in a recovery to the trust fund which exceeds the principal
balance of the defaulted loan together with accrued interest thereon. We refer
you to "Credit Enhancement."
The proceeds from any liquidation of a loan will be applied in the
following order of priority:
o first, to reimburse the servicer for any unreimbursed expenses
incurred by it to restore the related mortgaged property and any
unreimbursed servicing compensation payable to the servicer relating
to the loan;
o second, to reimburse the servicer for any unreimbursed advances
relating to the loan;
o third, to accrued and unpaid interest (to the extent no advance has
been made for this amount) on the loan; and
o fourth, as a recovery of principal of the loan.
Realization Upon Defaulted Loans
FHA Insurance, VA Guaranties. Loans designated in the related prospectus
supplement as insured by the FHA will be insured by the FHA as authorized under
the United States Housing Act of 1937, as amended. In addition to the Title I
Program of the FHA (see "Certain Legal Aspects of the Loans--Title I Program")
some loans will be insured under various FHA programs including the standard FHA
203(b) program to finance the acquisition of one- to four-family housing units
and the FHA 245 graduated payment mortgage program. These programs generally
limit the principal amount and interest rates of the mortgage loans insured.
Loans insured by the FHA generally require a minimum down payment of
approximately 5% of the original principal amount of the loan. No
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FHA-insured loans relating to a series may have an interest rate or original
principal amount exceeding the applicable FHA limits at the time of origination
of the loan.
Loans designated in the related prospectus supplement as guaranteed by the
VA will be partially guaranteed by the VA under the Serviceman's Readjustment
Act of 1944, as amended. The Serviceman's Readjustment Act of 1944, as amended,
permits a veteran (or in some instances the spouse of a veteran) to obtain a
mortgage loan guaranty by the VA covering a portion of the mortgage financing
for the purchase or refinancing of a dwelling to be used as the veteran's home
at interest rates permitted by the VA. Loans made under the program cannot
exceed the reasonable value of the property or certain lower limits in the case
of refinancing loans. The program requires no down payment from the purchaser
and permits the guaranty of mortgage loans of up to 30 years' duration. No loan
guaranteed by the VA will have an original principal amount greater than five
times the partial VA guaranty for the loan. The maximum guaranty that may be
issued by the VA under a VA guaranteed mortgage loan depends upon the original
principal amount of the mortgage loan, as further described in 38 United States
Code Section 3703, as amended.
Primary Mortgage Insurance Policies. If so specified in the related
prospectus supplement, the servicer will maintain or cause to be maintained, as
the case may be, in full force and effect, a primary mortgage insurance policy
with regard to each loan for which the coverage is required. Primary mortgage
insurance policies reimburse certain losses sustained by reason of defaults in
payments by borrowers. The servicer will not cancel or refuse to renew any
primary mortgage insurance policy in effect at the time of the initial issuance
of a series of securities that is required to be kept in force under the
applicable Agreement unless the replacement primary mortgage insurance policy
for a cancelled or nonrenewed policy is maintained with an insurer whose
claims-paying ability is sufficient to maintain the current rating of the
classes of securities of that series that have been rated.
Servicing and Other Compensation and Payment of Expenses
The principal servicing compensation to be paid to the servicer in respect
of its servicing activities for each series of securities will be equal to the
percentage per annum described in the related prospectus supplement (which may
vary under some circumstances) of the outstanding principal balance of each
loan, and this compensation will be retained by it from collections of interest
on the loan in the related trust fund. As compensation for its servicing duties,
a sub-servicer or, if there is no sub-servicer, the servicer will be entitled to
a monthly servicing fee as described in the related prospectus supplement. In
addition, the servicer or sub-servicer will retain all prepayment charges,
assumption fees and late payment charges, to the extent collected from
borrowers, and any benefit that may accrue as a result of the investment of
funds in the applicable Security Account.
The servicer will pay or cause to be paid certain ongoing expenses
associated with each trust fund and incurred by it in connection with its
responsibilities under the related Agreement, which expenses may include,
without limitation, fees or other amounts payable in respect of credit
enhancement arrangements, fees and disbursements of the trustee, any custodian
appointed by the trustee, the certificate registrar or any paying agent, and
expenses incurred in enforcing the obligations of sub-servicers and sellers. The
servicer will be entitled to reimbursement of expenses incurred in enforcing the
obligations of sub-servicers and sellers under limited circumstances.
Evidence as to Compliance
Each Agreement will provide that on or before a specified date in each
year, a firm of independent public accountants will furnish a statement to the
trustee to the effect that, on the basis of the examination by that firm
conducted substantially in compliance with the Uniform Single Attestation
Program for Mortgage Bankers or the Audit Program for Mortgages serviced for the
Federal Home Loan Mortgage Corporation ("FHLMC" or "Freddie Mac"), the servicing
by or on behalf of the servicer of mortgage loans or private asset-backed
securities, or under pooling and servicing agreements substantially similar to
each other (including the related Agreement) was conducted in compliance with
these agreements except for any significant exceptions or errors in records
that, in the opinion of the firm, the Audit Program for Mortgages serviced for
FHLMC, or the Uniform Single Attestation Program for Mortgage Bankers, it is
required to report. In rendering its statement the firm may rely, as to matters
relating to the direct servicing of loans by sub-servicers, upon comparable
statements for examinations conducted
54
substantially in compliance with the Uniform Single Attestation Program for
Mortgage Bankers or the Audit Program for Mortgages serviced for FHLMC (rendered
within one year of the statement) of firms of independent public accountants
with respect to the related sub-servicer.
Each Agreement will also provide for delivery to the trustee, on or before
a specified date in each year, of an annual statement signed by two officers of
the servicer to the effect that the servicer has fulfilled its obligations under
the Agreement throughout the preceding year.
Copies of the annual accountants' statement and the statement of officers
of the servicer may be obtained by securityholders of the related series without
charge upon written request to the servicer at the address set forth in the
related prospectus supplement.
Certain Matters Regarding the Servicer and the Depositor
The servicer under each Pooling and Servicing Agreement or Master Servicing
Agreement, as applicable, will be named in the related prospectus supplement.
The entity serving as servicer may have normal business relationships with the
depositor or the depositor's affiliates.
Each Agreement will provide that the servicer may not resign from its
obligations and duties under the Agreement except upon a determination that its
duties thereunder are no longer permissible under applicable law. The servicer
may, however, be removed from its obligations and duties as set forth in the
Agreement. No resignation will become effective until the trustee or a successor
servicer has assumed the servicer's obligations and duties under the Agreement.
Each Agreement will further provide that neither the servicer, the
depositor nor any director, officer, employee, or agent of the servicer or the
depositor will be under any liability to the related trust fund or
securityholders for any action taken or for refraining from the taking of any
action in good faith pursuant to the Agreement, or for errors in judgment;
provided, however, that neither the servicer, the depositor nor any director,
officer, employee, or agent of the servicer or the depositor will be protected
against any liability which would otherwise be imposed by reason of willful
misfeasance, bad faith or gross negligence in the performance of duties
thereunder or by reason of reckless disregard of obligations and duties
thereunder. Each Agreement will further provide that the servicer, the depositor
and any director, officer, employee or agent of the servicer or the depositor
will be entitled to indemnification by the related trust fund and will be held
harmless against any loss, liability or expense incurred in connection with any
legal action relating to the Agreement or the securities, other than any loss,
liability or expense related to any specific loan or loans (except any loss,
liability or expense otherwise reimbursable pursuant to the Agreement) and any
loss, liability or expense incurred by reason of willful misfeasance, bad faith
or gross negligence in the performance of duties thereunder or by reason of
reckless disregard of obligations and duties thereunder. In addition, each
Agreement will provide that neither the servicer nor the depositor will be under
any obligation to appear in, prosecute or defend any legal action which is not
incidental to its respective responsibilities under the Agreement and which in
its opinion may involve it in any expense or liability. The servicer or the
depositor may, however, in its discretion undertake any action which it may deem
necessary or desirable with respect to the Agreement and the rights and duties
of the parties thereto and the interests of the securityholders thereunder. If
this occurs, the legal expenses and costs of the action and any liability
resulting therefrom will be expenses, costs and liabilities of the trust fund
and the servicer or the depositor, as the case may be, will be entitled to be
reimbursed therefor out of funds otherwise distributable to securityholders.
Except as otherwise specified in the related prospectus supplement, any
person into which the servicer may be merged or consolidated, or any person
resulting from any merger or consolidation to which the servicer is a party, or
any person succeeding to the business of the servicer, will be the successor of
the servicer under each Agreement, provided that the person is qualified to sell
mortgage loans to, and service mortgage loans on behalf of, the Federal National
Mortgage Association ("FNMA" or "Fannie Mae") or FHLMC and further provided that
the merger, consolidation or succession does not adversely affect the then
current rating or ratings of the class or classes of securities of that series
that have been rated.
55
Events of Default; Rights Upon Event of Default
Pooling and Servicing Agreement; Master Servicing Agreement. Except as
otherwise specified in the related prospectus supplement, events of default
under each Agreement will consist of
o any failure by the servicer to distribute or cause to be distributed
to securityholders of any class any required payment (other than an
advance) which continues unremedied for five days after the giving of
written notice of failure to the servicer by the trustee or the
depositor, or to the servicer, the depositor and the trustee by the
holders of securities of that class evidencing not less than 25% of
the total distributions allocated to that class ("Percentage
Interests"),
o any failure by the servicer to make an advance as required under the
Agreement, unless cured as specified therein,
o any failure by the servicer duly to observe or perform in any material
respect any of its other covenants or agreements in the Agreement
which continues unremedied for thirty days after the giving of written
notice of failure to the servicer by the trustee or the depositor, or
to the servicer, the depositor and the trustee by the holders of
securities of any class evidencing not less than 25% of the aggregate
Percentage Interests constituting that class, and
o certain events of insolvency, readjustment of debt, marshalling of
assets and liabilities or similar proceedings and certain actions by
or on behalf of the servicer indicating its insolvency, reorganization
or inability to pay its obligations.
If specified in the related prospectus supplement, the Agreement will
permit the trustee to sell the Trust Fund Assets and the other assets of a trust
fund described under "Credit Enhancement" herein if payments from these sources
are insufficient to make all payments required in the Agreement. The assets of a
trust fund will be sold only under the circumstances and in the manner specified
in the related prospectus supplement.
Unless otherwise provided in the related prospectus supplement, so long as
an event of default under an Agreement remains unremedied, the trustee may, and
at the direction of holders of securities of any class evidencing not less than
25% of the aggregate Percentage Interests under any other circumstances
specified in the Agreement shall, terminate all of the rights and obligations of
the servicer under the Agreement relating to that trust fund and in and to the
related Trust Fund Assets, The trustee will then succeed to all of the
responsibilities, duties and liabilities of the servicer under the Agreement,
including, if specified in the related prospectus supplement, the obligation to
make advances, and will be entitled to similar compensation arrangements. If the
trustee is unwilling or unable so to act, it may appoint, or petition a court of
competent jurisdiction for the appointment of, a mortgage loan servicing
institution with a net worth of at least $10,000,000 to act as successor to the
servicer under the Agreement. Pending this appointment, the trustee is obligated
to act as a successor to the servicer. The trustee and any successor to the
servicer may agree upon the servicing compensation to be paid, which in no event
may be greater than the compensation payable to the servicer under the
Agreement.
Unless otherwise provided in the related prospectus supplement, no
securityholder, solely by virtue of its status as a securityholder, will have
any right under any Agreement to institute any proceeding relating to the
Agreement, unless the holder previously has given to the trustee written notice
of default and unless the holders of securities of any class of that series
evidencing not less than 25% of the aggregate Percentage Interests constituting
the class have made a written request of the trustee to institute the proceeding
in its own name as trustee thereunder and have offered to the trustee reasonable
indemnity, and the trustee for 60 days has neglected or refused to institute the
proceeding.
Indenture. Except as otherwise specified in the related prospectus
supplement, events of default under the Indenture for each series of
asset-backed notes shall include:
o a default in the payment of any principal of or interest on any note
of that series which continues unremedied for five days after written
notice of default is given as specified in the related prospectus
supplement;
56
o failure to perform in any material respect any other covenant of the
depositor or the trust fund in the Indenture which continues for a
period of thirty (30) days after notice thereof is given in accordance
with the procedures described in the related prospectus supplement;
o certain events of bankruptcy, insolvency, receivership or liquidation
of the depositor or the trust fund; or
o any other event of default provided for notes of that series including
but not limited to certain defaults on the part of the issuer, if any,
of a credit enhancement instrument supporting the notes.
If an event of default on the notes of any series at the time outstanding
occurs and is continuing, either the trustee or the holders of a majority of the
then aggregate outstanding amount of the notes of that series may declare the
principal amount (or, if the notes of that series have an interest rate of 0%,
the portion of the principal amount as may be specified in the terms of that
series, as provided in the related prospectus supplement) of all the notes of
that series to be due and payable immediately. The declaration may, under
certain circumstances, be rescinded and annulled by the holders of more than 50%
of the Percentage Interests of the notes of that series.
If, following an event of default on any series of notes, the notes of that
series have been declared to be due and payable, the trustee may, in its
discretion, notwithstanding acceleration, elect to maintain possession of the
collateral securing the notes of that series and to continue to apply
distributions on the collateral as if there had been no declaration of
acceleration if the collateral continues to provide sufficient funds for the
payment of principal of and interest on the notes of that 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 notes of a
series following an event of default, other than a default in the payment of any
principal or interest on any notes of that series for five days or more, unless
o the holders of 100% of the Percentage Interests of the notes of that
series consent to the sale,
o the proceeds of the sale or liquidation are sufficient to pay in full
the principal of and accrued interest, due and unpaid, on the
outstanding notes of that series at the date of the sale, or
o the trustee determines that the collateral would not be sufficient on
an ongoing basis to make all payments on the notes as these payments
would have become due if the notes had not been declared due and
payable, and the trustee obtains the consent of the holders of 66% of
the Percentage Interests of the notes of that series.
If the trustee liquidates the collateral in connection with an event of
default involving a default for five days or more in the payment of principal of
or interest on the notes of a series, the Indenture provides that the trustee
will have a prior lien on the proceeds of any liquidation for unpaid fees and
expenses. As a result, upon the occurrence of a payment-related event of
default, the amount available for distribution to the holders of notes 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 holders of notes after the occurrence of this type of an event of default.
Except as otherwise specified in the related prospectus supplement, if the
principal of the notes of a series is declared due and payable, as described
above, the holders of any notes issued at a discount from par may be entitled to
receive no more than the unpaid principal amount thereof less the amount of the
discount that is unamortized.
Subject to the provisions of the Indenture relating to the duties of the
trustee, in case an event of default relating to a series of notes occurs and is
continuing, the trustee will have no obligation to exercise any of the rights or
powers under the Indenture at the request or direction of any of the holders of
notes of that series, unless the holders offer to the trustee security or
indemnity satisfactory to it against the costs, expenses and liabilities which
might be incurred by it in complying with the request or direction. Subject to
these provisions for indemnification and specific limitations contained in the
Indenture, the holders of a majority of the then aggregate outstanding amount of
the notes of that series shall have the right to direct the time, method and
place of conducting any
57
proceeding for any remedy available to the trustee or exercising any trust or
power conferred on the trustee relating to the notes of that series, and the
holders of a majority of the then aggregate outstanding amount of the notes of
that series may, in some cases, waive any default with respect thereto, except a
default in the payment of principal or interest or a default in respect of a
covenant or provision of the Indenture that cannot be modified without the
waiver or consent of all the holders of the outstanding notes of that series
affected thereby.
Amendment
Except as otherwise specified in the related prospectus supplement, each
Agreement may be amended by the depositor, the servicer and the trustee, with
the consent of the provider of credit enhancement for the related series of
securities, if any, but without the consent of any of the securityholders,
o to cure any ambiguity,
o to correct or supplement any provision therein which may be defective
or inconsistent with any other provision therein,
o to conform the Agreement to the final prospectus supplement provided
to investors in accordance with the initial offering of the
securities, or
o to make any other revisions relating to matters or questions arising
under the Agreement which are not inconsistent with its provisions,
provided that the amendment will not adversely affect in any material respect
the interests of any securityholder. An amendment will be deemed not to
adversely affect in any material respect the interests of the securityholders if
the person requesting the amendment obtains a letter from each Rating Agency
requested to rate the class or classes of securities of that series stating that
the amendment will not result in the downgrading or withdrawal of the respective
ratings then assigned to those securities.
In addition, to the extent provided in the related Agreement, an Agreement
may be amended without the consent of any of the securityholders to change the
manner in which the Security Account is maintained, provided that the change
does not adversely affect the then current rating on the class or classes of
securities of that series that have been rated. In addition, if a REMIC or FASIT
election is made for a trust fund, the related Agreement may be amended to
modify, eliminate or add to any of its provisions to the extent necessary to
maintain the qualification of the related trust fund as a REMIC or FASIT or to
avoid or minimize the risk of imposition of any tax on the REMIC or FASIT,
provided that the trustee has received an opinion of counsel to the effect that
the action is necessary or helpful to maintain the qualification, avoid or
minimize that risk or comply with those requirements, as applicable.
Except as otherwise specified in the related prospectus supplement, each
Agreement may also be amended by the depositor, the servicer and the trustee
with consent of holders of securities of that series evidencing not less than
66% of the aggregate Percentage Interests of each class affected thereby for the
purpose of adding any provisions to or changing in an manner or eliminating any
of the provisions of the Agreement or of modifying in any manner the rights of
the holders of the related securities; provided, however, that no amendment may
o reduce in any manner the amount of or delay the timing of, payments
received on loans which are required to be distributed on any security
without the consent of the holder of the security, or
o reduce the aforesaid percentage of securities of any class the holders
of which are required to consent to the amendment without the consent
of the holders of all securities of that class covered by the
Agreement then outstanding.
If a REMIC or FASIT election is made for a trust fund, the trustee will not be
entitled to consent to an amendment to the related Agreement without having
first received an opinion of counsel to the effect that the amendment will not
cause the trust fund to fail to qualify as a REMIC or FASIT.
58
Termination; Optional Termination
Pooling and Servicing Agreement; Trust Agreement. Unless otherwise
specified in the related Agreement, the obligations created by each Pooling and
Servicing Agreement and Trust Agreement for each series of certificates will
terminate upon the payment to the related holders of certificates of all amounts
held in the Security Account or by the servicer and required to be paid to them
pursuant to that Agreement following the later of
o the final payment of or other liquidation of the last of the Trust
Fund Assets subject thereto or the disposition of all property
acquired upon foreclosure of any Trust Fund Assets remaining in the
trust fund, or
o the purchase by the servicer or, if REMIC or FASIT treatment has been
elected and if specified in the related prospectus supplement, by the
holder of the residual interest in the REMIC or ownership interest in
the FASIT from the related trust fund of all of the remaining Trust
Fund Assets and all property acquired in respect of those Trust Fund
Assets.
Unless otherwise specified in the related prospectus supplement, any
purchase of Trust Fund Assets and property acquired in respect of Trust Fund
Assets evidenced by a series of asset-backed certificates will be made at the
option of the servicer, the holders of certificates or, if applicable, a holder
of the REMIC residual interest or FASIT ownership interest, at a price specified
in the related prospectus supplement. The exercise of this right will effect
early retirement of the asset-backed certificates of that series, but the right
of the servicer, the holders of certificates or, if applicable, a holder of the
REMIC residual interest or FASIT ownership interest, to so purchase is subject
to the principal balance of the related Trust Fund Assets being less than the
percentage specified in the related prospectus supplement of the aggregate
principal balance of the Trust Fund Assets at the cut-off date for the series.
The foregoing is subject to the provision that if a REMIC or FASIT election is
made for a trust fund, any purchase pursuant to the second bullet above will be
made only in connection with a "qualified liquidation" of the REMIC or FASIT
within the meaning of Section 860F(a)(4) of the Code, as made applicable to a
FASIT through Section 860L(e)(3)(A)(i) of the Code.
Indenture. The Indenture will be discharged for a series of notes (except
for continuing rights specified in the Indenture) upon the delivery to the
trustee for cancellation of all the notes of that series or, with certain
limitations, upon deposit with the trustee of funds sufficient for the payment
in full of all of the notes of that series.
The Indenture will also provide that, if so specified for the notes of any
series, the related trust fund will be discharged from any and all obligations
to the notes of that series (except for certain obligations relating to
temporary notes and exchanges of notes, to register the transfer of or exchange
notes of that series, to replace stolen, lost or mutilated notes of that series,
to maintain paying agencies and to hold monies for payment in trust) upon the
deposit with the trustee, in trust, of money and/or direct obligations of or
obligations guaranteed by the United States which through the payment of
interest and principal in respect thereof in accordance with their terms will
provide money in an amount sufficient to pay the principal of and each
installment of interest on the notes of that series on the last scheduled
distribution date for those notes and any installment of interest on those notes
in accordance with the terms of the Indenture and the notes of that series. In
the event of any defeasance and discharge of notes of that series, holders of
notes of that series would be able to look only to that money and/or direct
obligations for payment of principal and interest, if any, on their notes until
maturity.
The Trustee
The trustee under each Agreement will be named in the applicable prospectus
supplement. The commercial bank or trust company serving as trustee may have
normal banking relationships with the depositor, the servicer and any of their
respective affiliates.
59
LEGAL ASPECTS OF THE LOANS
The following discussion contains summaries, which are general in nature,
of certain legal matters relating to the loans. Because these legal aspects are
governed primarily by applicable state law (which laws may differ
substantially), the descriptions do not, except as expressly provided below,
reflect the laws of any particular jurisdiction, or encompass the laws of all
jurisdictions in which the security for the loans is situated. The descriptions
are qualified in their entirety by reference to applicable federal laws and the
appropriate laws of the jurisdictions in which loans may be originated.
General
The loans for a series may be secured by deeds of trust, mortgages,
security deeds or deeds to secure debt, depending upon the prevailing practice
in the state in which the property subject to the loan is located. A mortgage
creates a lien upon the real property encumbered by the mortgage that is
generally not prior to the lien for real estate taxes and assessments. Priority
between mortgages depends on their terms and generally on the order of recording
with a state or county office. There are two parties to a mortgage: the
mortgagor, who is the borrower and owner of the mortgaged property, and the
mortgagee, who is the lender. Under the mortgage instrument, the mortgagor
delivers to the mortgagee a note or bond and the mortgage. Although a deed of
trust is similar to a mortgage, a deed of trust formally has three parties, the
borrower-property owner called the trustor (similar to a mortgagor), a lender
(similar to a mortgagee) called the beneficiary, and a third-party grantee
called the trustee. Under a deed of trust, the borrower grants the property,
irrevocably until the debt is paid, in trust, generally with a power of sale, to
the trustee to secure payment of the obligation. A security deed and a deed to
secure debt are special types of deeds which indicate on their face that they
are granted to secure an underlying debt. By executing a security deed or deed
to secure debt, the grantor conveys title to, as opposed to merely creating a
lien upon, the subject property to the grantee until the underlying debt is
repaid. The trustee's authority under a deed of trust, the mortgagee's authority
under a mortgage and the grantee's authority under a security deed or deed to
secure debt are governed by law and, for some deeds of trust, the directions of
the beneficiary.
Foreclosure/Repossession
Deeds of Trust and Security Deeds. Foreclosure of a deed of trust or a
security deed is generally accomplished by a non-judicial sale under a specific
provision in the deed of trust or security deed which authorizes the trustee or
grantee to sell the property at public auction upon any default by borrower
under the terms of the note, deed of trust or security deed. In some states,
foreclosure also may be accomplished by judicial sale in the manner provided for
foreclosure of mortgages.
Mortgages. Foreclosure of a mortgage is generally accomplished by judicial
action. The action is initiated by the service of legal pleadings upon all
parties having an interest in the real property.
Actions prior to Commencement of Foreclosure. Many states require notices,
sometimes in prescribed form, be given to borrowers prior to commencement of
foreclosure proceedings in addition to any notice requirements contained in the
mortgage or deed of trust. In some states, a notice of default must be recorded
and a copy sent to the borrower and any other party with an interest in the
property. In some states, the borrower has the right to reinstate the loan at
any time following default until shortly before the sale. If a deed of trust,
security deed or mortgage is not reinstated within any applicable cure period, a
notice of sale must be posted in a public place and, in most states, published
for a specific period of time in one or more newspapers. In addition, some state
laws require that a copy of the notice of sale be posted on the property and
sent to all parties having an interest of record in the real property.
Foreclosure Proceedings. In the case of foreclosure of a security deed,
deed of trust or mortgage, delays in completion of the foreclosure may
occasionally result from difficulties in locating necessary parties. Judicial
foreclosure proceedings are often not contested by any of the parties, but when
the mortgagee's right to foreclose is contested, the legal proceedings necessary
to resolve the issue can be time consuming. After completion of a judicial
foreclosure proceeding, the court generally issues a judgment of foreclosure and
the court either appoints or directs a referee, sheriff, or other court officer
to conduct the sale of the property. In some states, mortgages may
60
also be foreclosed by advertisement, pursuant to a power of sale provided in the
mortgage. Deeds of trust and security deeds are generally foreclosed by the
trustee or grantee in a non-judicial sale.
Although foreclosure sales are typically public sales, frequently no third
party purchaser bids in excess of the lender's lien because of the difficulty of
determining the exact status of title to the property, the possible
deterioration of the property during the foreclosure proceedings and a
requirement that the purchaser pay for the property in cash or by cashier's
check. Thus, the foreclosing lender often purchases the property from the
trustee, referee, sheriff, or other court officer, for an amount equal to the
principal amount outstanding under the loan, accrued and unpaid interest and the
expenses of foreclosure in which event the mortgagor's debt will be
extinguished. However, the lender may purchase for a lesser amount in some
jurisdictions which only require a minimum bid, or, in states where a deficiency
judgment is available, in order to preserve its right to seek a deficiency
judgment. Thereafter, subject to the right of the borrower in some states to
remain in possession during the redemption period, the lender will assume the
burden of ownership, including obtaining hazard insurance and making repairs
necessary to render the property suitable for sale at its own expense. The
lender will commonly obtain the services of a real estate broker and pay the
broker's commission in connection with the sale of the property. Depending upon
market conditions, the ultimate proceeds of the sale of the property may not
equal the lender's investment in the property. Any loss may be reduced by the
receipt of any mortgage guaranty insurance proceeds.
Courts have imposed equitable principles upon foreclosure, which are
generally designed to mitigate the legal consequences to the borrower of the
borrower's default under the loan documents. Some courts have been faced with
the issue of whether federal or state constitutional provisions reflecting due
process concerns for fair notice require that borrowers under deeds of trust
receive notice longer than that prescribed by statute. For the most part, these
cases have upheld the notice provisions as being reasonable or have found that
the sale by a trustee under a deed of trust does not involve sufficient state
action to afford constitutional protection to the borrower.
Right of Redemption. In many states, the borrower, or any other person
having a junior encumbrance on the real estate, may, during a statutorily
prescribed reinstatement period, cure a monetary default by paying the entire
amount in arrears plus other designated costs and expenses incurred in enforcing
the obligation. Generally, state law controls the amount of foreclosure expenses
and costs, including attorney's fees, which may be recovered by a lender. After
the reinstatement period has expired without the default having been cured, the
borrower or junior lienholder no longer has the right to reinstate the loan and
must pay the loan in full to prevent the scheduled foreclosure sale.
When the beneficiary under a junior mortgage or deed of trust cures the
default and reinstates or redeems by paying the full amount of the senior
mortgage or deed of trust, the amount paid by the beneficiary so to cure or
redeem becomes a part of the indebtedness secured by the junior mortgage or deed
of trust. We refer you to "--Junior Mortgages; Rights of Senior Mortgagees."
Environmental Risks
Real property pledged as security to a lender may be subject to unforeseen
environmental risks. Under the laws of some states, contamination of a property
may give rise to a lien on the property to assure the payment of the costs of
clean-up. In several states this lien has priority over the lien of an existing
mortgage against the property. In addition, under the federal Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended
("CERCLA"), the United States Environmental Protection Agency ("EPA") may impose
a lien on property where EPA has incurred clean-up costs. However, a CERCLA lien
is subordinate to preexisting, perfected security interests.
Under the laws of some states, and under CERCLA, it is conceivable that a
secured lender may be held liable as an "owner" or "operator" for the costs of
addressing releases or threatened releases of hazardous substances at a
mortgaged property, even though the environmental damage or threat was caused by
a prior or current owner or operator. CERCLA imposes liability for these costs
on any and all "responsible parties," including an owner or operator as that
term is therein defined. In 1996, however, Congress passed the Asset
Conservation, Lender Liability and Deposit Insurance Protection Act of 1996,
which substantially modified the definition of "owner or
61
operator" to make several important exclusions relating to persons who hold
indicia of facility ownership primarily as a means to protect that person's
security interest in the facility (the "Secured Creditor Exclusion"). This
exclusion contains several restrictions, however, under which the lender holding
the security interest must operate to insure that it is not "participating in
management" of the facility. Thus, if a lender's activities begin to encroach on
the actual management of a contaminated facility or property while the borrower
is still in possession of the facility or property, the lender may incur
liability as an "owner or operator" under CERCLA. Similarly, if a lender
forecloses and takes title to a contaminated facility or property, the lender
may incur CERCLA liability in various circumstances, including, but not limited
to, when it holds the facility or property as an investment, or fails to market
or lease the property at the earliest practicable, commercially reasonable time,
on commercially reasonable terms, taking into account market conditions and
legal and regulatory requirements.
This new legislation also provides that in order to be deemed to have
participated in the management of a mortgaged property, a lender must actually
participate in the operational affairs of the property or the borrower. The
legislation provides that participation in the management of the property does
not include "merely having the capacity to influence, or unexercised right to
control" operations, which had been one of the major concerns arising from the
Eleventh Circuit's decision in U.S. v. Fleet Factors Corp., 901 F. 2d 1550 (11th
Cir. 1990). A lender does not "participate in the management," the standard for
incurring owner and operator liability under CERCLA, unless it:
o exercises decision-making control over environmental compliance
related to the property while the borrower is still in possession of
the property or facility;
o actually participates in the management or operational affairs of the
facility; or
o exercises control over substantially all of the non-environmental
compliance operational functions of the property (as opposed to
financial or administrative functions).
These amendments do not, however, affect the potential for liability under other
federal or state laws which impose liability on "owners or operators" but do not
provide any protection for secured creditors.
If a lender is or becomes liable, it can bring an action for contribution
against any other "responsible parties," including a previous owner or operator,
who created the environmental hazard, but those persons or entities may be
bankrupt or otherwise judgment-proof. The costs associated with environmental
cleanup may be substantial. It is conceivable that costs arising from the
circumstances set forth above would result in a loss to securityholders.
CERCLA does not apply to petroleum products, and the Secured Creditor
Exclusion does not govern liability for cleanup costs under federal laws other
than CERCLA, in particular Subtitle I of the federal Resource Conservation and
Recovery Act ("RCRA"), which regulates underground petroleum storage tanks
(except heating oil tanks). The EPA has adopted a lender liability rule for
underground storage tanks under Subtitle I of RCRA which also contains a
liability exclusion analogous to the Secured Creditor Exclusion. It should be
noted, however, that liability for cleanup of petroleum contamination may be
governed by state law, which may not provide for any specific protection for
secured creditors. Moreover, several states impose strict liability upon
homeowners and property owners for discharges of oil from residential heating
oil tanks that are not governed by CERCLA or RCRA, and the remediation of these
tanks can impose a significant economic burden upon a borrower. It is possible
that if a lender forecloses and takes ownership of a property impacted by an
underground storage tank, it could be held directly liable for the cost of
remediation since the statutory protections afforded to lenders under RCRA and
CERCLA do not extend to tanks that are not within the jurisdiction of those
statutes.
In the case of residential loans, at the time of origination, no
environmental assessment of the mortgaged properties was conducted. In the case
of mixed use loans, except as otherwise specified in the related prospectus
supplement, at the time of origination, no environmental assessment of the
mortgaged properties was conducted.
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Rights of Redemption
In some states, after sale pursuant to a deed of trust or foreclosure of a
mortgage, the borrower and foreclosed junior lienors are given a statutory
period in which to redeem the property from the foreclosure sale. In some other
states, this right of redemption applies only to sales following judicial
foreclosure, and not to sales pursuant to a non-judicial power of sale. In most
states where the right of redemption is available, statutory redemption may
occur upon payment of the foreclosure purchase price, accrued interest and
taxes. In other states, redemption may be authorized if the former borrower pays
only a portion of the sums due. The effect of a statutory right of redemption is
to diminish the ability of the lender to sell the foreclosed property. The
exercise of a right of redemption would defeat the title of any purchaser from
the lender subsequent to foreclosure or sale under a deed of trust.
Consequently, the practical effect of the redemption right is to force the
lender to retain the property and pay the expenses of ownership until the
redemption period has run. In some states, there is no right to redeem property.
Anti-Deficiency Legislation; Bankruptcy Laws; Tax Liens
Some states have imposed statutory restrictions that limit the remedies of
a beneficiary under a deed of trust or a mortgagee under a mortgage. In some
states, statutes limit the right of the beneficiary or mortgagee to obtain a
deficiency judgment against borrowers financing the purchase of their residence
or following sale under a deed of trust or certain other foreclosure
proceedings. A deficiency judgment is a personal judgment against the borrower
equal in most cases to the difference between the amount due to the lender and
the fair market value of the real property at the time of the foreclosure sale.
As a result of these prohibitions, it is anticipated that in most instances the
servicer will utilize the non-judicial foreclosure remedy and will not seek
deficiency judgments against defaulting borrowers.
Some state statutes require the beneficiary or mortgagee to exhaust the
security afforded under a deed of trust or mortgage by foreclosure in an attempt
to satisfy the full debt before bringing a personal action against the borrower.
In some 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 relating to the security. Consequently, the practical effect of the
election requirement, when applicable, is that lenders will usually proceed
first against the security rather than bringing a personal action against the
borrower. In some states, exceptions to the anti-deficiency statutes are
provided for in certain instances where the value of the lender's security has
been impaired by acts or omissions of the borrower, for example, in the event of
waste of the property. Finally, other statutory provisions limit any deficiency
judgment against the former borrower following a foreclosure sale to the excess
of the outstanding debt over the fair market value of the property at the time
of the public sale. The purpose of these statutes is generally to prevent a
beneficiary or a mortgagee from obtaining a large deficiency judgment against
the former borrower as a result of low or no bids at the foreclosure sale.
In addition to anti-deficiency and related legislation, numerous other
federal and state statutory provisions, including the federal bankruptcy laws,
and state laws affording relief to debtors, may interfere with or affect the
ability of the secured mortgage lender to realize upon its security. For
example, in a proceeding under the Bankruptcy Code, a lender may not foreclose
on a mortgaged property without the permission of the bankruptcy court. The
rehabilitation plan proposed by the debtor may provide, if the mortgaged
property is not the debtor's principal residence and the court determines that
the value of the mortgaged property is less than the principal balance of the
mortgage loan, for the reduction of the secured indebtedness to the value of the
mortgaged property as of the date of the commencement of the bankruptcy,
rendering the lender a general unsecured creditor for the difference, and also
may reduce the monthly payments due under the mortgage loan, change the rate of
interest and alter the mortgage loan repayment schedule. The effect of any
proceedings under the Bankruptcy Code, including but not limited to any
automatic stay, could result in delays in receiving payments on the loans
underlying a series of securities and possible reductions in the aggregate
amount of these payments.
The federal tax laws provide priority to certain tax liens over the lien of
a mortgage or secured party.
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Due-on-Sale Clauses
To the extent specified in the related prospectus supplement, conventional
loans will contain due-on-sale clauses which will generally provide that if the
mortgagor or obligor sells, transfers or conveys the mortgaged property, the
loan or contract may be accelerated by the mortgagee or secured party. Court
decisions and legislative actions have placed substantial restriction on the
right of lenders to enforce these clauses in many states. However, the Garn-St
Germain Depository Institutions Act of 1982 (the "Garn-St Germain Act"), subject
to certain exceptions, preempts state constitutional, statutory and case law
prohibiting the enforcement of due-on-sale clauses. As a result, due-on-sale
clauses have become generally enforceable except in those states whose
legislatures exercised their authority to regulate the enforceability of these
clauses over mortgage loans that were
o originated or assumed during the "window period" under the Garn-St
Germain Act which ended in all cases not later than October 15, 1982,
and
o originated by lenders other than national banks, federal savings
institutions and federal credit unions.
Freddie Mac has taken the position in its published mortgage servicing standards
that, out of a total of eleven "window period states," five states (Arizona,
Michigan, Minnesota, New Mexico and Utah) have enacted statutes extending, on
various terms and for varying periods, the prohibition on enforcement of
due-on-sale clauses for certain categories of window period loans. Also, the
Garn-St Germain Act does "encourage" lenders to permit assumption of loans at
the original rate of interest or at some other rate less than the average of the
original rate and the market rate.
As to loans secured by an owner-occupied residence, the Garn-St Germain Act
sets forth nine specific instances in which a mortgagee covered thereunder may
not exercise its rights under a due-on-sale clause, notwithstanding the fact
that a transfer of the property may have occurred. The inability to enforce a
due-on-sale clause may result in transfer of the related mortgaged property to
an uncreditworthy person, which could increase the likelihood of default or may
result in a mortgage bearing an interest rate below the current market rate
being assumed by a new home buyer, which may affect the average life of the
loans and the number of loans which may extend to maturity.
In addition, under federal bankruptcy law, due-on-sale clauses may not be
enforceable in bankruptcy proceedings and may, under certain circumstances, be
eliminated in any modified mortgage resulting from the bankruptcy proceeding.
Enforceability of Prepayment and Late Payment Fees
Forms of notes, mortgages and deeds of trust used by lenders may contain
provisions obligating the borrower to pay a late charge if payments are not
timely made, and in some circumstances may provide for prepayment fees or
penalties if the obligation is paid prior to maturity. In some states, there are
or may be specific limitations upon the late charges which a lender may collect
from a borrower for delinquent payments. Some states also limit the amounts that
a lender may collect from a borrower as an additional charge if the loan is
prepaid. Under some state laws, prepayment charges may not be imposed after a
specified period of time following the origination of mortgage loans when the
prepayments are made on loans secured by liens encumbering owner-occupied
residential properties. Since many of the mortgaged properties will be
owner-occupied, it is anticipated that prepayment charges may not be imposed on
many of the loans. The absence of a restraint on prepayment, particularly on
fixed rate loans having higher interest rates, may increase the likelihood of
refinancing or other early retirement of these loans or contracts. Late charges
and prepayment fees are typically retained by servicers as additional servicing
compensation.
Equitable Limitations on Remedies
In connection with lenders' attempts to realize upon their security, courts
have invoked general equitable principles. The equitable principles are
generally designed to relieve the borrower from the legal effect of defaults
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under the loan documents. Examples of judicial remedies that have been fashioned
include judicial requirements that the lender undertake affirmative and
expensive actions to determine the causes of the borrower's default and the
likelihood that the borrower will be able to reinstate the loan. In some cases,
courts have substituted their judgment for the lender's judgment and have
required that lenders reinstate loans or recast payment schedules in order to
accommodate a borrower suffering from temporary financial disability. In other
cases, courts have limited the right of a lender to realize upon the lender's
security if the default under the security agreement is not monetary, such as
the borrower's failure to adequately maintain the property or the borrower's
execution of secondary financing affecting the property. Finally, some courts
have been faced with the issue of whether or not federal or state constitutional
provisions reflecting due process concerns for adequate notice require that
borrowers under security agreements receive notices in addition to the
statutorily-prescribed minimums. For the most part, these cases have upheld the
notice provisions as being reasonable or have found that, in some cases
involving the sale by a trustee under a deed of trust or by a mortgagee under a
mortgage having a power of sale, there is insufficient state action to afford
constitutional protection to the borrower.
Applicability of Usury Laws
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980, enacted in March 1980, as amended ("Title V") provides that state
usury limitations shall not apply to certain types of residential first mortgage
loans originated by certain lenders after March 31, 1980. The Office of Thrift
Supervision, as successor to the Federal Home Loan Bank Board, is authorized to
issue rules and regulations and to publish interpretations governing
implementation of Title V. The statute authorized the states to reimpose
interest rate limits by adopting, before April 1, 1983, a law or constitutional
provision which expressly rejects an application of the federal law. Fifteen
states adopted 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 mortgage
loans covered by Title V. Some states have taken action to reimpose interest
rate limits and/or to limit discount points or other charges.
Service Members Civil Relief Act
Generally, under the terms of the Service Members Civil Relief Act, as
amended (the "Relief Act"), a borrower who enters military service after the
origination of the borrower's loan (including a borrower who is a member of the
National Guard or is in reserve status at the time of the origination of the
loan and is later called to active duty) may not be charged interest above an
annual rate of 6% during the period of the borrower's active duty status, unless
a court orders otherwise upon application of the lender. It is possible that the
interest rate limitation could have an effect, for an indeterminate period of
time, on the ability of the servicer to collect full amounts of interest on some
of the loans. Unless otherwise provided in the related prospectus supplement,
any shortfall in interest collections resulting from the application of the
Relief Act could result in losses to securityholders. The Relief Act also
imposes limitations which would impair the ability of the servicer to foreclose
on an affected loan during the borrower's period of active duty status.
Moreover, the Relief Act permits the extension of a loan's maturity and the
re-adjustment of its payment schedule beyond the completion of military service.
Thus, in the event that a loan goes into default, there may be delays and losses
occasioned by the inability to realize upon the mortgaged property in a timely
fashion.
Junior Mortgages; Rights of Senior Mortgagees
To the extent that the loans comprising a trust fund for a series are
secured by mortgages which are junior to other mortgages held by other lenders
or institutional investors, the rights of the trust fund (and therefore the
securityholders), as mortgagee under any junior mortgage, are subordinate to
those of any mortgagee under any senior mortgage. The senior mortgagee has the
right to receive hazard insurance and condemnation proceeds and to cause the
property securing the loan to be sold upon default of the mortgagor, thereby
extinguishing the junior mortgagee's lien unless the junior mortgagee asserts
its subordinate interest in the property in foreclosure litigation and,
possibly, satisfies the defaulted senior mortgage. A junior mortgagee may
satisfy a defaulted senior loan in full and, in some states, may cure a default
and bring the senior loan current, in either event adding the amounts expended
to the balance due on the junior loan. In most states, absent a provision in the
mortgage or deed of trust, no notice of default is required to be given to a
junior mortgagee.
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The standard form of the mortgage used by most institutional lenders
confers on the mortgagee the right both to receive all proceeds collected under
any hazard insurance policy and all awards made in connection with condemnation
proceedings, and to apply these proceeds and awards to any indebtedness secured
by the mortgage, in the order determined by the mortgagee. Thus, in the event
improvements on the property are damaged or destroyed by fire or other casualty,
or in the event the property is taken by condemnation, the mortgagee or
beneficiary under senior mortgages will have the prior right to collect any
insurance proceeds payable under a hazard insurance policy and any award of
damages in connection with the condemnation and to apply the same to the
indebtedness secured by the senior mortgages. Proceeds in excess of the amount
of senior mortgage indebtedness, in most cases, may be applied to the
indebtedness of a junior mortgage.
Another provision sometimes found in the form of the mortgage or deed of
trust used by institutional lenders obligates the mortgagor to pay before
delinquency all taxes and assessments on the property and, when due, all
encumbrances, charges and liens on the property which appear prior to the
mortgage or deed of trust, to provide and maintain fire insurance on the
property, to maintain and repair the property and not to commit or permit any
waste thereof, and to appear in and defend any action or proceeding purporting
to affect the property or the rights of the mortgagee under the mortgage. Upon a
failure of the mortgagor to perform any of these obligations, the mortgagee is
given the right under certain mortgages to perform the obligation itself, at its
election, with the mortgagor agreeing to reimburse the mortgagee for any sums
expended by the mortgagee on behalf of the mortgagor. All sums so expended by
the mortgagee become part of the indebtedness secured by the mortgage.
The Title I Program
General. Some of the loans contained in a trust fund may be loans insured
under the Title I Credit Insurance program created pursuant to Sections I and
2(a) of the National Housing Act of 1934, as amended (the "Title I Program").
Under the Title I Program, the Secretary of the Department of Housing and Urban
Development ("HUD") is authorized and empowered to insure qualified lending
institutions against losses on eligible loans. The Title I Program operates as a
coinsurance program in which the Secretary of HUD insures up to 90% of certain
losses incurred on an individual insured loan, including the unpaid principal
balance of the loan, but only to the extent of the insurance coverage available
in the lender's insurance coverage reserve account. The owner of the loan bears
the uninsured loss on each loan.
The types of loans which are eligible for insurance by the Secretary of HUD
under the Title I Program include property improvement loans ("Property
Improvement Loans" or "Title I Loans"). A Property Improvement Loan or Title I
Loan means a loan made to finance actions or items that substantially protect or
improve the basic livability or utility of a property and includes single family
improvement loans.
There are two basic methods of lending or originating these loans which
include a "direct loan" or a "dealer loan." For a direct loan, the borrower
makes application directly to a lender without any assistance from a dealer,
which application may be filled out by the borrower or by a person acting at the
direction of the borrower who does not have a financial interest in the loan
transaction, and the lender may disburse the loan proceeds solely to the
borrower or jointly to the borrower and other parties to the transaction. For a
dealer loan, the dealer, who has a direct or indirect financial interest in the
loan transaction, assists the borrower in preparing the loan application or
otherwise assists the borrower in obtaining the loan from lender and the lender
may distribute proceeds solely to the dealer or the borrower or jointly to the
borrower and the dealer or other parties. For a dealer Title I Loan, a dealer
may include a seller, a contractor or supplier of goods or services.
Loans insured under the Title I Program are required to have fixed interest
rates and, generally, provide for equal installment payments due weekly,
biweekly, semi-monthly or monthly, except that a loan may be payable quarterly
or semi-annually in order to correspond with the borrower's irregular flow of
income. The first or last payments (or both) may vary in amount but may not
exceed 150% of the regular installment payment, and the first payment may be due
no later than two months from the date of the loan. The note must contain a
provision permitting full or partial prepayment of the loan. The interest rate
must be negotiated and agreed to by the borrower and lender and must be fixed
for the term of the loan and recited in the note. Interest on an insured loan
must accrue from the date of the loan and be calculated on a simple interest
basis. The lender must assure that the note and all other documents evidencing
the loan are in compliance with applicable federal, state and local laws.
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Each insured lender is required to use prudent lending standards in
underwriting individual loans and to satisfy the applicable loan underwriting
requirements under the Title I Program prior to its approval of the loan and
disbursement of loan proceeds. Generally, the lender must exercise prudence and
diligence to determine whether the borrower and any co-maker is solvent and an
acceptable credit risk, with a reasonable ability to make payments on the loan
obligation. The lender's credit application and review must determine whether
the borrower's income will be adequate to meet the periodic payments required by
the loan, as well as the borrower's other housing and recurring expenses, which
determination must be made in accordance with the expense-to-income ratios
published by the Secretary of HUD.
Under the Title I Program, the Secretary of HUD does not review or approve
for qualification for insurance the individual loans insured thereunder at the
time of approval by the lending institution (as is typical) the case with other
federal loan programs). If, after a loan has been made and reported for
insurance under the Title I Program, the lender discovers any material
misstatement of fact or that the loan proceeds have been misused by the
borrower, dealer or any other party, it shall promptly report this to the
Secretary of HUD. In this case, provided that the validity of any lien on the
property has not been impaired, the insurance of the loan under the Title I
Program will not be affected unless the material misstatement of fact or misuse
of loan proceeds was caused by (or was knowingly sanctioned by) the lender or
its employees.
Requirements for Title I Loans. The maximum principal amount for Title I
Loans must not exceed the actual cost of the project plus any applicable fees
and charges allowed under the Title I Program; provided that the maximum amount
does not exceed $25,000 (or the current applicable amount) for a single family
property improvement loan. Generally, the term of a Title I Loan may not be less
than six months nor greater than 20 years and 32 days. A borrower may obtain
multiple Title I Loans on multiple properties, and a borrower may obtain more
than one Title I Loan on a single property, in each case as long as the total
outstanding balance of all Title I Loans in the same property does not exceed
the maximum loan amount for the type of Title I Loan thereon having the highest
permissible loan amount.
Borrower eligibility for a Title I Loan requires that the borrower have at
least a one-half interest in either fee simple title to the real property, a
lease thereof for a term expiring at least six months after the final maturity
of the Title I Loan or a recorded land installment contract for the purchase of
the real property. Any Title I Loan in excess of $7,500 must be secured by a
recorded lien on the improved property which is evidenced by a mortgage or deed
of trust executed by the borrower and all other owners in fee simple.
The proceeds from a Title I Loan may be used only to finance property
improvements which substantially protect or improve the basic livability or
utility of the property as disclosed in the loan application. The Secretary of
HUD has published a list of items and activities which cannot be financed with
proceeds from any Title I Loan and from time to time the Secretary of HUD may
amend the list of items and activities. Before the lender may disburse funds on
any dealer Title I Loan, the lender must have in its possession a completion
certificate on a HUD approved form, signed by the borrower and the dealer. For a
direct Title I Loan, the lender is required to obtain, promptly upon completion
of the improvements but not later than six months after disbursement of the loan
proceeds with one six month extension if necessary, a completion certificate,
signed by the borrower. The lender is required to conduct an on-site inspection
on any Title I Loan where the principal obligation is $7,500 or more, and on any
direct Title I Loan where the borrower fails to submit a completion certificate.
HUD Insurance Coverage. Under the Title I Program the Secretary of HUD
establishes an insurance coverage reserve account for each lender which has been
granted a Title I insurance contract. The amount of insurance coverage in this
account is 10% of the amount disbursed, advanced or expended by the lender in
originating or purchasing eligible loans registered with the Secretary of HUD
for Title I insurance, with certain adjustments. The balance in the insurance
coverage reserve account is the maximum amount of insurance claims the FHA is
required to pay. Loans to be insured under the Title I Program will be
registered for insurance by the Secretary of HUD and the insurance coverage
attributable to these loans will be included in the insurance coverage reserve
account for the originating or purchasing lender following the receipt and
acknowledgment by the Secretary of HUD of a timely filed loan report on the
prescribed form pursuant to the Title I regulations. The Secretary of HUD
charges a fee of 1.00% of the loan amount multiplied by the number of years in
the loan term for any eligible loan so reported and acknowledged for insurance.
For loans with maturities of 25 months or less, payment of the
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entire insurance premium is due 25 days after the Secretary of HUD acknowledges
the loan report. For loans with a term longer than 25 months, payment of the
insurance premium is made in annual installments beginning 25 days after the
Secretary of HUD acknowledges the loan report. If an insured loan is prepaid
during the year, FHA will not refund or abate portions of the insurance premium
already paid. Refunds and abatements are allowed only in limited circumstances.
Under the Title I Program the Secretary of HUD will reduce the insurance
coverage available in the lender's insurance coverage reserve account for loans
insured under the lender's contract of insurance by
o the amount of insurance claims approved for payment relating to
insured loans and
o the amount of insurance coverage attributable to insured loans sold by
the lender.
The balance of the lender's insurance coverage reserve account will be further
adjusted as required under Title I or by the Secretary of HUD. Originations and
acquisitions of new eligible loans will continue to increase a lender's
insurance coverage reserve account balance by 10% of the amount disbursed,
advanced or expended in originating or acquiring eligible loans registered with
the Secretary of HUD for insurance under the Title I Program. The Secretary of
HUD may transfer insurance coverage between insurance coverage reserve accounts
with earmarking relating to a particular insured loan or group of insured loans
when a determination is made that it is in the Secretary of HUD's interest to do
so.
The lender may transfer insured loans and loans reported for insurance only
to another qualified lender under a valid Title I contract of insurance (except
as collateral in a bona fide transaction). Unless an insured loan is transferred
with recourse or with a guaranty or repurchase agreement, the Secretary of HUD,
upon receipt of the loan report required upon transfer in accordance with the
Title I regulations, will transfer from the transferor's insurance coverage
reserve account to the transferee's insurance coverage reserve account an
amount, if available, equal to 10% of the actual purchase price or the net
unpaid principal balance of the loan (whichever is less). However, under the
Title I Program not more than $5,000 in insurance coverage shall be transferred
to or from a lender's insurance coverage reserve account during any October 1 to
September 30 period without the prior approval of the Secretary of HUD.
Claims Procedures Under Title I. Under the Title I Program the lender may
accelerate an insured loan following a default on the loan only after the lender
or its agent has contacted the borrower in a face-to-face meeting or by
telephone to discuss the reasons for the default and to seek its cure. If the
borrower does not cure the default or agree to a modification agreement or
repayment plan, in addition to complying with applicable state and local notice
requirements, the lender will notify the borrower in writing that, unless within
30 days the default is cured or the borrower enters into a modification
agreement or repayment plan, the loan will be accelerated and that, if the
default persists, the lender will report the default to an appropriate credit
agency. The lender may rescind the acceleration of maturity after full payment
is due and reinstate the loan only if the borrower brings the loan current,
executes a modification agreement or agrees to an acceptable repayment plan.
Following acceleration of maturity upon a secured Title I Loan, the lender
may either
o proceed against the property under any security instrument, or
o make a claim under the lender's contract of insurance.
If the lender chooses to proceed against the property under a security
instrument (or if it accepts a voluntary conveyance or surrender of the
property), the lender may file an insurance claim only with the prior approval
of the Secretary of HUD.
When a lender files an insurance claim with the Secretary of HUD under the
Title I Program, the Secretary of HUD reviews the claim, the complete loan file
and documentation of the lender's efforts to obtain recourse against any dealer
who has agreed thereto, certification of compliance with applicable state and
local laws in carrying out any foreclosure or repossession, and evidence that
the lender has properly filed proofs of claims, where
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the borrower is bankrupt or deceased. Generally, a claim for reimbursement for
loss on any Property Improvement Loan must be filed with the Secretary of HUD no
later than nine months after the date of default of the loan. Concurrently with
filing the insurance claim, the lender shall assign to the United States the
lender's entire interest in the loan note (or a judgment in lieu of the note),
in any security held and in any claim filed in any legal proceedings. If the
Secretary of HUD has reason to believe that the note is not valid or enforceable
against the borrower, the Secretary of HUD may deny the claim and reassign the
note to the lender. If either of these defects is discovered after the Secretary
of HUD has paid a claim, the Secretary of HUD may require the lender to
repurchase the paid claim and to accept a reassignment of the loan note. If the
lender subsequently obtains a valid and enforceable judgment against the
borrower, the lender may resubmit a new insurance claim with an assignment of
the judgment. The Secretary of HUD may contest any insurance claim and make a
demand for repurchase of the loan at any time up to two years from the date the
claim was certified for payment and may do so thereafter in the event of fraud
or misrepresentation on the part of the lender.
Under the Title I Program the amount of an insurance claim payment, when
made, is equal to the Claimable Amount, up to the amount of insurance coverage
in the lender's insurance coverage reserve account. For the purposes hereof, the
"Claimable Amount" means an amount equal to 90% of the sum of
o the unpaid loan obligation (net unpaid principal and the uncollected
interest earned to the date of default) with adjustments thereto if
the lender has proceeded against property securing the loan,
o the interest on the unpaid amount of the loan obligation from the date
of default to the date of the claim's initial submission for payment
plus 15 calendar days (but not to exceed 9 months from the date of
default), calculated at the rate of 7% per annum,
o the uncollected court costs,
o the attorney's fees not to exceed $500, and
o the expenses for recording the assignment of the security to the
United States.
Consumer Protection Laws
Federal, state and local laws extensively regulate various aspects of
brokering, originating, servicing and collecting loans secured by consumer's
dwellings. Among other things, these laws may regulate interest rates and other
charges, require disclosures, impose financial privacy requirements, mandate
specific business practices, and prohibit unfair and deceptive trade practices.
In addition, licensing requirements may be imposed on persons that broker,
originate, service or collect such loans.
Additional requirements may be imposed under federal, state or local laws
on so-called "high cost mortgage loans," which typically are defined as loans
secured by a consumer's dwelling that have interest rates or origination costs
in excess of prescribed levels. These laws may limit certain loan terms, such as
prepayment penalties, or the ability of a creditor to refinance a loan unless it
is in the borrower's interest. In addition, certain of these laws may allow
claims against loan brokers or originators, including claims based on fraud or
misrepresentations, to be asserted against persons acquiring the loans, such as
the trust fund.
The federal laws that may apply to loans held in the trust fund include the
following:
o the Truth in Lending Act and its regulations, which (among other
things) require disclosures to borrowers regarding the terms of loans
and provide consumers who pledged their principal dwelling as
collateral in a non-purchase money transaction with a right of
rescission that generally extends for three days after proper
disclosures are given;
o the Home Ownership and Equity Protection Act and its regulations,
which (among other things) impose additional disclosure requirements
and limitations on loan terms with respect to non-purchase money,
installment loans secured by the consumer's principal dwelling that
have interest rates or
69
origination costs in excess of prescribed levels;
o the Home Equity Loan Consumer Protection Act and its regulations,
which (among other things) limit changes that may be made to open-end
loans secured by the consumer's dwelling, and restrict the ability to
accelerate balances or suspend credit privileges on such loans;
o the Real Estate Settlement Procedures Act and its regulations, which
(among other things) prohibit the payment of referral fees for real
estate settlement services (including mortgage lending and brokerage
services) and regulate escrow accounts for taxes and insurance and
billing inquiries made by borrowers;
o the Equal Credit Opportunity Act and its regulations, which (among
other things) generally prohibit discrimination in any aspect of a
credit transaction on certain enumerated basis, such as age, race,
color, sex, religion, marital status, national origin or receipt of
public assistance;
o the Fair Credit Reporting Act, which (among other things) regulates
the use of consumer reports obtained from consumer reporting agencies
and the reporting of payment histories to consumer reporting agencies;
and
o the Federal Trade Commission's Rule on Preservation of Consumer Claims
and Defenses, which generally provides that the rights of an assignee
of a conditional sales contract (or of certain lenders making purchase
money loans) to enforce a consumer credit obligation are subject to
the claims and defenses that the consumer could assert against the
seller of goods or services financed in the credit transaction.
The penalties for violating these federal, state, or local laws vary
depending on the applicable law and the particular facts of the situation.
However, private plaintiffs typically may assert claims for actual damages and,
in some cases, also may recover civil money penalties or exercise a right to
rescind the loan. Violations of certain laws may limit the ability to collect
all or part of the principal or interest on a loan and, in some cases, borrowers
even may be entitled to a refund of amounts previously paid. Federal, state and
local administrative or law enforcement agencies also may be entitled to bring
legal actions, including actions for civil money penalties or restitution, for
violations of certain of these laws.
Depending on the particular alleged misconduct, it is possible that claims
may be asserted against various participants in secondary market transactions,
including assignees that hold the loans, such as the trust fund. Losses on loans
from the application of these federal, state and local laws that are not
otherwise covered by a credit enhancement will be borne by the holders of one or
more classes of securities.
Forfeiture for Drug, RICO and Money Laundering Violations
Federal law provides that property purchased or improved with assets
derived from criminal activity or otherwise tainted, or used in the commission
of certain offenses, can be seized and ordered forfeited to the United States of
America. The offenses which can trigger such a seizure and forfeiture include,
among others, violations of the Racketeer Influenced and Corrupt Organizations
Act, the Bank Secrecy Act, the anti-money laundering laws and regulations,
including the USA Patriot Act of 2001 and the regulations issued pursuant to
that Act, as well as the narcotic drug laws. In many instances, the United
States may seize the property even before a conviction occurs.
In the event of a forfeiture proceeding, a Lender may be able to establish
its interest in the property by proving that (1) its mortgage was executed and
recorded before the commission of the illegal conduct from which the assets used
to purchase or improve the property were derived or before the commission of any
other crime upon which the forfeiture is based, or (2) the Lender, at the time
of the execution of the mortgage, was reasonably without cause to believe that
the property was subject to forfeiture. However, there is no assurance that such
a defense will be successful.
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FEDERAL INCOME TAX CONSEQUENCES
General
The following is a summary of the anticipated material federal income tax
consequences of the purchase, ownership, and disposition of the securities
offered hereby and represents the opinion of Stradley, Ronon, Stevens & Young,
LLP, special counsel to the depositor. The summary is based upon the provisions
of the Code, the regulations promulgated thereunder, including, where
applicable, proposed regulations, and the judicial and administrative rulings
and decisions now in effect, all of which are subject to change, possibly
retroactively, or possible differing interpretations.
The summary does not purport to deal with all aspects of federal income
taxation that may affect particular investors in light of their individual
circumstances, or with certain types of investors subject to special treatment
under the federal income tax laws. This summary focuses primarily on investors
who will hold securities as "capital assets" (generally, property held for
investment) within the meaning of Section 1221 of the Code, but much of the
discussion is applicable to other investors as well. Prospective investors are
advised to consult their own tax advisers concerning the federal, state, local
and any other tax consequences to them of the purchase, ownership and
disposition of the securities.
The federal income tax consequences to holders will vary depending on
whether
o the securities of a series are classified as indebtedness for federal
income tax purposes,
o one or more elections are made to treat certain assets of the trust
fund relating to a particular series of securities as a REMIC or FASIT
under the Code,
o the securities represent an ownership interest in some or all of the
assets included in the trust fund for a series, or
o for federal income tax purposes the Trust Fund relating to a
particular series of certificates is classified as a partnership or is
disregarded as an entity separate from its owner.
The Prospectus Supplement for each series of securities will specify how the
securities will be treated for federal income tax purposes and will discuss
whether a REMIC or FASIT election, if any, will be made for that series. Prior
to the issuance of each series of securities, the depositor shall file with the
SEC a Form 8-K on behalf of the related trust fund containing an opinion and
related consent of Stradley, Ronon, Stevens & Young, LLP regarding the validity
of the information set forth under "Federal Income Tax Consequences" herein and
in the related prospectus supplement.
Taxation of Debt Securities
Interest and Acquisition Discount. Securities representing regular
interests in a REMIC or a FASIT ("Regular Interest Securities") are taxable to
holders in the same manner as evidences of indebtedness issued by the REMIC or
FASIT. Stated interest on the Regular Interest Securities will be taxable as
ordinary income and taken into account using the accrual method of accounting,
regardless of the holder's normal accounting method. Interest (other than
original issue discount) on securities (other than Regular Interest Securities)
that are characterized as indebtedness for federal income tax purposes will be
includible in income by holders thereof in accordance with their usual methods
of accounting. Securities characterized as debt for federal income tax purposes
and Regular Interest Securities will be referred to hereinafter collectively as
"Debt Securities."
Debt Securities that are Accrual Securities will, and some of the other
Debt Securities may, be issued with "original issue discount" ("OID"). The
following discussion is based in part on the rules governing OID which are set
forth in Part V of Subchapter P of Chapter 1 of Subtitle A of the Code and the
Treasury Department regulations issued thereunder (the "OID Regulations"). A
holder should be aware, however, that the OID Regulations do not adequately
address certain issues relevant to prepayable securities like the Debt
Securities.
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OID, if any, is the difference of the stated redemption price at maturity
of a Debt Security over its issue price. A holder of a Debt Security must
include OID in gross income as ordinary interest income as it accrues. The
amount of OID the holder must accrue is determined under the constant yield
method. In general, OID must be included in income in advance of the receipt of
the cash representing that income. The amount of OID on a Debt Security will be
considered to be zero if it is less than a de minimis amount determined under
the Code.
The issue price of a Debt Security is the first price at which a
substantial amount of Debt Securities of that class are sold to the public
(excluding bond houses, brokers, underwriters or wholesalers). If less than a
substantial amount of a particular class of Debt Securities is sold for cash on
or prior to the related closing date, the issue price for that class will be
treated as the fair market value of that class on the closing date. The issue
price of a Debt Security also includes the amount paid by an initial Debt
Security holder for accrued interest that relates to a period prior to the issue
date of the Debt Security. The stated redemption price at maturity of a Debt
Security includes the original principal amount of the Debt Security, but
generally will not include distributions of interest if these distributions
constitute "qualified stated interest."
Under the OID Regulations, qualified stated interest generally means
interest payable at a single fixed rate or qualified variable rate (as described
below) provided that these interest payments are unconditionally payable at
intervals of one year or less during the entire term of the Debt Security. The
OID Regulations state that interest payments are unconditionally payable only if
reasonable remedies exist to compel timely payment or the debt instrument
otherwise provides terms and conditions that make the likelihood of late payment
(other than late payment that occurs within a reasonable grace period) or
nonpayment of interest a remote contingency. Some Debt Securities may provide
for default remedies in the event of late payment or nonpayment of interest. The
interest on Debt Securities will be unconditionally payable and constitute
qualified stated interest, not OID. However, absent clarification of the OID
Regulations, where Debt Securities do not provide for default remedies, the
interest payments may be included in the Debt Security's stated redemption price
at maturity and taxed as OID. Interest is payable at a single fixed rate only if
the rate appropriately takes into account the length of the interval between
payments. Distributions of interest on Debt Securities with respect to which
deferred interest will accrue, will not constitute qualified stated interest
payments, in which case the stated redemption price at maturity of the Debt
Securities includes all distributions of interest as well as principal thereon.
Where the interval between the issue date and the first distribution date on a
Debt Security is shorter than the interval between subsequent distribution
dates, all of the additional interest will be included in the stated redemption
price at maturity and tested under the de minimis rule described below. Holders
of Debt Securities should consult their own tax advisors to determine the issue
price and stated redemption price at maturity of a Debt Security.
Under the de minimis rule, OID on a Debt Security generally will be
considered to be zero if OID is less than 0.25% of the stated redemption price
at maturity of the Debt Security multiplied by the weighted average maturity of
the Debt Security. For this purpose, the weighted average maturity of the Debt
Security is computed as the sum of the amounts determined by multiplying the
number of full years (i.e., rounding down partial years) from the issue date
until each distribution in reduction of stated redemption price at maturity is
scheduled to be made, by a fraction, the numerator of which is the amount of
each distribution included in the stated redemption price at maturity of the
Debt Security and the denominator of which is the stated redemption price at
maturity of the Debt Security. Holders generally must report de minimis OID pro
rata as principal payments are received, and this income will be capital gain if
the Debt Security is held as a capital asset. However, holders may elect to
accrue all de minimis OID as well as "market discount" (discussed below) under
the constant yield method.
OID on debt instruments, including Debt Securities, the principal of which
may be repaid on an earlier than scheduled basis (a "Pay-Through Security"), is
determined under section 1272(a)(6) of the Code. The Treasury Department, to
date, has not issued any regulations under section 1272(a)(6). The Treasury
Department and the Internal Revenue Service (the "IRS") have issued final
regulations prescribing the calculation of OID on debt instruments the payments
on which are subject to a contingency. These regulations, however, expressly do
not apply to debt instruments, including the Debt Securities, falling within the
scope of section 1272(a)(6). Consequently, the trustee will calculate the OID,
if any, arising under the Debt Securities, in accordance with the methodology
prescribed under section 1272(a)(6). This methodology generally requires taking
into account an anticipated amount of prepayments (the "Prepayment Assumption").
OID is determined by allocating to each day of the accrual period, the ratable
portion of the excess (if any) of the sum of the present values of all payments
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expected to be received on the outstanding Debt Securities or Pay-Through
Securities at the close of the period (taking into account the Prepayment
Assumption) and the payments during the accrual period of amounts included in
the stated redemption price of the securities over the adjusted issue price of
the securities at the beginning of the period. For this purpose, the present
values of the expected payments are computed in accordance with the methodology
the Code prescribes.
The holder of a Debt Security issued with OID must include in gross income,
for all days during the holder's taxable year in which it holds the Debt
Security, the sum of the "daily portions" of the OID. The amount of OID
includible in income by a holder will be computed by allocating to each day
during the holder's taxable year a pro rata portion of the original issue
discount that accrued during that period. In the case of a Debt Security that is
not a Regular Interest Security and the principal payments on which are not
subject to acceleration resulting from prepayments on the loans, the amount of
OID includible in income of a holder for an accrual period (generally the period
over which interest accrues on the debt instrument) will equal the product of
the yield to maturity of the Debt Security and the adjusted issue price of the
Debt Security, reduced by any payments of qualified stated interest. The
adjusted issue price is the sum of the issue price of the Debt Security plus
prior accruals of OID, reduced by the total payments made on the Debt Security
in all prior periods, other than qualified stated interest payments.
The effect of this method is to increase the portions of OID required to be
included in income by a holder to take into account prepayments on the loans at
a rate that exceeds the Prepayment Assumption, and to decrease (but not below
zero for any period) the portions of original issue discount required to be
included in income by a holder of a Pay-Through Security to take into account
prepayments on the loans at a rate that is slower than the Prepayment
Assumption. Although original issue discount will be reported to holders of
Pay-Through Securities based on the Prepayment Assumption, no representation is
made to holders that loans will be prepaid at that rate or at any other rate.
Some classes of Regular Interest Securities may represent more than one
class of REMIC or FASIT regular interests. Unless otherwise provided in the
related prospectus supplement, the trustee intends, based on the OID
Regulations, to calculate OID on these securities as if, solely for the purposes
of computing OID, the separate regular interests were a single debt instrument.
A subsequent holder of a Debt Security will also be required to include OID
in gross income, but a subsequent holder who purchases the Debt Security for an
amount that exceeds its adjusted issue price will be entitled (as will an
initial holder who pays more than a Debt Security's issue price) to offset the
OID by comparable economic accruals of portions of the excess.
Effects of Defaults and Delinquencies. Holders will be required to report
income from the Debt Securities under an accrual method without giving effect to
delays and reductions in distributions attributable to a default or delinquency
on the loans, except possibly to the extent that it can be established that any
accrual of interest on a security is uncollectible. The IRS, in a 1995 Technical
Advice Memorandum, ruled that holders of a debt instrument having OID must
continue to accrue OID, as distinguished from the accrual of interest, even when
there is no reasonable expectation that the instrument will be redeemed
according to its terms due to the issuer's financial condition. As a result, the
amount of income (including OID) reported by a holder of this type of security
in any period could significantly exceed the amount of cash distributed to the
holder in that period. The holder will eventually be allowed a loss (or will be
allowed to report a lesser amount of income) to the extent that the aggregate
amount of distributions on the securities is reduced as a result of a loan
default. However, the timing and character of these losses or reductions in
income are uncertain and, accordingly, holders of securities should consult
their own tax advisors on this point.
Interest Weighted Securities. It is not clear how income should be accrued
for Regular Interest Securities or Debt Securities representing interest strips
of all or a portion of the underlying qualified mortgages held by the REMIC or
loans supporting Pass-Through Certificates (the "Interest Weighted Securities").
The Issuer intends to take the position that all of the income derived from an
Interest Weighted Security should be treated as OID and that the amount of OID
should be calculated by including the aggregate amount of all payments in the
stated redemption price, and thus treating none of the payments under the
instrument as qualified stated interest. However, in the case of Interest
Weighted Securities that are entitled to some payments of principal and that are
Regular Interest
73
Securities the IRS could assert that income derived from an Interest Weighted
Security should be calculated as if the security were a security purchased at a
premium equal to the excess of the price paid by the holder for the security
over its stated principal amount, if any. Under this approach, a holder would be
entitled to amortize the premium only if it has in effect an election under
Section 171 of the Code for all taxable debt instruments held by the holder, as
described below. Alternatively, the IRS could assert that an Interest Weighted
Security should be taxable under the rules governing bonds issued with
contingent payments. This treatment may be more likely in the case of Interest
Weighted Securities that are Stripped Securities as described below. We refer
you to "--Tax Status as a Grantor Trust--Discount or Premium on Pass-Through
Certificates."
Variable Rate Debt Securities. Debt Securities may bear interest at a
variable rate as authorized in the appropriate Income Tax Regulations. Debt
Securities that bear interest at a variable rate will be referred to as
"Variable Rate Debt Securities." Under the relevant Income Tax Regulations, an
"authorized variable rate" is a rate that is --
o a qualified floating rate, defined as a rate the variation in the
value of which can reasonably be expected to measure the
contemporaneous variations in the cost of newly borrowed funds
generally, or for the Sponsor, specifically, in the currency in which
the Variable Rate Debt Securities are issued,
o a rate equal to the highest, lowest, or average of two or more
qualified floating rates described in the first bullet above,
o a rate based on a weighted average of the interest rates on some or
all of the qualified mortgages the REMIC holds, as long as the
qualified mortgage rates are either fixed or payable at an authorized
variable rate, even if some of interest payments on some or all of the
qualified mortgages is first subject to a cap or a floor, or is first
reduced by a number of basis points or a fixed percentage, or the rate
is based net of any servicing spread, credit enhancement fees, or
other expenses of the REMIC,
o a rate that is expressed as the product of a rate described in the
first, second or third bullets above and a fixed multiplier, or a
constant number of basis points more or less than a rate described in
the first, second or third bullets above, or the product, plus or
minus a constant number of basis points, of a rate described in the
first, second or third bullets above, and a fixed multiplier (which
may be either a positive or negative number),
o a rate that would be described in the first, second or third bullets
above, except that it is limited by a cap or ceiling that establishes
either a maximum rate or a maximum number of basis points by which the
rate may increase from one accrual or payment period to another or
over the term of the interest, or is limited by a floor that
establishes either a minimum rate or a maximum number of basis points
by which the rate may decrease from the accrual or payment period to
another or over the term of the interest,
o a rate that would be described in any of the first, second, third,
fourth or fifth bullets above except that it is subject to a "funds
available cap" as defined in the appropriate Income Tax Regulations,
or
o a rate that is based on one fixed rate during one or more accrual or
payment periods and a different fixed rate or rates, or a rate or
rates described in any of the first, second, third, fourth, fifth or
sixth bullets above, during other accrual or payment periods, or a
rate described in any of the first, second, third, fourth, fifth or
sixth bullets above, during one or more accrual or payment periods and
a fixed rate or rates, or a different rate or rates described in any
of the first, second, third, fourth, fifth or sixth bullets above.
In the case of Accrual Securities, certain Interest Weighted Securities,
and some of the other Debt Securities, none of the payments under the instrument
will be considered qualified stated interest, and thus the aggregate amount of
all payments will be included in the stated redemption price. In the case of
Variable Rate Debt Securities bearing interest at a rate that varies directly,
according to a fixed formula, with an objective index, it appears that
74
o the yield to maturity of the Debt Securities, and
o in the case of Pay-Through Securities, the present value of all
payments remaining to be made on the Debt Securities,
should be calculated as if the interest index remained at its value as of
the issue date of these securities if the rate on the Security is a "qualified
floating rate" or "qualified inverse floating rate" or at a value that reflects
the reasonably expected yield of the Security if the rate on the Security is an
"objective rate" (other than a "qualified inverse floating rate"). Because the
proper method of adjusting accruals of OID on a variable rate Debt Security is
uncertain, holders of variable rate Debt Securities should consult their own tax
advisers regarding the appropriate treatment of the securities for federal
income tax purposes.
Market Discount. A Debt Security may be a "market discount bond." A "market
discount bond" is generally any evidence of indebtedness, including a Debt
Security, having market discount. A Debt Security will have market discount if
the stated redemption price at maturity of the Debt Security exceeds the amount
the purchaser paid to acquire it from a person other than the original issuer.
If the amount of market discount is less than 0.25% of the stated redemption
price at maturity of the Debt Security multiplied by the number of complete
years to maturity of the Debt Security, then the amount of market discount is de
minimis and is considered to be zero. If a Debt Security is a market discount
bond, the holder generally must recognize on its disposition, any gain to the
extent it does not exceed the accrued market discount on the bond as ordinary
income. Market discount is accrued on a ratable basis unless the holder elects
to accrue the discount under the constant yield method. As an alternative to the
rule requiring recognition of ordinary gain treatment on the disposal of a
market discount bond, the holder may elect to currently include in income any
accrued market discount. If elected, the amount of market discount the holder
must include in income must be determined under the constant yield method.
If a holder uses the proceeds of a loan to acquire a Debt Security having
market discount, the "net interest expense" the holder is allowed to deduct may
be limited to the excess of the amount that the "net interest expense" exceeds
the portion of the market discount allocable to the days during the taxable year
for which the holder held the Debt Security. A holder's "net interest expense"
is the amount of interest paid or accrued during the taxable year on
indebtedness which is incurred or continued to purchase or carry the Debt
Security over the aggregate amount of interest (including original issue
discount) includible in the holder's gross income for the taxable year with
respect to the Debt Security. The holder generally may deduct any disallowed
portion of net interest expense in the taxable year the holder disposes of the
Debt Security in a recognition transaction unless the holder elects to deduct
the disallowed interest expense in a taxable year in which the holder realizes
"net investment income" on the Debt Security. A holder's "net investment income"
is equal to the excess of the aggregate amount of interest (including original
issue discount) includible in the holder's gross income for the taxable year
with respect to the Debt Security over the amount of interest the holder paid or
accrued during the taxable year on indebtedness which is incurred or continued
to purchase or carry the Debt Security. If the Debt Security is disposed of in a
nonrecognition transaction, special rules apply.
Premium. A holder who purchases a Debt Security (other than an Interest
Weighted Security to the extent described above) at a cost greater than its
stated redemption price at maturity, generally will be considered to have
purchased the security at a premium, which it may elect to amortize as an offset
to interest income on the security (and not as a separate deduction item) under
the constant yield method. Although no regulations addressing the computation of
premium accrual on securities similar to the securities have been issued, the
legislative history of the Code indicates that premium is to be accrued in the
same manner as original issue discount. Accordingly, it appears that the accrual
of premium on a class of Pay-Through Securities will be calculated using the
prepayment assumption used in pricing that class. Premium on a Pay-Through
Security that is not amortized pursuant to an election under section 171 of the
Code is allocated among the principal payments to be made on the Pay-Through
Security and is allowed as an interest offset, or possibly as a loss deduction,
on the maturity of the security. If a holder makes an election to amortize
premium on a Debt Security, the election will apply to all taxable debt
instruments (including all REMIC regular interests and all pass-through
certificates representing ownership interests in a trust holding debt
obligations) held by the holder at the beginning of the taxable year in which
the election is made, and to all taxable debt instruments acquired thereafter by
the holder, and will be irrevocable without the
75
consent of the IRS. Purchasers who pay a premium for the securities should
consult their tax advisers regarding the election to amortize premium and the
method to be employed.
The IRS has issued final regulations (the "Amortizable Bond Premium
Regulations") dealing with amortizable bond premium. These regulations
specifically do not apply to prepayable debt instruments subject to Code Section
1272(a)(6), such as the securities. Absent further guidance from the IRS, the
trustee intends to account for amortizable bond premium in the manner described
above. Prospective purchasers of the securities should consult their tax
advisors regarding the possible application of the Amortizable Bond Premium
Regulations.
Election to Treat All Interest as Original Issue Discount. The OID
Regulations permit a holder of a Debt Security to elect to accrue all interest,
discount (including de minimis market or original issue discount) and premium in
income as interest, based on a constant yield method for Debt Securities
acquired on or after April 4, 1994. If this type of election were to be made for
a Debt Security with market discount, the holder of the Debt Security would be
deemed to have made an election to include in income currently market discount
relating to all other debt instruments having market discount that the holder of
the Debt Security acquires during the year of the election or thereafter.
Similarly, a holder of a Debt Security that makes this election for a Debt
Security that is acquired at a premium will be deemed to have made an election
to amortize bond premium on all debt instruments having amortizable bond premium
that the holder owns or acquires. The election to accrue interest, discount and
premium on a constant yield method for a Debt Security may be revoked only with
the IRS's approval.
Taxation of the REMIC and its Holders
General. In the opinion of Stradley, Ronon, Stevens & Young, LLP, special
counsel to the depositor, if a REMIC election is made for a series of
securities, then the arrangement by which the securities of that series are
issued will be treated as a REMIC as long as all of the provisions of the
applicable Agreement are complied with and the statutory and regulatory
requirements are satisfied. Securities will be designated as "regular interests"
or "residual interests" in a REMIC, as specified in the related prospectus
supplement.
Except to the extent specified otherwise in a prospectus supplement, if a
REMIC election is made for a series of securities, (1) securities held by a
domestic building and loan association will constitute "a regular or a residual
interest in a REMIC" within the meaning of Code Section 7701(a)(19)(C)(xi)
(assuming that at least 95% of the REMIC's assets consist of cash, government
securities, "loans secured by an interest in real property," and other types of
assets described in Code Section 7701(a)(19)(C)); and (2) securities held by a
real estate investment trust will constitute "real estate assets" within the
meaning of Code Section 856(c)(5)(B), and income from the securities will be
considered "interest on obligations secured by mortgages on real property or on
interests in real property" within the meaning of Code Section 856(c)(3)(B)
(assuming, for both purposes, that at least 95% of the REMIC's assets are
qualifying assets). If less than 95% of the REMIC's assets consist of assets
described in (1) or (2) above, then a security will qualify for the tax
treatment described in (1) and (2) in the proportion that the REMIC assets are
qualifying assets.
REMIC Expenses; Single Class REMICs
As a general rule, all of the expenses of a REMIC will be taken into
account by holders of the Residual Interest Securities. In the case of a "single
class REMIC," however, the expenses will be allocated, under Treasury Department
regulations, among the holders of the Regular Interest Securities and the
holders of the Residual Interest Securities (as defined herein) on a daily basis
in proportion to the relative amounts of income accruing to each holder on that
day. In the case of a holder of a Regular Interest Security who is an individual
or a "pass-through interest holder" (including certain pass-through entities but
not including real estate investment trusts), the expenses will be deductible
only to the extent that the expenses, plus other "miscellaneous itemized
deductions" of the holder, exceed 2% of the holder's adjusted gross income. In
addition, for taxable years beginning after December 31, 1990, the amount of
itemized deductions otherwise allowable for the taxable year for an individual
whose adjusted gross income exceeds the applicable amount (which amount will be
adjusted for inflation for taxable years beginning after 1990) will be reduced
by the lesser of
o 3% of the excess of adjusted gross income over the applicable amount,
or
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o 80% of the amount of itemized deductions otherwise allowable for that
taxable year.
For tax years beginning after December 31, 2010, the current limitation on
itemized deductions, which is generally applicable to higher income individuals,
will be repealed. When the repeal is complete, affected individuals will no
longer be required to reduce the amount of their itemized deductions if their
adjusted gross income exceeds a statutorily prescribed amount as current law
requires. The phase out will be accomplished in stages over a five year period
commencing in 2006. The limitation will be reduced by one-third for tax years
beginning in either of calendar years 2006 and 2007, reduced by an additional
one-third for tax years beginning in either of calendar years 2008 and 2009, and
will be fully phased out through a final one-third reduction effective for tax
years beginning after December 31, 2009.
For taxable years beginning after December 31, 1997, in the case of a
partnership that has 100 or more partners and elects to be treated as an
"electing large partnership," 70% of that partnership's miscellaneous itemized
deductions will be disallowed, although the remaining deductions will generally
be allowed at the partnership level and will not be subject to the 2% floor that
would otherwise be applicable to individual partners. The reduction or
disallowance of this deduction may have a significant impact on the yield of the
Regular Interest Security to a holder with that level of income. In general
terms, a single class REMIC is one that either (1) would qualify, under existing
Treasury Department regulations, as an investment trust if it were not a REMIC
(treating all interests as ownership interests, even if they would be classified
as debt for federal income tax purposes) or (2) is similar to an investment
trust and is structured with the principal purpose of avoiding the single class
REMIC rules. Unless otherwise stated in the applicable Prospectus Supplement,
the expenses of the REMIC will be allocated to holders of the related residual
interest securities.
Taxation of the REMIC
General. Although a REMIC is a separate entity for federal income tax
purposes, a REMIC is not generally subject to entity-level tax. Rather, the
taxable income or net loss of a REMIC is taken into account by the holders of
residual interests. As described above, the regular interests are taxable as
debt issued by the REMIC.
Tiered REMIC Structures. For some series of certificates, two or more
separate elections may be made to treat designated portions of the related trust
fund as multiple REMICs ("Tiered REMICs") for federal income tax purposes. Upon
the issuance of any series of certificates of this type, counsel to the
depositor will deliver its opinion generally to the effect that, assuming
compliance with all provisions of the related Pooling and Servicing Agreement,
the Tiered REMICs will each qualify as a REMIC and the REMIC certificates issued
by the Tiered REMICs, respectively, will be considered to evidence ownership of
Regular Interest Securities or Residual Interest Securities in the related REMIC
within the meaning of the REMIC provisions.
Solely for purposes of determining whether the REMIC certificates will be
"real estate assets" within the meaning of Section 856(c)(4)(A) of the Code, and
"loans...secured by an interest in real property" under Section
7701(a)(19)(C)(v) of the Code, and whether the income on the REMIC certificates
is interest described in Section 856(c)(3)(B) of the Code, the Tiered REMICs
will be treated as one REMIC.
Calculation of REMIC Income. The taxable income or net loss of a REMIC is
determined under an accrual method of accounting and in the same manner as in
the case of an individual, with certain adjustments. In general, the taxable
income or net loss will be the difference between
o the gross income produced by the REMIC's assets, including stated
interest and any OID or market discount on loans and other assets, and
o deductions, including stated interest and OID accrued on Regular
Interest Securities, amortization of any premium relating to loans,
and servicing fees and other expenses of the REMIC.
A holder of a Residual Interest Security that is an individual or a
"pass-through interest holder" (including certain pass-through entities, but not
including real estate investment trusts) will be unable to deduct servicing fees
payable on the loans or other administrative expenses of the REMIC for a given
taxable year, to the extent that these
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expenses, when aggregated with the holder's other miscellaneous itemized
deductions for that year, do not exceed 2% of the holder's adjusted gross
income.
For purposes of computing its taxable income or net loss, the REMIC should
have an initial aggregate tax basis in its assets equal to the aggregate fair
market value of the regular interests and the residual interests on the startup
day (i.e., the day on which the REMIC issues all of its regular and residual
interests). That aggregate basis will be allocated among the assets of the REMIC
in proportion to their respective fair market values.
The OID provisions of the Code apply to loans made by individuals
originated on or after March 2, 1984, and the currently applicable market
discount provisions apply to loans purchased after April 30, 1993. Subject to
possible application of the de minimis rules, the method of accrual by the REMIC
of OID income on the loans will be equivalent to the method under which holders
of Pay-Through Securities accrue original issue discount (i.e., under the
constant yield method taking into account the Prepayment Assumption). However, a
REMIC that acquires loans at a market discount must include the market discount
in income currently, as it accrues, on a constant yield basis. The REMIC will
deduct OID accruing on the Regular Interest Securities it issues in the same
manner that the holders of the Regular Interest Securities include the discount
in income, but without regard to the de minimis rules. See "--Taxation of Debt
Securities."
To the extent that the REMIC's basis allocable to loans that it holds
exceeds their principal amounts, the resulting premium, if attributable to
mortgages originated after September 27, 1985, will be amortized over the life
of the loans (taking into account the Prepayment Assumption) on a constant yield
method. Although the law is somewhat unclear regarding recovery of premium
attributable to loans originated on or before that date, it is possible that the
premium may be recovered in proportion to payments of loan principal.
Prohibited Transactions and Other Possible Taxes. The REMIC will be subject
to a 100% tax on any net income derived from a "prohibited transaction." For
this purpose, net income will be calculated without taking into account any
losses from prohibited transactions or any deductions attributable to any
prohibited transaction that resulted in a loss. In general, prohibited
transactions include
o subject to limited exceptions, the sale or other disposition of any
qualified mortgage transferred to the REMIC,
o subject to a limited exception, the sale or other disposition of a
cash flow investment,
o the receipt of any income from assets not permitted to be held by the
REMIC pursuant to the Code, or
o the receipt of any fees or other compensation for services rendered by
the REMIC.
It is anticipated that a REMIC will not engage in any prohibited transaction in
which it would recognize a material amount of net income. In addition, subject
to a number of exceptions, a tax is imposed at the rate of 100% on amounts
contributed to a REMIC after the close of the three-month period beginning on
the startup day. REMICs also are subject to federal income tax at the highest
corporate rate on "net income from foreclosure property," determined by
reference to the rules applicable to real estate investment trusts. "Net income
from foreclosure property" generally means gain from the sale of foreclosure
property that is inventory property, and gross income from foreclosure property,
other than qualifying rents and other income that would be qualifying income
under the Code provisions applicable to real estate investment trusts. Unless
otherwise disclosed in the related Prospectus Supplement, it is not anticipated
that any REMIC will recognize "net income from foreclosure property" subject to
federal income taxation. The holders of Residual Interest Securities will
generally be responsible for the payment of any taxes imposed on the REMIC. To
the extent not paid by the holders or otherwise, however, taxes will be paid out
of the trust fund and will be allocated pro rata to all outstanding classes of
securities of the REMIC.
Taxation of Holders of Residual Interest Securities
The holder of a security representing a residual interest (a "Residual
Interest Security") will take into account the "daily portion" of the taxable
income or net loss of the REMIC for each day during the taxable year on
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which the holder held the Residual Interest Security. The daily portion is
determined by allocating to each day in any calendar quarter the ratable portion
of the taxable income or net loss of the REMIC for that quarter and by
allocating that amount among the holders (on that day) of the Residual Interest
Securities in proportion to their respective holdings on that day.
The holder of a Residual Interest Security must report its proportionate
share of the taxable income of the REMIC whether or not it receives cash
distributions from the REMIC attributable to that income or loss. The reporting
of taxable income without corresponding distributions could occur, for example,
in certain REMIC issues in which the loans held by the REMIC were issued or
acquired at a discount, since mortgage prepayments cause recognition of discount
income, while the corresponding portion of the prepayment could be used in whole
or in part to make principal payments on REMIC regular interests issued without
any discount or at an insubstantial discount (if this occurs, it is likely that
cash distributions will exceed taxable income in later years). Taxable income
may also be greater in earlier years of certain REMIC issues as a result of the
fact that interest expense deductions, as a percentage of outstanding principal
on REMIC Regular Interest Securities, will typically increase over time as lower
yielding securities are paid, whereas interest income from loans will generally
remain constant over time as a percentage of loan principal.
In any event, because the holder of a residual interest is taxed on the net
income of the REMIC, the taxable income derived from a Residual Interest
Security in a given taxable year will be greater or less than the taxable income
associated with investment in a corporate bond or stripped instrument having
similar cash flow characteristics and pretax yield. Therefore, the after-tax
yield on the Residual Interest Security may be less than that of that type of
bond or instrument.
Limitation on Losses. The amount of the REMIC's net loss that a holder may
take into account currently is limited to the holder's adjusted basis at the end
of the calendar quarter in which the loss arises. A holder's basis in a Residual
Interest Security will initially equal the holder's purchase price, and will
subsequently be increased by the amount of the REMIC's taxable income allocated
to the holder, and decreased (but not below zero) by the amount of distributions
made and the amount of the REMIC's net loss allocated to the holder. Any
disallowed loss may be carried forward indefinitely, but may be used only to
offset income of the REMIC generated by the same REMIC. The ability of holders
of Residual Interest Securities to deduct net losses may be subject to
additional limitations under the Code, as to which those holders should consult
their tax advisers.
Distributions. Distributions on a Residual Interest Security (whether at
their scheduled times or as a result of prepayments) will generally not result
in any additional taxable income or loss to a holder of a Residual Interest
Security. If the amount of the payment exceeds a holder's adjusted basis in the
Residual Interest Security, however, the holder will recognize gain (treated as
gain from the sale of the Residual Interest Security) to the extent of the
excess.
Sale or Exchange. A holder of a Residual Interest Security will recognize
gain or loss on the sale or exchange of a Residual Interest Security equal to
the difference, if any, between the amount realized and the holder's adjusted
basis in the Residual Interest Security at the time of the sale or exchange.
Except to the extent provided in regulations, which have not yet been issued,
any loss upon disposition of a Residual Interest Security will be disallowed if
the selling holder acquires any residual interest in a REMIC or similar mortgage
pool within six months before or after the disposition.
Excess Inclusions. The portion of the REMIC taxable income of a holder of a
Residual Interest Security consisting of "excess inclusion" income may not be
offset by other deductions or losses, including net operating losses, on the
holder's federal income tax return. Further, if the holder of a Residual
Interest Security is an organization subject to the tax on unrelated business
income imposed by Code Section 511 (e.g., an organization described under Code
Section 401(a) or 501(c), with some limited exceptions), the holder's excess
inclusion income will be treated as unrelated business taxable income of the
holder. In addition, under Treasury Department regulations yet to be issued, if
a real estate investment trust, a regulated investment company, a common trust
fund, or certain cooperatives were to own a Residual Interest Security, and a
"disqualified organization" is the owner of record of an interest in the
Residual Interest Security holder, then a portion of the dividends (or other
distributions) the Residual Interest Security holder pays will be treated as
excess inclusion income. A "disqualified organization"
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for this purpose means the United States, any State or political subdivision
thereof, any foreign government, any international organization, or any agency
or instrumentality of the foregoing, any organization (other than a farmers
cooperative) that is exempt from federal income tax (unless the exempt
organization is liable for unrelated business income tax), and a cooperative
that furnishes electric energy or provides telephone service to persons in rural
areas. If a Residual Security is owned by a Foreign Person excess inclusion
income is subject to tax at a rate of 30% which may not be reduced by treaty, is
not eligible for treatment as "portfolio interest" and is subject to certain
additional limitations. We refer you to "--Tax Treatment of Foreign Investors."
The Small Business Job Protection Act of 1996 has eliminated the special rule
permitting Section 593 institutions ("Thrift Institutions") to use net operating
losses and other allowable deductions to offset their excess inclusion income
from REMIC residual certificates that have "significant value" within the
meaning of the REMIC Regulations, effective for taxable years beginning after
December 31, 1995, except with respect to residual certificates continuously
held by a Thrift Institution since November 1, 1995.
In addition, the Small Business Job Protection Act of 1996 provides three
rules for determining the effect of excess inclusions on the alternative minimum
taxable income of a residual holder. First, alternative minimum taxable income
for the residual holder is determined without regard to the special rule that
taxable income cannot be less than excess inclusions. Second, a residual
holder's alternative minimum taxable income for a tax year cannot be less than
the excess inclusion for the year. Third, the amount of any alternative minimum
tax net operating loss deductions must be computed without regard to any excess
inclusions. These rules are effective for tax years beginning after December 31,
1986, unless a residual holder elects to have these rules apply to tax years
beginning after August 20, 1996.
A REMIC residual interest holder's excess inclusion for any given calendar
quarter is generally the excess (if any) of the amount of the sum of the ratable
daily portion of the net income the residual holder takes into account for the
quarter over the sum of the daily accruals with respect to the interest for the
days during the quarter the holder held the interest. For this purpose, the
daily accruals are determined by allocating to each day in the calendar quarter
a ratable portion of the product of the adjusted issue price of the residual
interest at the beginning of the quarter and 120 percent of the applicable
federal rate, adjusted as the Code prescribes. The adjusted issue price of a
Residual Interest Security at the beginning of each calendar quarter will equal
its issue price (calculated in a manner analogous to the determination of the
issue price of a Regular Interest Security), increased by the aggregate of the
daily accruals for prior calendar quarters, and decreased (but not below zero)
by the amount of distributions made on the Residual Interest Security before the
beginning of the quarter. The long-term federal rate, which is announced monthly
by the Treasury Department, is an interest rate that is based on the average
market yield of outstanding marketable obligations of the United States
government having remaining maturities in excess of nine years.
Under the REMIC Regulations, in certain circumstances, transfers of
Residual Securities may be disregarded. We refer you to "--Restrictions on
Ownership and Transfer of Residual Interest Securities" and "--Tax Treatment of
Foreign Investors."
Restrictions on Ownership and Transfer of Residual Interest Securities. As
a condition to qualification as a REMIC, reasonable arrangements must be made to
prevent a "Disqualified Organization" from holding a REMIC residual interest.
Disqualified Organizations include the United States, any State or political
subdivision thereof, any foreign government, any international organization, or
any agency or instrumentality of any of the foregoing, a rural electric or
telephone cooperative described in Section 1381(a)(2)(C) of the Code, or any
entity exempt from the federal income tax (other than a farmers' cooperative
described in Code Section 521), if the entity is not subject to tax on its
unrelated business income. Accordingly, the applicable Pooling and Servicing
Agreement will prohibit Disqualified Organizations from owning a Residual
Interest Security. In addition, no transfer of a Residual Interest Security will
be permitted unless the proposed transferee shall have furnished to the trustee
an affidavit representing and warranting that it is neither a Disqualified
Organization nor an agent or nominee acting on behalf of a Disqualified
Organization.
If a Residual Interest Security is transferred to a Disqualified
Organization after March 31, 1988 (in violation of the restrictions set forth
above), a substantial tax will be imposed on the transferor of the Residual
Interest Security at the time of the transfer. In addition, if a Disqualified
Organization holds an interest in a pass-through entity after March 31, 1988
(including, among others, a partnership, trust, real estate investment trust,
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regulated investment company, or any person holding as nominee), that owns a
Residual Interest Security, the pass-through entity will be required to pay an
annual tax on its allocable share of the excess inclusion income of the REMIC.
Under the REMIC Regulations, a transfer of a "noneconomic residual
interest" to a US person is disregarded for all federal tax purposes if a
significant purpose of the transfer is to enable the transferor to impede the
assessment or collection of tax. A significant purpose to impede the assessment
or collection exists if the transferor, at the time of the transfer, either knew
or should have known that the transferee would be unwilling or unable to pay the
taxes due on its share of the REMIC's taxable income (i.e. had "improper
knowledge"). A Residual Interest Security is a "noneconomic residual interest"
unless, at the time of the transfer (1) the present value of the expected future
distributions on the Residual Interest Security at least equals the product of
the present value of the anticipated excess inclusions and the highest rate of
tax for the year in which the transfer occurs, and (2) the transferor reasonably
expects that the transferee will receive distributions from the REMIC at or
after the time at which the taxes accrue on the anticipated excess inclusions in
an amount sufficient to satisfy the accrued taxes. If a transfer of a Residual
Interest is disregarded, the transferor would be liable for any federal income
tax imposed upon taxable income derived by the transferee from the REMIC.
Under a safe harbor set forth in the applicable Income Tax Regulations (the
"original safe harbor"), a transferor will be presumed not to have improper
knowledge if the transferor: (1) determines, at the time of transfer, and
following a reasonable investigation, that the transferee historically paid its
debts as they became due and no significant evidence exists to indicate that the
transferee would not continue to timely pay its debts (the "investigation
requirement"), and (2) receives from the transferee a representation
acknowledging that the transferee may incur tax liabilities exceeding the amount
of any cash flows the interest might generate (the "representation
requirement"). The IRS, in the year 2000, issued a notice of proposed rulemaking
to clarify the existence of a third component of the original safe harbor. Under
this clarification, the original safe harbor is not available unless an
additional requirement (the "formula test") is satisfied. Under the formula
test, the present value of the anticipated tax liabilities associated with
holding the residual interest cannot exceed the sum of: (1) the present value of
any consideration given to the transferee to acquire the interest, (2) the
present value of the expected future distributions on the interest and (3) the
present value of the anticipated tax savings associated with holding the
interest.
In the year 2001, the IRS issued a revenue procedure that substantially
ratifies the formula test and introduces a new, alternative, safe harbor (the
"alternative safe harbor") applicable to transferors who cannot satisfy the
formula test. Under the alternative safe harbor a transferor of a residual
interest in a REMIC is generally presumed not to have improper knowledge under
the REMIC Regulations if: (1) the transferor satisfies the first two components
of the original safe harbor (the investigation and representation requirements),
(2) at the time of the transfer, and at the close of each of the transferee's
two fiscal years preceding the year of transfer, the transferee's gross assets
for financial reporting purposes exceed $100 million dollars and its net assets
for financial reporting purposes exceed $10 million dollars, (3) the transferee
is a corporation that meets certain eligibility requirements and makes a written
agreement that any subsequent transfers of the interest will be to another
eligible corporation, and (4) the facts and circumstances known to the
transferor on or before the transfer date do not reasonably indicate that the
taxes associated with the residual interest will not be paid. Among other
additional restrictions, the revenue procedure explicitly prohibits the
alternative safe harbor from applying to transfers to a foreign branch of an
otherwise eligible corporation or any other arrangement by which the interest is
at any time subject to net tax by a foreign country or possession of the United
States.
In July, 2002, the IRS issued final regulations that adopt the formula test
and alternative safe harbor with modifications. The modifications include
prohibiting either the original or alternative safe harbors to apply to
transfers to foreign permanent establishments or fixed bases of U.S. taxpayers
and revising the discount rate used in formula test computations. These
regulations are generally effective for transfers made on or after February 4,
2000, except that the rules prohibiting transfers to foreign branches and
revising the discount rate for formula test computations are applicable to
transfers made on or after August 19, 2002.
Mark to Market Rules. Prospective purchasers of a REMIC Residual Interest
Security should be aware that the Treasury Department has issued final
regulations (the "Mark-to-Market Regulations") which provide that a
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REMIC Residual Interest Security acquired after January 3, 1995 cannot be
marked-to-market. The Mark-to-Market Regulations replace the temporary
regulations which allowed a REMIC Residual Interest Security to be
marked-to-market provided that it was not a negative value residual interest and
did not have the same economic effect as a negative value residual interest.
Prospective purchasers of a REMIC Residual Interest Security should consult
their tax advisors regarding the application of the Mark-to-Market Regulations.
Administrative Matters
The REMIC's books must be maintained on a calendar year basis and the REMIC
must file an annual federal income tax return. The REMIC will also be subject to
the procedural and administrative rules of the Code applicable to partnerships,
including the determination of any adjustments to, among other things, items of
REMIC income, gain, loss, deduction, or credit, by the IRS in a unified
administrative proceeding.
Financial Asset Securitization Investment Trust Qualification
The Trust Fund may elect to be a FASIT in lieu of making the election to be
a REMIC. A FASIT is a statutorily authorized vehicle that is modeled on the
REMIC but is distinguished from the REMIC based on the types of assets which it
may hold (and therefore, against which its interests may be written) among other
factors. If a FASIT election is made, the securities representing interests in
the FASIT will be designated either as "regular interests" or the ownership
interest. A regular interest, in turn, may be either "high yield" regular
interest or regular interest other than a high yield regular interest. If the
regular interest is a "high yield" regular interest, then it will be so
identified in the prospectus supplement and the certificate evidencing the
interest.
Qualification as a FASIT
The provisions governing the election to be treated as a FASIT and the
federal income tax treatment of a FASIT generally are set forth in Sections
860H-860L of the Code. The Treasury Department issued proposed regulations to
implement these statutory provisions in February 2000, but these proposed
regulations do not have the force and effect of law and may be revised before
they are issued in final form. At this time, it is not certain when final
regulations may be issued. To qualify as a FASIT, an entity, such as the Trust
Fund, must elect to be treated as a FASIT and must satisfy certain tests that
are briefly summarized below.
Interests. A FASIT is permitted to issue regular interests and one and only
one interest designated as the "ownership interest." The ownership interest must
at all times be held by a single "eligible corporation" which is generally a
taxable domestic "C corporation" that is not a regulated investment company, a
real estate investment trust, a REMIC, or a subchapter T cooperative. Apart from
being held by an eligible corporation and being designated as the ownership
interest, there are no other formal requirements for an ownership interest.
A FASIT regular interest is any interest a FASIT issues on or after its
startup day which is designated as a regular interest and that: (1)
unconditionally entitles the interest holder to receive a specified principal
amount (or other similar amount), (2) provides for interest payments that are
computed on a fixed rate or "permitted" variable rate, (3) has a stated maturity
(including renewal periods) of 30 years or less, (4) has an issue price not
exceeding 125% of its stated principal amount, and (5) has a yield to maturity
that is less than the applicable federal rate in effect for the month the
interest is issued plus 5%. A "high yield interest" is any interest that would
otherwise qualify as a regular interest but for the failure of the interest to
meet any one or more of conditions (1), (4), or (5), above, or condition (2),
above, but then only if the interest payments on the interest consist of a
specified portion of the interest payments on assets the FASIT is permitted to
hold and the portion does not vary during the period the interest is
outstanding. Special rules apply to ensure that a "high yield interest" is held
only by either an eligible corporation or another FASIT.
Assets. As of the close of the third month beginning on the day after the
FASIT is created, substantially all of a FASIT's assets must be "permitted
assets." A "permitted asset" is defined to include the following categories of
assets:
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o cash or cash equivalents;
o any instrument that qualifies as a debt instrument for purposes of
federal income tax law as long as any interest is payable on the
instrument at a fixed or variable rate that satisfies the prescribed
requirements for a REMIC regular interest and the instrument is not
issued by the holder of the ownership interest or a person "related"
to the holder;
o property that is received as a result of a foreclosure on a debt
instrument the FASIT holds;
o assets that are used to guarantee the FASIT's interests or hedge
against the FASIT's risks associated with its being the obligor on the
interests the FASIT issues;
o contract rights to acquire debt instruments, guarantees, or hedges the
FASIT is otherwise permitted to hold;
o regular interests another FASIT issues; or
o regular interests a REMIC issues.
Consequences of Failing to Comply with FASIT Requirements
If the Trust Fund makes the FASIT election but subsequently fails to comply
with the FASIT statutory requirements, and if appropriate, regulatory
requirements, during any day during the taxable year, the Trust Fund may lose
its status as a FASIT on the date following the date on which the failure occurs
and until such time as the Treasury Department allows the Trust Fund to
re-qualify as a FASIT.
Taxation of the FASIT
A FASIT is not subject to federal income tax. Therefore, if the Trust Fund
elects to be treated as a FASIT, it will not be subject to federal income tax
and will not be treated as a trust, partnership, or corporation for federal
income tax purposes.
Taxation of Regular Interest Holders
Assuming the Trust Fund elects and continues to qualify as a FASIT, any
regular interests the FASIT issues will be treated as debt for federal income
tax purposes. This treatment, and the treatment of regular interests issued or
acquired at discount or premium generally will accord with the treatment of
REMIC regular interests. For a more complete discussion, please see the material
under the heading "Taxation of Debt Securities."
Regular interest holders are required to report any amount includible in
the holder's gross income on an accrual method of accounting regardless of the
holder's usual method of accounting. Thus, a holder who normally uses the cash
receipts and disbursements method of accounting must nonetheless report any
interest income on the regular interest as it accrues, regardless of whether or
when the payment is actually received.
The Code contains special rules applicable to holders of "high yield"
regular interests. The taxable income of a "high yield" regular interest cannot
be less than the sum of the holder's taxable income determined solely with
respect to the interest and any excess inclusion for the taxable year. For this
purpose, taxable income determined with respect to the interest includes any
gains and losses from the sale or exchange of high yield interests. For purposes
of applying the rules on excess inclusions, the Code specifically incorporates
the rules applicable to REMIC residual interests. For a discussion on the excess
inclusion rules, please see the material under the heading "Taxation of the
Holders of Residual Interest Securities." In addition, a "high yield" interest
holder's income attributable to the interest cannot be offset by any current net
operating losses or net operating loss carryovers.
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If a "high yield" regular interest is transferred to a disqualified holder
(generally any holder other than an eligible corporation, another FASIT or a
dealer in securities that holds the interest for sale to customers in the
ordinary course of the dealer's business), the disqualified holder does not
include in income any income other than gain attributable to the interest.
Rather, any income not included in the disqualified person's income is included
in the gross income of the last person to hold the interest that was not a
disqualified person. If a dealer in securities that is not a domestic C
corporation acquires a "high yield" regular interest but later ceases to be a
dealer in securities or ceases to hold the interest for sale to customers, the
dealer may be subject to a penalty tax.
If a pass-through entity, such as a partnership, issues any interest (debt
or equity) in the entity that has the characteristics of a "high-yield" regular
interest, the interest in the entity is backed by a FASIT regular interest, and
the yield on the interest in the entity exceeds both the yield on the regular
interest and the applicable federal rate in effect for the month the interest is
issued plus 5%, then the entity will be subject to a penalty tax.
Taxation of Ownership Interest Holders
The FASIT ownership interest represents the residual equity interest in a
FASIT. In determining its taxable income, the holder of the FASIT ownership
interest treats all of the FASIT's assets and liabilities as its own. The holder
of the FASIT ownership interest also must treat as its own any of the FASIT's
items of income, gain, loss, deduction and credit (other than items of income,
gain or deduction attributable to a prohibited transaction). Any interest that
would otherwise be exempt from tax under the Code must be included in the income
of the holder of the ownership interest as ordinary income. The holder of the
ownership interest must apply the constant yield method under an accrual method
of accounting in determining all interest, acquisition discount, original issue
discount, and market discount, and all premium deductions or adjustments with
respect to each debt instrument the FASIT holds. The holder of the ownership
interest is subject to the same restrictions on the use of net operating losses
and net operating loss carryovers to offset FASIT income as the holder of a
"high yield" regular interest. We refer you to "Taxation of Regular Interest
Holders," above. For purposes of the alternative minimum tax, the taxable income
of the holder of the ownership interest is determined without regard to the
minimum FASIT income. The alternative minimum taxable income of the holder of
the ownership interest also cannot be less than the FASIT income for that year,
and the alternative minimum tax net operating loss deduction is computed without
regard to the minimum FASIT income. The Code specifically makes applicable to
FASIT ownership interests the "wash sale" rules applicable to dispositions of
REMIC residual interests. Thus, any loss realized on the disposition of the
FASIT ownership interest will be disallowed where the holder acquires within the
time span of six months before or after the disposition date, an ownership
interest in another FASIT that is economically equivalent to the ownership
interest disposed. The holder of a noneconomic ownership interest in a FASIT is
liable to similar transfer restrictions as apply to the holder of a noneconomic
REMIC residual interest. For a discussion on the newly promulgated safe harbors
concerning transfers of noneconomic ownership interests, please see the
discussion under the heading "Taxation of Holders of Residual Interest
Securities," above.
The holder of the ownership interest will be subject to a penalty tax on
the net income derived from a prohibited transaction. The tax is equal to 100%
of the net income derived from a prohibited transaction. A prohibited
transaction includes:
o the receipt of any income derived from any asset other than a
permitted asset;
o except for certain allowed dispositions, the disposition of a
permitted asset;
o the receipt of any income derived from any loan the FASIT originates,
and
o except as permitted, the receipt of any income representing a fee or
other compensation for services.
Tax Status as a Grantor Trust
General. As specified in the related prospectus supplement if a REMIC,
FASIT or partnership election is not made, in the opinion of Stradley, Ronon,
Stevens & Young, LLP, special counsel to the depositor, the trust fund relating
to a series of securities will be classified for federal income tax purposes as
a grantor trust under Subpart E
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of Part I of Subchapter J of the Code and not as an association taxable as a
corporation (the securities of that series, the "Pass-Through Certificates"). In
some series there will be no separation of the principal and interest payments
on the loans. In these circumstances, a holder will be considered to have
purchased a pro rata undivided interest in each of the loans. In other cases
(the "Stripped Securities"), sale of the securities will produce a separation in
the ownership of all or a portion of the principal payments from all or a
portion of the interest payments on the loans.
Each holder must report on its federal income tax return its share of the
gross income derived from the loans (not reduced by the amount payable as fees
to the trustee and the servicer and similar fees (collectively, the "Servicing
Fee")), at the same time and in the same manner as these items would have been
reported under the holder's tax accounting method had it held its interest in
the loans directly, received directly its share of the amounts received on the
loans, and paid directly its share of the Servicing Fees. In the case of
Pass-Through Certificates other than Stripped Securities, this income will
consist of a pro rata share of all of the income derived from all of the loans
and, in the case of Stripped Securities, this income will consist of a pro rata
share of the income derived from each stripped bond or stripped coupon in which
the holder owns an interest. The holder of a security will generally be entitled
to deduct these Servicing Fees under Section 162 or Section 212 of the Code to
the extent that these Servicing Fees represent "reasonable" compensation for the
services rendered by the trustee and the servicer (or third parties that are
compensated for the performance of services). In the case of a noncorporate
holder, however, Servicing Fees (to the extent not otherwise disallowed, e.g.,
because they exceed reasonable compensation) will be deductible in computing the
holder's regular tax liability only to the extent that these fees, when added to
other miscellaneous itemized deductions, exceed 2% of adjusted gross income and
may not be deductible to any extent in computing the holder's alternative
minimum tax liability. In addition, the amount of itemized deductions otherwise
allowable for the taxable year for an individual whose adjusted gross income
exceeds the applicable amount (which amount will be adjusted for inflation in
taxable years beginning after 1990) will be reduced by the lesser of
o 3% of the excess of adjusted gross income over the applicable amount,
or
o 80% of the amount of itemized deductions otherwise allowable for that
taxable year.
For a discussion of the repeal and phase out of the current limitation on
itemized deductions, please see the discussion under the heading "REMIC
Expenses; Single Class REMICs," above.
Discount or Premium on Pass-Through Certificates. The holder's purchase
price of a Pass-Through Certificate is to be allocated among the loans in
proportion to their fair market values, determined as of the time of purchase of
the securities. In the typical case, the trustee (to the extent necessary to
fulfill its reporting obligations) will treat each loan as having a fair market
value proportional to the share of the aggregate principal balances of all of
the loans that it represents. To the extent that the portion of the purchase
price of a Pass-Through Certificate allocated to a loan (other than to a right
to receive any accrued interest thereon and any undistributed principal
payments) is less than or greater than the portion of the principal balance of
the loan allocable to the Pass-Through Certificate, the interest in the loan
allocable to the Pass-Through Certificate will be deemed to have been acquired
at a discount or premium, respectively.
The treatment of any discount will depend on whether the discount
represents OID or market discount. In the case of a loan with OID in excess of a
prescribed de minimis amount or a Stripped Security, a holder of a security will
be required to report as interest income in each taxable year its share of the
amount of OID that accrues during that year in the manner described above. OID
on a loan could arise, for example, by virtue of the financing of points by the
originator of the loan, or by virtue of the charging of points by the originator
of the loan in an amount greater than a statutory de minimis exception, in
circumstances under which the points are not currently deductible pursuant to
applicable Code provisions. Any market discount or premium on a loan will be
includible in income, generally in the manner described above, except that in
the case of Pass-Through Certificates, market discount is calculated based upon
the loans underlying the Pass-Through Certificate, rather than the Pass-Through
Certificate itself. A holder that purchases an interest in a loan after April
30, 1993 may be subject to the currently applicable market discount rules. We
refer you to "--Taxation of Debt Securities--Market Discount" and "--Premium."
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In the case of market discount on a Pass-Through Certificate attributable
to loans originated on or before July 18, 1984, the holder generally will be
required to allocate (e.g., on a ratable or straight line basis) the portion of
the discount that is allocable to a loan among the principal payments on the
loan and to include the discount allocable to each principal payment in ordinary
income at the time the principal payment is made. This treatment would generally
result in discount being included in income initially at a faster rate than
discount would be required to be included in income using the method described
in the preceding paragraph.
Stripped Securities. A Stripped Security may represent a right to receive
only a portion of the interest payments on the loans, a right to receive only
principal payments on the loans, or a right to receive certain payments of both
interest and principal. Some Stripped Securities (the "Ratio Strip Securities")
may represent a right to receive differing percentages of both the interest and
principal on each loan. Pursuant to Section 1286 of the Code, the separation of
ownership of the right to receive some or all of the interest payments on an
obligation from ownership of the right to receive some or all of the principal
payments results in the creation of "stripped bonds" when referring to principal
payments and "stripped coupons" when referring to interest payments. Section
1286 of the Code applies the OID rules to stripped bonds and stripped coupons.
For purposes of computing OID, a stripped bond or a stripped coupon is treated
as a debt instrument issued on the date that the stripped interest is purchased
with an issue price equal to its purchase price or, if more than one stripped
interest is purchased, the ratable share of the purchase price allocable to the
stripped interest.
Servicing fees in excess of reasonable servicing fees ("Excess Servicing")
will be treated under the stripped bond rules. If the Excess Servicing fee is
less than 100 basis points (i.e., 1% interest on the loan principal balance) or
the securities are initially sold with a de minimis discount (assuming no
prepayment assumption is required), any non-de minimis discount arising from a
subsequent transfer of the securities should be treated as market discount. The
IRS appears to require that reasonable servicing fees be calculated on a loan by
loan basis, which could result in some loans being treated as having more than
100 basis points of interest stripped off.
In the case of any pool of debt instruments, such as Stripped Securities
and other Pass-Through Certificates, the yield on which may be affected by
reason of prepayments, the daily portion of the OID will be determined, using a
reasonable prepayment assumption, by allocating to each day in any accrual
period its ratable portion of the excess (if any) of
o the sum of the present value of all remaining payments under the debt
instrument as of the close of that period and the payments during the
accrual period of amounts included in the stated redemption price of
the debt instrument, over
o the adjusted issue price of the debt instrument at the beginning of
that period.
If the loans prepay at a rate faster than the Prepayment Assumption a
holder's recognition of income may be accelerated. If, however, the loans prepay
at a rate slower that the prepayment assumption, in some circumstances a
holder's recognition of income may be decelerated.
In the case of a Stripped Security that is an Interest Weighted Security,
the trustee intends, absent contrary authority, to report income to security
holders as OID, in the manner described above for Interest Weighted Securities.
Possible Alternative Characterizations. The characterizations of the
Stripped Securities described above are not the only possible interpretations of
the applicable Code provisions. Among other possibilities, the IRS could contend
that
o in certain series, each non-Interest Weighted Security is composed of
an unstripped undivided ownership interest in loans and an installment
obligation consisting of stripped principal payments,
o the non-Interest Weighted Securities are subject to the final
regulations prescribing the calculation of OID on debt instruments the
payments on which are subject to a contingency, or
86
o each Interest Weighted Stripped Security is composed of an unstripped
undivided ownership interest in loans and an installment obligation
consisting of stripped interest payments.
Given the variety of alternatives for treatment of the Stripped Securities
and the different federal income tax consequences that result from each
alternative, potential purchasers are urged to consult their own tax advisers
regarding the proper treatment of the securities for federal income tax
purposes.
Character as Qualifying Loans. In the case of Stripped Securities, there is
no specific legal authority existing regarding whether the character of the
securities, for federal income tax purposes, will be the same as the loans. The
IRS could take the position that the loans' character is not carried over to the
securities in these circumstances. Pass-Through Certificates will be, and,
although the matter is not free from doubt, Stripped Securities should be
considered to represent "real estate assets" within the meaning of Section
856(c)(5)(B) of the Code and "loans secured by an interest in real property"
within the meaning of Section 7701(a)(19)(C)(v) of the Code; and interest income
attributable to the securities should be considered to represent "interest on
obligations secured by mortgages on real property or on interests in real
property" within the meaning of Section 856(c)(3)(B) of the Code. Reserves or
funds underlying the securities may cause a proportionate reduction in the
above-described qualifying status categories of securities.
Sale or Exchange
Subject to the discussion below regarding trust funds as to which a
partnership election is made, a holder's tax basis in its security is the price
the holder pays for a security, plus amounts of original issue or market
discount included in income and reduced by any payments received (other than
qualified stated interest payments) and any amortized premium. Gain or loss
recognized on a sale, exchange, or redemption of a security, measured by the
difference between the amount realized and the security's basis as so adjusted,
will generally be capital gain or loss, assuming that the security is held as a
capital asset. In the case of a security held by a bank, thrift, or similar
institution described in Section 582 of the Code, however, gain or loss realized
on the sale or exchange of a Regular Interest Security will be taxable as
ordinary income or loss. In addition, gain from the disposition of a Regular
Interest Security that might otherwise be capital gain will be treated as
ordinary income to the extent of the excess, if any, of
o the amount that would have been includible in the holder's income if
the yield on the Regular Interest Security had equaled 110% of the
applicable federal rate as of the beginning of the holder's holding
period, over
o the amount of ordinary income actually recognized by the holder from
the Regular Interest Security.
The Jobs and Growth Tax Relief Reconciliation Act of 2003 ("2003 Tax Act")
reduced tax rates for individuals. For taxable years beginning after December
31, 2002, the maximum tax rate on ordinary income for individual taxpayers is
35%. For sales and exchanges taken into account on and after May 6, 2003, the
maximum tax rate for individuals on long-term capital gains is generally 15%.
The provisions of the 2003 Tax Act dealing with reduced rates of taxation are
scheduled to sunset for taxable years beginning after December 31, 2008, unless
extended or made permanent before that date. If these rules do sunset, the prior
rates of taxation on ordinary income under the Economic Growth and Tax Relief
Reconciliation Act of 2001 (the "2001 Tax Act") will again apply for 2009 and
2010, and will then sunset and be replaced (unless these provisions are extended
or made permanent) with income tax rates and provisions in effect prior to the
effective date of the 2001 Tax Act. If the 2003 Tax Act changes do sunset for
taxable years beginning after December 31, 2008, the rules on taxation of
capital gains that were in effect prior to the 2003 Tax Act, including
provisions for the taxation of five-year gains, will again be effective for 2009
and later years.
Miscellaneous Tax Aspects
Backup Withholding. Subject to the discussion below regarding trust funds
as to which a partnership election is made, a holder, other than a holder of a
Residual Interest Security or FASIT ownership interest, may, under certain
circumstances, be subject to "backup withholding" for distributions or the
proceeds of a sale of certificates to or through brokers that represent interest
or OID on the securities. When withholding is required, the
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rate will be 30% for calendar year 2003, 29% for calendar years 2004 and 2005,
and 28% for calendar years 2006 and thereafter. This withholding generally
applies if the holder of a security
o fails to furnish the trustee with its taxpayer identification number
("TIN"),
o furnishes the trustee an incorrect TIN,
o fails to report properly interest, dividends or other "reportable
payments" as defined in the Code, and/or
o under certain circumstances, fails to provide the trustee or the
holder's securities broker with a certified statement, signed under
penalty of perjury, that the TIN provided is its correct number, that
the holder is not subject to backup withholding and that the holder is
a U.S. person (including a U.S. resident alien).
Backup withholding will not apply, however, to certain payments made to holders,
including payments to certain exempt recipients (for example, exempt
organizations) and to certain Foreign Persons who provide appropriate ownership
statements as to status as a Foreign Person. Holders should consult their tax
advisers as to their qualification for exemption from backup withholding and the
procedure for obtaining the exemption.
The trustee will report to the holders and to the servicer for each
calendar year the amount of any "reportable payments" during that year and the
amount of tax withheld, if any, from payments on the securities.
Tax Treatment of Foreign Investors
The term "United States Person" means a citizen or resident of the United
States, a corporation or partnership (or other entity properly 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 political subdivision thereof,
an estate whose income is subject to United States federal income tax regardless
of its source of income, or a trust if a court within the United States is able
to exercise primary supervision of the administration of the trust and one or
more United States persons have the authority to control all substantial
decisions of the trust. A "Foreign Person" is any person that is not a United
States Person.
Subject to the discussion below regarding trust funds as to which a
partnership election is made, under the Code, unless interest (including OID)
paid on a security (other than a Residual Interest Security or FASIT ownership
interest) is considered to be "effectively connected" with a trade or business
conducted in the United States by a Foreign Person, the interest will normally
qualify as portfolio interest (except where (1) the recipient is a holder,
directly or by attribution, of 10% or more of the capital or profits interest in
the issuer, or (2) the recipient is a controlled foreign corporation to which
the issuer is a related person) and will be exempt from federal income tax. Upon
receipt of appropriate ownership statements as to status as a Foreign Person,
the issuer normally will be relieved of obligations to withhold tax from these
interest payments. These provisions supersede the generally applicable
provisions of United States law that would otherwise require the issuer to
withhold at a 30% rate (unless the rate were reduced or eliminated by an
applicable tax treaty) on, among other things, interest and other fixed or
determinable, annual or periodic income paid to Foreign Persons. Holders of
Pass-Through Certificates and Stripped Securities, including Ratio Strip
Securities, however, may be subject to withholding to the extent that the loans
were originated on or before July 18, 1984.
Interest and OID of holders who are Foreign Persons are not subject to
withholding if they are effectively connected with a United States business
conducted by the holder. They will, however, generally be subject to the regular
United States income tax.
Payments to holders of Residual Interest Securities who are Foreign Persons
will generally be treated as interest for purposes of the 30% (or lower treaty
rate) United States withholding tax. Holders should assume that this income does
not qualify for exemption from United States withholding tax as "portfolio
interest." It is clear that, to the extent that a payment represents a portion
of REMIC taxable income that constitutes excess inclusion
88
income, a holder of a Residual Interest Security will not be entitled to an
exemption from or reduction of the 30% (or lower treaty rate) withholding tax
rule. If the payments are subject to United States withholding tax, they
generally will be taken into account for withholding tax purposes only when paid
or distributed (or when the Residual Interest Security is disposed of). The
Treasury Department has statutory authority, however, to promulgate regulations
that would require these amounts to be taken into account at an earlier time in
order to prevent the avoidance of tax. These regulations could, for example,
require withholding prior to the distribution of cash in the case of Residual
Interest Securities that do not have significant value. Under the REMIC
Regulations, if a Residual Interest Security has tax avoidance potential, a
transfer of a Residual Interest Security to a Foreign Person will be disregarded
for all federal tax purposes. A Residual Interest Security has tax avoidance
potential unless, at the time of the transfer the transferor reasonably expects
that the REMIC will distribute to the transferee residual interest holder
amounts that will equal at least 30% of each excess inclusion, and that these
amounts will be distributed at or after the time at which the excess inclusions
accrue and not later than the calendar year following the calendar year of
accrual. If a Foreign Person transfers a Residual Interest Security to a United
States Person, and if the transfer has the effect of allowing the transferor to
avoid tax on accrued excess inclusions, then the transfer is disregarded and the
transferor continues to be treated as the owner of the Residual Interest
Security for purposes of the withholding tax provisions of the Code. We refer
you to "--Taxation of Holders of Residual Interest Securities--Excess
Inclusions"
Foreign Persons normally use Form W-8BEN to certify their status.
Tax Characterization of the Trust Fund as a Partnership
In the opinion of Stradley, Ronon, Stevens & Young, LLP, special counsel to
the depositor, a trust fund for which a partnership election is made (by default
or otherwise) should not be an association (or publicly traded partnership or
taxable mortgage pool) taxable as a corporation for federal income tax purposes.
This opinion is based on the assumption that the terms of the Trust Agreement
and related documents, including the requirement that the trust fund file with
the IRS a protective election to be classified as a partnership, will be
complied with, and on counsel's conclusions that
o the trust fund will be eligible to be classified as a partnership, and
o the nature of the income of the trust fund will exempt it from the
rule that certain publicly traded partnerships are taxable as
corporations or the issuance of the securities has been structured as
a private placement under an IRS safe harbor, so that the trust fund
will not be characterized as a publicly traded partnership taxable as
a corporation.
If the trust fund were taxable as a corporation for federal income tax
purposes, the trust fund would be subject to corporate income tax on its taxable
income. The trust fund's taxable income would include all its income, possibly
reduced by its interest expense on the notes. Any corporate income tax could
materially reduce cash available to make payments on the notes and distributions
on the certificates, and certificateholders could be liable for any tax of this
type that is unpaid by the trust fund.
Tax Consequences to Holders of the Notes
Treatment of the Notes as Indebtedness. The trust fund will agree, and the
holders of asset-backed notes will agree by their purchase of notes, to treat
the notes as debt for federal income tax purposes. Special counsel to the
depositor will, except as otherwise provided in the related prospectus
supplement, advise the depositor that the notes will be classified as debt for
federal income tax purposes. The discussion below assumes this characterization
of the notes is correct.
Assumptions Regarding the Notes. The discussion below assumes that all
payments on the notes are denominated in United States dollars, and that the
notes are not Stripped Securities. Moreover, the discussion assumes that the
interest formula for the notes meets the requirements for "qualified stated
interest" under the OID regulations, and that any OID on the notes (i.e., any
excess of the principal amount of the notes over their issue price) does not
exceed a de minimis amount (i.e., generally 0.25% of their principal amount
multiplied by their
89
terms to maturity), all within the meaning of the OID regulations. If these
conditions are not satisfied for any given series of notes, additional tax
considerations relating to the notes will be disclosed in the applicable
prospectus supplement.
Interest Income on the Notes. Based on the above assumptions, except as
discussed in the following paragraph, the notes will not be considered issued
with OID. The stated interest thereon will be taxable to a noteholder as
ordinary interest income when received or accrued in accordance with the
noteholder's method of tax accounting. Under the OID regulations, a holder of a
note issued with a de minimis amount of OID must, under certain circumstances,
include OID in income, on a pro rata basis, as principal payments are made on
the note. It is believed that any prepayment premium paid as a result of a
mandatory redemption will be taxable as contingent interest when it becomes
fixed and unconditionally payable. A purchaser who buys a note for more or less
than its principal amount will generally be subject, respectively, to the
premium amortization or market discount rules of the Code.
A holder of a note that has a fixed maturity date of not more than one year
from the issue date of the note (a "Short-Term Note") may be subject to special
rules. An accrual basis holder of a Short-Term Note (and certain cash method
holders, including regulated investment companies, as set forth in Section 1281
of the Code) generally would be required to report interest income as interest
accrues on a straight-line basis over the term of each interest period. Other
cash basis holders of a Short-Term Note would, in general, be required to report
interest income as interest is received (or, if earlier, upon the taxable
disposition of the Short-Term Note). However, a cash basis holder of a
Short-Term Note reporting interest income as it is received may be required to
defer a portion of any interest expense otherwise deductible on indebtedness
incurred to purchase or carry the Short-Term Note until the taxable disposition
of the Short-Term Note. A cash basis taxpayer may elect under Section 1281 of
the Code to accrue interest income on all nongovernment debt obligations with a
term of one year or less, in which case the taxpayer would include interest on
the Short-Term Note in income as it accrues, but would not be subject to the
interest expense deferral rule referred to in the preceding sentence. Special
rules apply if a Short-Term Note is purchased for more or less than its
principal amount.
Sale or Other Disposition. If a noteholder sells a note, the holder will
recognize gain or loss in an amount equal to the difference between the amount
realized on the sale and the holder's adjusted tax basis in the note. The
adjusted tax basis of a note to a particular noteholder will equal the holder's
cost for the note, increased by any market discount, acquisition discount, OID
and gain previously included by the noteholder in income resulting from the note
and decreased by the amount of bond premium (if any) previously amortized and by
the amount of principal payments previously received by the noteholder on the
note. Any gain or loss of this type will be capital gain or loss if the note was
held as a capital asset, except for gain representing accrued interest and
accrued market discount not previously included in income (which is ordinary in
character). Capital losses generally may be used only to offset capital gains.
Foreign Holders. Interest payments made (or accrued) to a noteholder who is
a Foreign Person generally will be considered "portfolio interest," and
generally will not be subject to United States federal income tax and
withholding tax, if the interest is not effectively connected with the conduct
of a trade or business within the United States by the Foreign Person and the
Foreign Person
o is not actually or constructively a "10 percent shareholder" of the
trust fund or the seller (including a holder of 10% of the outstanding
asset-backed certificates) or a "controlled foreign corporation" with
respect to which the trust fund or the seller is a "related person"
within the meaning of the Code, and
o provides the owner trustee or other person who is otherwise required
to withhold United States tax from payments on the notes with an
appropriate statement (on Form W-8BEN or a similar form), signed under
penalties of perjury, certifying that the Beneficial Owner of the note
is a Foreign Person and providing the Foreign Person's name and
address.
If a note is held through a securities clearing organization or certain other
financial institutions, the organization or institution may provide the relevant
signed statement to the withholding agent; in that case, however, the signed
statement must be accompanied by a Form W-8BEN or substitute form provided by
the Foreign Person that owns
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the note. If this interest is not portfolio interest, then it will be subject to
United States federal income and withholding tax at a rate of 30%, unless
reduced or eliminated pursuant to an applicable tax treaty.
Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of a note by a Foreign Person will be exempt from United
States federal income and withholding tax, provided that
o the gain is not effectively connected with the conduct of a trade or
business in the United States by the Foreign Person, and
o in the case of an individual Foreign Person, the Foreign Person is not
present in the United States for 183 days or more in the taxable year.
Backup Withholding. Each holder of a note (other than an exempt holder,
including a corporation, tax-exempt organization, qualified pension and
profit-sharing trust, individual retirement account or Foreign Person who
provides certification as to status as a Foreign Person) will be required to
provide, under penalties of perjury, a certificate containing the holder's name,
address, correct federal taxpayer identification number, a statement that the
holder is not subject to backup withholding and a statement that the holder is a
U.S. person (including a U.S. resident alien). Should a nonexempt noteholder
fail to provide the required certification, the trust fund will be required to
withhold a portion of the amount otherwise payable to the holder, and remit the
withheld amount to the IRS as a credit against the holder's federal income tax
liability. When withholding is required, the rate will be 28%. The rate of
backup withholding is based on the fourth lowest rate of tax applicable to
single individuals and thus is subject to the sunset of the provisions of the
2001 Tax Act as described above.
Possible Alternative Treatments of the Notes. If, contrary to the opinion
of special counsel to the depositor, the IRS successfully asserted that one or
more of the notes did not represent debt for federal income tax purposes, the
notes might be treated as equity interests in the trust fund. If so treated, the
trust fund might be taxable as a corporation with the adverse consequences
described above (and the taxable corporation would not be able to reduce its
taxable income by deductions for interest expense on notes recharacterized as
equity). Alternatively, and most likely in the view of special counsel to the
depositor, the trust fund might be treated as a publicly traded partnership that
would not be taxable as a corporation because it would meet certain qualifying
income tests. Nonetheless, treatment of the notes as equity interests in a
publicly traded partnership could have adverse tax consequences to some holders.
For example, income to certain tax-exempt entities (including pension funds)
might be "unrelated business taxable income," income to foreign holders
generally would be subject to United States tax and United States tax return
filing and withholding requirements, and individual holders might be subject to
limitations on their ability to deduct their share of the trust fund's expenses.
Tax Consequences to Holders of the Certificates Issued by a Partnership
Treatment of the Trust Fund as a Partnership. The trust fund and the
servicer will agree, and the holders of asset-backed certificates will agree by
their purchase of the certificates, to treat the trust fund as a partnership for
purposes of federal and state income tax, franchise tax and any other tax
measured in whole or in part by income, with the assets of the partnership being
the assets held by the trust fund, if any, the partners of the partnership being
the certificateholders (or if there is a single certificateholder for federal
income tax purposes, to disregard the trust fund as an entity separate from the
single certificateholder). However, the proper characterization of the
arrangement involving the trust fund, the certificates, the notes, if any, and
the servicer is not clear because there is no authority on transactions closely
comparable to that contemplated herein.
A variety of alternative characterizations are possible. For example,
because the certificates have some features characteristic of debt, the
certificates might be considered debt of the trust fund. Generally, provided
that the certificates are issued at or close to face value, any characterization
of this type would not result in materially adverse tax consequences to
certificateholders as compared to the consequences from treatment of the
certificates as equity in a partnership, described below.
You should note that the federal tax law is unclear with respect to the
status of certificates issued by a partnership qualifying as "loans secured by
an interest in real property." A partnership may be regarded as an
91
aggregate of its partners or an entity separate and apart from its partners. If
it is determined that the partnership is an entity and the certificates
represent equity in the partnership, it is unlikely that the certificates will
constitute loans secured by an interest in real property under Code Section
7701(a)(19)(C). If, however, it is determined that the partnership is an
aggregate of its partners, certificates classified as equity in the partnership
might constitute loans secured by an interest in real property as defined in
Code Section 7701(a)(19)(C) to the extent that the assets held by the
partnership qualify as such. If the certificates are classified as debt it is
unlikely that the certificates will qualify as loans secured by an interest in
real property within the meaning of Code Section 7701(a)(19)(C). The following
discussion assumes that the certificates represent equity interests in a
partnership.
Assumptions Regarding the Certificates. The following discussion assumes
that all payments on the certificates are denominated in United States dollars,
none of the certificates are Stripped Securities, and that a series of
securities includes a single class of certificates. If these conditions are not
satisfied for any given series of certificates, additional tax considerations
relating to those certificates will be disclosed in the applicable prospectus
supplement.
Partnership Taxation. As a partnership, the trust fund will not be subject
to federal income tax. Rather, each certificateholder will be required to
separately take into account the holder's allocable share of income, gains,
losses, deductions and credits of the trust fund. The trust fund's income will
consist primarily of interest and finance charges earned on the loans (including
appropriate adjustments for market discount, OID and bond premium) and any gain
upon collection or disposition of loans. The trust fund's deductions will
consist primarily of interest accruing on the notes, servicing and other fees,
and losses or deductions upon collection or disposition of loans. The tax items
of a partnership are allocable to the partners in accordance with the Code,
Treasury Department regulations and the partnership agreement (here, the Trust
Agreement and related documents). The Trust Agreement will provide, in general,
that the certificateholders will be allocated taxable income of the trust fund
for each month equal to the sum of
o the interest that accrues on the certificates in accordance with their
terms for that month, including interest accruing at the Pass-Through
Rate for that month and interest on amounts previously due on the
certificates but not yet distributed,
o any trust fund income attributable to discount on the loans that
corresponds to any excess of the principal amount of the certificates
over their initial issue price,
o prepayment premium payable to the certificateholders for that month,
and
o any other amounts of income payable to the certificateholders for that
month.
This allocation will be reduced by any amortization by the trust fund of premium
on loans that corresponds to any excess of the issue price of certificates over
their principal amount. All remaining taxable income of the trust fund will be
allocated to the certificateholders. Based on the economic arrangement of the
parties, this approach for allocating trust fund income should be permissible
under applicable Treasury Department regulations, although no assurance can be
given that the IRS would not require a greater amount of income to be allocated
to certificateholders. Moreover, even under the foregoing method of allocation,
certificateholders may be allocated income equal to the entire Pass-Through Rate
plus the other items described above even though the trust fund might not have
sufficient cash to make current cash distributions of this amount. Thus, cash
basis holders will in effect be required to report income from the certificates
on the accrual basis and certificateholders may become liable for taxes on trust
fund income even if they have not received cash from the trust fund to pay these
taxes. In addition, because tax allocations and tax reporting will be done on a
uniform basis for all certificateholders but certificateholders may be
purchasing certificates at different times and at different prices,
certificateholders may be required to report on their tax returns taxable income
that is greater or less than the amount reported to them by the trust fund.
The taxable income allocated to a certificateholder that is a pension,
profit sharing or employee benefit plan or other tax-exempt entity (including an
individual retirement account) will constitute "unrelated business taxable
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income" generally taxable to this type of holder under the Code to the extent
that the certificateholder's share of the taxable income is derived from, or on
account of, debt financed securities. The notes will constitute acquisition
indebtedness of the trust fund for this purpose under Code Section 514.
An individual taxpayer's share of expenses of the trust fund (including
fees to the servicer but not interest expense) would be miscellaneous itemized
deductions. These deductions might be disallowed to the individual in whole or
in part and might result in the holder being taxed on an amount of income that
exceeds the amount of cash actually distributed to the holder over the life of
the trust fund.
The trust fund intends to make all tax calculations relating to income and
allocations to certificateholders on an aggregate basis. If the IRS were to
require that these calculations be made separately for each loan, the trust fund
might be required to incur additional expense but it is believed that there
would not be a material adverse effect on certificateholders.
Section 708 Termination. Under Section 708 of the Code, the trust fund will
be deemed to terminate for federal income tax purposes if 50% or more of the
capital and profits interests in the trust fund are sold or exchanged within a
12-month period. If a termination of this type occurs, the trust fund will be
considered to contribute its assets and liabilities to a new partnership in
exchange for interests in that new partnership, and the trust fund (as part of
the termination) would be treated as distributing the newly-created partnership
interests to the partners in liquidation. The trust fund may not be able to
comply with technical requirements that might apply when a constructive
termination occurs due to a lack of data. As a result, the trust fund may be
subject to tax penalties and may incur additional expenses if it is required to
comply with those requirements.
Discount and Premium. It is believed that the loans were not issued with
OID, and, therefore, the trust fund should not have OID income. However, the
purchase price paid by the trust fund for the loans may be greater or less than
the remaining principal balance of the loans at the time of purchase. If so, the
loan will have been acquired at a premium or discount, as the case may be. (As
indicated above, the trust fund will make this calculation on an aggregate
basis, but might be required to recompute it on a loan by loan basis.)
If the trust fund acquires the loans at a market discount or premium, the
trust fund will elect to include any discount in income currently as it accrues
over the life of the loans or to offset any premium against interest income on
the loans. As indicated above, a portion of market discount income or premium
deduction may be allocated to certificateholders.
Disposition of Certificates. Generally, capital gain or loss will be
recognized on a sale of certificates in an amount equal to the difference
between the amount realized and the seller's tax basis in the certificates sold.
A certificateholder's tax basis in a certificate will generally equal the
holder's cost increased by the holder's share of trust fund income (includible
in income) and decreased by any distributions received on the certificate. In
addition, both the tax basis in the certificates and the amount realized on a
sale of a certificate would include the holder's share of the notes and other
liabilities of the trust fund. A holder acquiring certificates at different
prices may be required to maintain a single aggregate adjusted tax basis in
those certificates, and, upon sale or other disposition of some of the
certificates, allocate a portion of that aggregate tax basis to the certificates
sold (rather than maintaining a separate tax basis in each certificate for
purposes of computing gain or loss on a sale of that certificate).
Any gain on the sale of a certificate attributable to the holder's share of
unrecognized accrued market discount on the loans would generally be treated as
ordinary income to the holder and would give rise to special tax reporting
requirements. The trust fund does not expect to have any other assets that would
give rise to these special reporting requirements. Thus, to avoid those special
reporting requirements, the trust fund will elect to include market discount in
income as it accrues.
If a certificateholder is required to recognize an aggregate amount of
income (not including income attributable to disallowed itemized deductions
described above) over the life of the certificates that exceeds the aggregate
cash distributions with respect thereto, this excess will generally give rise to
a capital loss upon the retirement of the certificates.
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Allocations Between Transferors and Transferees. In general, the trust
fund's taxable income and losses will be determined monthly and the tax items
for a particular calendar month will be apportioned among the certificateholders
in proportion to the principal amount of certificates owned by them as of the
close of the last day of that month. As a result, a holder purchasing
certificates may be allocated tax items (which will affect its tax liability and
tax basis) attributable to periods before the actual transaction.
The use of this type of a monthly convention may not be permitted by
existing regulations. If a monthly convention is not allowed (or only applies to
transfers of less than all of the partner's interest), taxable income or losses
of the trust fund might be reallocated among the certificateholders. The trust
fund's method of allocation between transferors and transferees may be revised
to conform to a method permitted by future regulations.
Section 754 Election. If a certificateholder sells its certificates at a
profit (loss), the purchasing certificateholder will have a higher (lower) basis
in the certificates than had the selling certificateholder. The tax basis of the
trust fund's assets will not be adjusted to reflect that higher (or lower) basis
unless the trust fund were to file an election under Section 754 of the Code. In
order to avoid the administrative complexities that would be involved in keeping
accurate accounting records, as well as potentially onerous information
reporting requirements, the trust fund will not make that election. As a result,
certificateholders might be allocated a greater or lesser amount of trust fund
income than would be appropriate based on their own purchase price for
certificates.
Administrative Matters. The trustee is required to keep, or have kept,
complete and accurate books of the trust fund. These books will be maintained
for financial reporting and tax purposes on an accrual basis and the fiscal year
of the trust fund will be the calendar year. The trustee will file a partnership
information return (IRS Form 1065) with the IRS for each taxable year of the
trust fund and will report each certificateholder's allocable share of items of
trust fund income and expense to holders and the IRS on Schedule K-1. The trust
fund will provide the Schedule K-1 information to nominees that fail to provide
the trust fund with the information statement described below and these nominees
will be required to forward this information to the Beneficial Owners of the
certificates. Generally, holders must file tax returns that are consistent with
the information return filed by the trust fund or be subject to penalties unless
the holder notifies the IRS of all inconsistencies.
Under Section 6031 of the Code, any person that holds certificates as a
nominee at any time during a calendar year is required to furnish the trust fund
with a statement containing information on the nominee, the Beneficial Owners
and the certificates so held. This information includes
o the name, address and taxpayer identification number of the nominee,
and
o as to each Beneficial Owner
o the name, address and identification number of the person,
o whether the person is a United States Person, a tax-exempt entity
or a foreign government, an international organization, or any
wholly owned agency or instrumentality of either of the
foregoing, and
o information on certificates that were held, bought or sold on
behalf of the person throughout the year.
In addition, brokers and financial institutions that hold certificates
through a nominee are required to furnish directly to the trust fund information
as to themselves and their ownership of certificates. A clearing agency
registered under Section 17A of the Securities and Exchange Act of 1934, as
amended, is not required to furnish any information statement to the trust fund.
The information referred to above for any calendar year must be furnished to the
trust fund on or before the following January 31. Nominees, brokers and
financial institutions that fail to provide the trust fund with the information
described above may be subject to penalties.
The depositor will be designated as the tax matters partner in the related
Trust Agreement and, in that capacity, will be responsible for representing the
certificateholders in any dispute with the IRS. The Code provides
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for administrative examination of a partnership as if the partnership were a
separate and distinct taxpayer. Generally, the statute of limitations for
partnership items does not expire before three years after the date on which the
partnership information return is filed. Any adverse determination following an
audit of the return of the trust fund by the appropriate taxing authorities
could result in an adjustment of the returns of the certificateholders, and,
under certain circumstances, a certificateholder may be precluded from
separately litigating a proposed adjustment to the items of the trust fund. An
adjustment could also result in an audit of a certificateholder's returns and
adjustments of items not related to the income and losses of the trust fund.
Tax Consequences to Foreign Certificateholders. It is not clear whether the
trust fund would be considered to be engaged in a trade or business in the
United States for purposes of federal withholding taxes from the perspective of
Foreign Persons because there is no clear authority dealing with that issue
under facts substantially similar to those described herein. Although it is not
expected that the trust fund would be engaged in a trade or business in the
United States for these purposes, the trust fund will withhold as if it were so
engaged in order to protect the trust fund from possible adverse consequences of
a failure to withhold. The trust fund expects to withhold on the portion of its
taxable income that is allocable to certificateholders who are not Foreign
Persons pursuant to Section 1446 of the Code, as if this income were effectively
connected to a United States trade or business, at a rate of 35% for holders
that are Foreign Persons taxable as corporations and 35% (subject to sunset of
the 2001 Tax Act as described above) for all other holders who are Foreign
Persons. Subsequent adoption of Treasury Department regulations or the issuance
of other administrative pronouncements may require the trust fund to change its
withholding procedures. In determining a holder's withholding status, the trust
fund may rely on IRS Form W-8BEN, IRS Form W-9 or the holder's certification of
foreign status signed under penalties of perjury.
Each holder who is a Foreign Person might be required to file a United
States individual or corporate income tax return (including, in the case of a
corporation, the branch profits tax) on its share of the trust fund's income.
Each holder who is a Foreign Person must obtain a taxpayer identification number
from the IRS and submit that number to the trust fund on Form W-8BEN in order to
assure appropriate crediting of the taxes withheld. A holder who is a Foreign
Person generally would be entitled to file with the IRS a claim for refund on
taxes withheld by the trust fund taking the position that no taxes were due
because the trust fund was not engaged in a United States trade or business.
However, interest payments made (or accrued) to a certificateholder who is a
Foreign Person generally will be considered guaranteed payments to the extent
the payments are determined without regard to the income of the trust fund. If
these interest payments are properly characterized as guaranteed payments, then
the interest will not be considered "portfolio interest." As a result,
certificateholders will be subject to United States federal income tax and
withholding tax at a rate of 30%, unless reduced or eliminated pursuant to an
applicable treaty. In this case, a holder who is a Foreign Person would only be
entitled to claim a refund for that portion of the taxes in excess of the taxes
that should be withheld from the guaranteed payments.
Backup Withholding. Distributions on certificates, as well as payment of
proceeds from the sale of certificates, will be subject to the backup
withholding tax under Section 3406 of the Code if recipients fail to furnish
certain information, including their correct taxpayer identification numbers,
there has been a "notified payee underreporting" or recipients otherwise fail to
establish an exemption from such tax. Any amounts deducted and withheld from a
recipient would be allowed as a credit against such recipient's federal income
tax.
OTHER TAX CONSIDERATIONS
In addition to the federal income tax consequences described in "Federal
Income Tax Consequences," potential investors should consider the state, local
and foreign income tax consequences of the acquisition, ownership, and
disposition of the securities. State and local income tax law may differ
substantially from the corresponding federal law, and this discussion does not
purport to describe any aspect of the income tax laws of any state or locality.
Therefore, potential investors should consult their own tax advisors regarding
the various state, local and foreign tax consequences of an investment in the
securities.
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ERISA CONSIDERATIONS
ERISA imposes requirements on employee benefit plans (and on certain other
retirement plans and arrangements, including individual retirement accounts and
annuities, Keogh plans and collective investment funds and separate accounts in
which these plans, accounts or arrangements are invested) (collectively,
"Plans") subject to ERISA and on persons who are fiduciaries of those Plans.
Generally, ERISA applies to investments made by Plans. Among other things, ERISA
requires that the assets of Plans be held in trust and that the trustee, or
other duly authorized fiduciary, have exclusive authority and discretion to
manage and control the assets of those Plans. ERISA also imposes duties on
persons who are fiduciaries of Plans. Under ERISA, any person who exercises any
authority or control respecting the management or disposition of the assets of a
Plan is considered to be a fiduciary of the Plan (subject to exceptions not here
relevant). Some employee benefit plans, such as governmental plans (as defined
in ERISA Section 3(32)) and, if no election has been made under Section 410(d)
of the Code, church plans (as defined in ERISA Section 3(33)), are not subject
to ERISA requirements. Accordingly, assets of these plans may be invested in
securities without regard to the ERISA considerations described above and below,
subject to the provisions of applicable state law. Any governmental or church
plan which is qualified and exempt from taxation under Code Sections 401(a) and
501(a), however, is subject to the prohibited transaction rules set forth in
Code Section 503.
On November 13, 1986, the United States Department of Labor (the "DOL")
issued final regulations concerning the definition of what constitutes the
assets of a Plan (Labor Reg. Section 2510.3-101). Under this regulation, the
underlying assets and properties of corporations, partnerships and certain other
entities in which a Plan makes an "equity" investment could be deemed for
purposes of ERISA to be assets of the investing Plan in certain circumstances.
However, the regulation provides that, generally, the assets of a corporation,
partnership or other entity in which a Plan invests will not be deemed for
purposes of ERISA to be assets of the Plan if the equity interest acquired by
the investing Plan is a publicly-offered security. A publicly-offered security,
as defined in the Labor Reg. Section 2510.3-101, is, in general, a security that
is widely held, freely transferable and registered under the Securities and
Exchange Act of 1934, as amended. In the event that the securities are treated
as equity interests, no assurance can be given to potential Plan investors that
the securities will constitute "publicly-offered securities" within the meaning
of the DOL regulations.
In addition to the imposition of general fiduciary standards of investment
prudence and diversification, ERISA prohibits a broad range of transactions
involving Plan assets and persons ("Parties in Interest" or "Party in Interest")
having certain specified relationships to a Plan and imposes additional
prohibitions where Parties in Interest are fiduciaries of the Plan. Because
loans held by the trust fund may be deemed Plan assets of each Plan that
purchases securities, an investment in the securities by a Plan might be a
prohibited transaction under ERISA Sections 406 and 407 and subject to an excise
tax under Code Section 4975 unless a statutory or administrative exemption
applies.
The acquisition or holding of asset-backed notes by or on behalf of a Plan
could be considered to give rise to a prohibited transaction upon its
acquisition from a Party in Interest. However, a number of prohibited
transaction class exemptions (or "PTCEs") issued by the Department of Labor
might apply to exempt a prohibited transaction arising by virtue of the purchase
or holding of a note by or on behalf of, or with the assets of a Plan: PTCE
96-23 (class exemption for plan asset transactions determined by in-house asset
managers), PTCE 95-60 (class exemption for certain transactions involving
insurance company general accounts), PTCE 91-38 (class exemption for certain
transactions involving bank collective investment funds), PTCE 90-1 (class
exemption for certain transactions involving insurance company pooled separate
accounts), or PTCE 84-14 (class exemption for plan asset transactions determined
by independent qualified professional asset managers). Even if the conditions
specified in one or more of these exemptions are met, the scope of the relief
provided by these exemptions might or might not cover all the acts in connection
with an investment in the notes that might be construed as prohibited
transactions. There can be no assurance that any of these exemptions, or any
other exemption, will be available with respect to any particular transaction
involving the notes.
The DOL has granted certain underwriters individual administrative
exemptions (the "Underwriter Exemptions") from some of the prohibited
transaction rules of ERISA and the related excise tax provisions of Section 4975
of the Code with respect to the initial purchase, the holding and the subsequent
resale by Plans of
96
securities which are certificates in pass-through trusts that consist of
receivables, loans and other obligations that meet the conditions and
requirements of the Underwriter Exemptions. The Underwriter Exemptions, as
amended by the DOL on July 21, 1997, November 13, 2000 and August 22, 2002,
contain an expanded definition of "security" which includes a pass-through
certificate or trust certificate that represents a beneficial ownership interest
in the assets of an issuer which is a trust which entitles the holder to
pass-through payments of principal, interest and/or other payments. The
Underwriter Exemption also provides that the term "security" includes a debt
instrument that is issued by, and is an obligation of, an issuer with respect to
which the underwriter is either (i) the sole underwriter or the manager or
co-manager of the underwriting syndicate, or (ii) a selling or placement agent.
The Underwriter Exemptions contain an expanded definition of "trust" which means
an issuer which is a trust, including an owner trust, grantor trust or a REMIC
or FASIT which is operated as a trust.
While each Underwriter Exemption is an individual exemption separately
granted to a specific underwriter, the terms and conditions which generally
apply to the Underwriter Exemptions are substantially the following:
o the acquisition of the securities by a Plan is on terms (including the
price for the securities) that are at least as favorable to the Plan
as they would be in an arm's-length transaction with an unrelated
party;
o the rights and interest evidenced by the securities acquired by the
Plan are not subordinated to the rights and interests evidenced by
other securities of the same issuer, unless the securities are issued
in a "designated transaction," as defined below;
o the securities acquired by the Plan have received a rating at the time
of the acquisition that is one of the three (or in the case of
"designated transactions," four) highest generic rating categories
from S&P, Moody's or Fitch Ratings ("Fitch") or any successors
thereto;
o the trustee must not be an affiliate of any other member of the
Restricted Group, as defined below, other than an underwriter;
o the sum of all payments made to and retained by the underwriters in
connection with the distribution or placement of the securities
represents not more than reasonable compensation for underwriting or
placing the securities; the sum of all payments made to and retained
by the pool sponsor pursuant to the assignment of the obligations (or
interests therein) to the issuer represents not more than the fair
market value of the loans; the sum of all payments made to and
retained by the servicer represents not more than reasonable
compensation for that person's services under the agreement pursuant
to which the obligations (or interests therein) are pooled and
reimbursements of that person's reasonable expenses in connection
therewith;
o the Plan investing in the securities is an "accredited investor" as
defined in Rule 501(a)(1) of Regulation D of the SEC under the
Securities Act of 1933, as amended; and
o in the event that the obligations used to fund an issuer have not been
transferred to the issuer on the closing date, additional obligations
(as specified in the Underwriter Exemptions) may be transferred to the
issuer during the Funding Period in exchange for amounts credited to
the pre-funding account, provided that the Pre-Funded Amount does not
exceed 25% of the initial aggregate principal amount of the securities
and provided that other conditions set forth in the Underwriter
Exemptions are satisfied.
In a case where the securities are backed by Trust Fund Assets that are
fully secured one-to-four family residential, home equity, manufactured housing,
multi-family, mixed use, cooperative or commercial loans which are described in
the Underwriter Exemptions as "designated transactions," the Underwriter
Exemptions permit the securities issued by the trust fund in such transactions
to be rated in one of the highest four rating categories by S&P, Moody's or
Fitch and/or to be subordinated. Trust Fund Assets will be considered to be
"designated transactions" unless otherwise specified in the related prospectus
supplement.
In addition, one subset of designated transactions, residential
(one-to-four family) and home equity loans, may be less than fully secured,
provided that:
97
o the rights and interests evidenced by the securities issued in
such transactions are not subordinated to the rights and
interests evidenced by securities of the same trust fund;
o securities issued in such transactions that are acquired by the
Plan have received a rating from S&P, Moody's or Fitch at the
time of such acquisition that is in one of the two highest
generic ratings categories; and
o at the time of issuance of the securities in such transactions,
each loan included in the corpus or assets of the related trust
fund has a loan-to-value ratio or combined loan-to-value ratio
that does not exceed 125%.
Moreover, the Underwriter Exemptions generally provide relief from
self-dealing/conflict of interest prohibited transactions that may occur when
the Plan fiduciary causes a Plan to acquire securities as to which the fiduciary
(or its affiliate) is an obligor on the receivables contained in the issuer
provided that, among other requirements:
o in the case of an acquisition in connection with the initial issuance
of securities, at least 50% of each class of securities in which Plans
have invested is acquired by persons independent of the Restricted
Group and at least 50% of the aggregate interest in the issuer is
acquired by persons independent of the Restricted Group;
o the fiduciary (or its affiliate) is an obligor with respect to 5% or
less of the fair market value of the obligations or receivables
contained in the issuer;
o the Plan's investment in each class of securities does not exceed 25%
of all of the securities of that class outstanding at the time of the
acquisition; and
o immediately after the acquisition, no more than 25% of the assets of
the Plan with respect to which the person is a fiduciary is invested
in securities representing an interest in an issuer containing assets
sold or serviced by the same entity.
The Underwriter Exemptions do not apply to Plans sponsored by the depositor, the
related Underwriter, the trustee, the servicer, any insurer for the loans, any
obligor for more than 5% of the fair market value of obligations or receivables
contained in the issuer, or any affiliate of these parties (the "Restricted
Group").
The prospectus supplement for each series of securities will indicate the
classes of securities, if any, offered thereby as to which it is expected that
an Underwriter Exemption will apply.
In the event that securities do not meet the requirements of the
Underwriter Exemptions solely because they are subordinate securities or fail to
meet a minimum rating requirement under the Underwriter Exemptions, certain
Plans may be eligible to purchase certificates (but not asset-backed notes)
pursuant to PTCE 95-60 which permits insurance company general accounts, as
defined in PTCE 95-60, to purchase such certificates if they otherwise meet all
of the other requirements of the Underwriter Exemptions.
Any Plan fiduciary who proposes to cause a Plan to purchase securities
should consult with its counsel concerning the impact of ERISA and the Code, the
applicability of the Underwriter Exemptions, and the potential consequences in
their specific circumstances, prior to making this investment. Moreover, each
Plan fiduciary should determine whether under the general fiduciary standards of
investment procedure and diversification an investment in the securities is
appropriate for the Plan, taking into account the overall investment policy of
the Plan and the composition of the Plan's investment portfolio.
LEGAL INVESTMENT
The related prospectus supplement for each series of securities will
specify which, if any, of the classes of securities offered thereby constitute
`mortgage related securities" for purposes of the Secondary Mortgage Market
Enhancement Act of 1984, as amended ("SMMEA"). Classes of securities that
qualify as "mortgage related securities" will be legal investments for persons,
trusts, corporations, partnerships, associations, business trusts, and
98
business entities (including depository institutions, life insurance companies
and pension funds) created pursuant to or existing under the laws of the United
States or of any state (including the District of Columbia and Puerto Rico)
whose authorized investments are subject to state regulations to the same extent
as, under applicable law, obligations issued by or guaranteed as to principal
and interest by the United States or any of those entities. Under SMMEA, if a
state enacts legislation prior to October 4, 1991 specifically limiting the
legal investment authority of any of those entities relating to "mortgage
related securities," securities will constitute legal investments for entities
subject to the legislation only to the extent provided therein. Approximately
twenty-one states adopted this legislation prior to the October 4, 1991
deadline. SMMEA provides, however, that in no event will the enactment of any
legislation affect the validity of any contractual commitment to purchase, hold
or invest in securities, or require the sale or other disposition of securities,
so long as the contractual commitment was made or the securities were acquired
prior to the enactment of the legislation.
SMMEA also amended the legal investment authority of federally-chartered
depository institutions as follows: federal savings and loan associations and
federal savings banks may invest in, sell or otherwise deal in securities
without limitations as to the percentage of their assets represented thereby,
federal credit unions may invest in mortgage related securities, and national
banks may purchase securities for their own account without regard to the
limitations generally applicable to investment securities set forth in 12 U.S.C.
24 (Seventh), subject in each case to any regulations prescribed by the
applicable federal authority. In this connection, federal credit unions should
review the National Credit Union Administration ("NCUA") Letter to Credit Unions
No. 96, as modified by Letter to Credit Unions No. 108, which includes
guidelines to assist federal credit unions in making investment decisions for
mortgage related securities and the NCUA's regulation "Investment and Deposit
Activities" (12 C.F.R. Part 703), which sets forth restrictions on investment by
federal credit unions in mortgage related securities (in each case whether or
not the class of securities under consideration for purchase constituted a
"mortgage related security").
All depository institutions considering an investment in the securities
(whether or not the class of securities under consideration for purchase
constitutes a "mortgage related security") should review the Federal Financial
Institutions Examination Council's Supervisory Policy Statement on the
Securities Activities (to the extent adopted by their respective regulators)
(the "Policy Statement") setting forth, in relevant part, securities trading and
sales practices deemed unsuitable for an institution's investment portfolio, and
guidelines for (and restrictions on) investing in mortgage derivative products,
including "mortgage related securities," which are "high-risk mortgage
securities" as defined in the Policy Statement. According to the Policy
Statement, these "high-risk mortgage securities" include securities not entitled
to distributions allocated to principal or interest, or Subordinated Securities.
Under the Policy Statement, it is the responsibility of each depository
institution to determine, prior to purchase (and at stated intervals
thereafter), whether a particular mortgage derivative product is a "high-risk
mortgage security," and whether the purchase (or retention) of this type of
product would be consistent with the Policy Statement.
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines or agreements generally
governing investments made by a particular investor, including, but not limited
to "prudent investor" provisions, percentage-of-assets limits and provisions
which may restrict or prohibit investment in securities which are not "interest
bearing" or "income paying," or in securities that are issued in book-entry
form.
There may be other restrictions on the ability of some types of investors,
including depository institutions, either to purchase securities or to purchase
securities representing more than a specified percentage of the investor's
assets. Investors should consult their own legal advisors in determining whether
and to what extent the securities constitute legal investments for those
investors.
METHOD OF DISTRIBUTION
Securities are being offered hereby in series from time to time (each
series evidencing or relating to a different trust fund) through any of the
following methods:
o by negotiated firm commitment underwriting and public reoffering by
underwriters;
99
o by agency placements through one or more placement agents primarily
with institutional investors and dealers; and
o by placement directly by the depositor with institutional investors.
A prospectus supplement will be prepared for each series which will
describe the method of offering being used for that series and will set forth
the identity of any underwriters thereof and either the price at which the
series is being offered, the nature and amount of any underwriting discounts or
additional compensation to the underwriters and the proceeds of the offering to
the depositor, or the method by which the price at which the underwriters will
sell the securities will be determined. Each prospectus supplement for an
underwritten offering will also contain information regarding the nature of the
underwriters' obligations, any material relationship between the depositor and
any underwriter and, where appropriate, information regarding any discounts or
concessions to be allowed or reallowed to dealers or others and any arrangements
to stabilize the market for the securities so offered. In firm commitment
underwritten offerings, the underwriters will be obligated to purchase all of
the securities of that series if any securities of that type are purchased.
Securities may be acquired by the underwriters for their own accounts and may be
resold from time to time in one or more transactions, including negotiated
transactions, at a fixed public offering price or at varying prices determined
at the time of sale.
Underwriters and agents may be entitled under agreements entered into with
the depositor to indemnification by the depositor against specified civil
liabilities, including liabilities under the Securities Act of 1933, as amended,
or to contribution with respect to payments which the underwriters or agents may
be required to make in respect thereof.
If a series is offered other than through underwriters, the prospectus
supplement relating thereto will contain information regarding the nature of the
offering and any agreements to be entered into between the depositor and
purchasers of securities of that series.
LEGAL MATTERS
Certain legal matters relating to the securities of each series, including
specific federal income tax consequences with respect thereto, will be passed
upon for the depositor by Stradley, Ronon, Stevens & Young, LLP, 2600 One
Commerce Square, Philadelphia, PA 19103.
FINANCIAL INFORMATION
A new trust fund will be formed with respect to each series of securities
and no trust fund will engage in any business activities or have any assets or
obligations prior to the issuance of the related series of securities.
Accordingly, no financial statements with respect to any trust fund will be
included in this prospectus or in the related prospectus supplement.
RATING
It is a condition to the issuance of the securities of each series offered
hereby and by the related prospectus supplement that they shall have been rated
in one of the four highest rating categories by the nationally recognized
statistical rating agency or agencies (each, a "Rating Agency") specified in the
related prospectus supplement.
Any rating of the securities offered hereby would be based on, among other
things, the adequacy of the value of the Trust Fund Assets and any credit
enhancement of that class and will reflect that Rating Agency's assessment
solely of the likelihood that holders of a class of securities of that class
will receive payments to which those securityholders are entitled under the
related Agreement. The rating will not constitute an assessment of the
likelihood that principal prepayments on the related loans will be made, the
degree to which the rate of prepayments might differ from that originally
anticipated or the likelihood of early optional termination of the series of
securities. The rating should not be deemed a recommendation to purchase, hold
or sell securities, inasmuch as it does not address market price or suitability
for a particular investor. Each security rating should be evaluated
independently of any other security rating. The rating will not address the
possibility that prepayment at higher or lower rates than anticipated by an
investor may cause the investor to experience a lower than anticipated yield or
that an investor
100
purchasing a security at a significant premium might fail to recoup its initial
investment under certain prepayment scenarios.
There is also no assurance that any rating will remain in effect for any
given period of time or that it may not be lowered or withdrawn entirely by the
Rating Agency in the future if in its judgment circumstances in the future so
warrant. In addition to being lowered or withdrawn due to any erosion in the
adequacy of the value of the Trust Fund Assets or any credit enhancement of a
series, the rating might also be lowered or withdrawn among other reasons,
because of an adverse change in the financial or other condition of a credit
enhancement provider or a change in the rating of that credit enhancement
provider's long term debt.
The amount, type and nature of credit enhancement, if any, established for
a series of securities will be determined on the basis of criteria established
by each Rating Agency rating classes of that series. These criteria are
sometimes based upon an actuarial analysis of the behavior of mortgage loans in
a larger group. This analysis is often the basis upon which each Rating Agency
determines the amount of credit enhancement required for each class. There can
be no assurance that the historical data supporting any actuarial analysis will
accurately reflect future experience nor any assurance that the data derived
from a large pool of mortgage loans accurately predicts the delinquency,
foreclosure or loss experience of any particular pool of loans. No assurance can
be given that values of any mortgaged properties have remained or will remain at
their levels on the respective dates of origination of the related loans. If the
residential real estate markets should experience an overall decline in property
values resulting in the outstanding principal balances of the loans in a
particular trust fund and any secondary financing on the related mortgaged
properties becoming equal to or greater than the value of the mortgaged
properties, the rates of delinquencies, foreclosures and losses could be higher
than those now generally experienced in the mortgage lending industry. In
addition, adverse economic conditions (which may or may not affect real property
values) may affect the timely payment by mortgagors of scheduled payments of
principal and interest on the loans and, accordingly, the rates of
delinquencies, foreclosures and losses of any trust fund. To the extent that
these losses are not covered by credit enhancement, the losses will be borne, at
least in part, by the holders of one or more classes of the securities of the
related series.
AVAILABLE INFORMATION
The depositor has filed with the SEC a Registration Statement under the
Securities Act of 1933, as amended, covering the securities. This prospectus,
which forms a part of the Registration Statement, and the prospectus supplement
relating to each series of certificates contain summaries of the material terms
of the documents referred to in this prospectus and in the prospectus
supplement, but do not contain all of the information in the Registration
Statement pursuant to the rules and regulations of the SEC. For further
information, reference is made to the Registration Statement and its exhibits.
The Registration Statement and exhibits can be inspected and copied at
prescribed rates at the public reference facilities maintained by the SEC at its
Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549, and at
its Regional Offices located as follows: Chicago Regional Office, 500 West
Madison Street, Chicago, Illinois 60661; and New York Regional Office, 233
Broadway, New York, New York 10279. You may obtain information on the operation
of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC
maintains an internet website that contains reports, information statements and
other information regarding the registrants that file electronically with the
SEC, including the depositor. The address of that internet website is
http://www.sec.gov.
This prospectus and any applicable prospectus supplement do not constitute
an offer to sell or a solicitation of an offer to buy any securities other than
the securities offered by this prospectus and the prospectus supplement nor an
offer of the securities to any person in any state or other jurisdiction in
which the offer would be unlawful.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents subsequently filed by or on behalf of the trust fund referred
to in the accompanying prospectus supplement with the SEC pursuant to Section
13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as amended,
after the date of this prospectus and prior to the termination of any offering
of the securities issued by the trust fund shall be deemed to be incorporated by
reference in this prospectus and to be a part of this prospectus from the date
of the filing of these documents. Any statement contained in a document
incorporated or
101
deemed to be incorporated by reference herein shall be deemed to be modified or
superseded for all purposes of this prospectus to the extent that a statement
contained herein (or in the accompanying prospectus supplement) or in any other
subsequently filed document which also is or is deemed to be incorporated by
reference modifies or replaces that statement. Any statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this prospectus. Neither the depositor nor the servicer for
any series intends to file with the SEC periodic reports for the related trust
fund following completion of the reporting period required by Rule 15d-1 or
Regulation 15D under the Securities and Exchange Act of 1934, as amended.
The trustee or any other entity specified in the related prospectus
supplement on behalf of any trust fund will provide without charge to each
person to whom this prospectus is delivered, on the written or oral request of
that person, a copy of any or all of the documents referred to above that have
been or may be incorporated by reference in this prospectus (not including
exhibits to the information that is incorporated by reference unless the
exhibits are specifically incorporated by reference into the information that
this prospectus incorporates). Additionally, the trustee will provide a copy of
the Agreement (without exhibits) relating to any series without charge upon
written request of a holder of record of a security of that series. These
requests should be directed to the corporate trust office of the trustee or the
address of the other entity specified in the accompanying prospectus supplement.
Included in the accompanying prospectus supplement is the name, address,
telephone number, and, if available, facsimile number of the office or contact
person at the corporate trust office of the trustee or that other entity.
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INDEX OF DEFINED TERMS
2001 Tax Act.......................................87 Loan Indices.......................................35
2003 Tax Act.......................................87 Mark-to-Market Regulations.........................81
Accrual Securities.................................27 Master Servicing Agreement.........................13
Agreement..........................................13 Mixed Use Properties...............................16
AIV................................................20 Moody's............................................42
Amortizable Bond Premium Regulations...............76 Mortgage...........................................47
APR................................................16 NCUA...............................................99
Available Funds....................................26 OID................................................71
Bankruptcy Code....................................40 OID Regulations....................................71
Beneficial Owners..................................35 Parties in Interest................................96
BIF................................................48 Party in Interest..................................96
CERCLA.............................................61 Pass-Through Certificates..........................85
Claimable Amount...................................69 Pass-Through Rate..................................27
Clearstream, Luxembourg............................35 Pay-Through Security...............................72
Collateral Value...................................17 Percentage Interests...............................56
Combined Loan-to-Value Ratio.......................16 Permitted Investments..............................41
Cut-off Date Principal Balance.....................25 Plans..............................................96
Debt Securities....................................71 PNA................................................18
Debt-to-Income Ratio...............................19 Policy Statement...................................99
Disqualified Organization..........................80 Pool Insurer.......................................43
DOL................................................96 Pooling and Servicing Agreement....................13
DTC................................................35 Popular............................................18
EPA................................................61 Pre-Funded Amount..................................50
Equity One.........................................14 Prepayment Assumption..............................72
Equity One Standards...............................18 Prime Rate.........................................35
Euroclear..........................................35 Principal Prepayments..............................27
Euroclear Operator.................................37 Property Improvement Loans.........................66
Excess Servicing...................................86 PTCEs..............................................96
Fannie Mae.........................................55 Purchase Agreement.................................13
FASIT..............................................26 Purchase Price.....................................24
Federal Reserve....................................18 Rating Agency.....................................100
FHA................................................14 Ratio Strip Securities.............................86
FHLMC..............................................54 RCRA...............................................62
Financial Intermediary.............................36 Record Date........................................26
Fitch..............................................97 Refinance Loan.....................................17
FNMA...............................................55 Regular Interest Securities........................71
Foreign Person.....................................88 Relief Act.........................................65
Freddie Mac........................................54 REMIC..............................................26
Full Doc...........................................20 Residual Interest Security.........................78
Funding Period.....................................50 Restricted Group...................................98
Garn-St Germain Act................................64 Retained Interest..................................25
HUD................................................66 Rules..............................................36
Indenture..........................................24 S&P................................................42
Insurance Proceeds.................................49 SAIF...............................................48
Insured Expenses...................................49 SEC................................................14
Interest Weighted Securities.......................73 Secured Creditor Exclusion.........................62
IRS................................................72 Securities Index...................................35
L/C Bank...........................................40 Security Account...................................48
L/C Percentage.....................................40 Senior Securities..................................39
Liquidation Expenses...............................49 Servicing Fee......................................85
Liquidation Proceeds...............................49 Short-Term Note....................................90
Lite Doc...........................................20 SI ................................................20
103
Single Family Properties...........................15 Title I Program....................................66
SMMEA..............................................98 Title V............................................65
Stripped Securities................................85 Treasury Index.....................................34
Subordinated Securities............................39 Trust Agreement....................................13
Subsequent Loans...................................50 Trust Fund Assets..................................13
Terms and Conditions...............................38 Underwriter Exemptions.............................96
Thrift Institutions................................80 United States Person...............................88
Tiered REMICs......................................77 VA.................................................14
TIN................................................88 Variable Rate Debt Securities......................74
Title I Loans......................................66
104
Equity One Mortgage Pass-Through Trust 2004-2
$700,000,000 Mortgage Pass-Through Certificates, Series 2004-2
Equity One ABS, Inc.
as Depositor
Equity One, Inc.
as Servicer
EQUITY ONE
==========
a Popular, Inc. Company
---------------------------------
PROSPECTUS SUPPLEMENT
Dated April 29, 2004
---------------------------------
Wachovia Securities RBS Greenwich Capital
(Joint Lead Managers and Joint Book Runners)
Friedman Billings Ramsey
(Co-Manager)