PROSPECTUS SUPPLEMENT DATED DECEMBER 15, 2000 (TO PROSPECTUS DATED MAY 19, 2000)
$460,000,000
[GRAPHIC OMITTED] MORTGAGE LOAN ASSET BACKED CERTIFICATES,
SAXON SERIES 2000-4
SAXON ASSET SECURITIES TRUST 2000-4
PRINCIPAL AND INTEREST PAYABLE MONTHLY, BEGINNING JANUARY 25, 2001
SAXON MORTGAGE, INC. SAXON ASSET SECURITIES COMPANY
SELLER AND MASTER SERVICER DEPOSITOR
The trust will issue:
o eight classes of senior certificates; and
o ten classes of subordinated certificates.
For a description of the 14 classes of certificates offered by this
prospectus supplement, see "Offered Certificates" on page S-4.
----------------
The assets of the trust will include two groups of mortgage loans
secured by one-to-four family residential properties. One group will consist of
fixed rate, first or second mortgage loans. The other group will consist of
adjustable rate, first mortgage loans. The trust will also hold cash for the
purchase of subsequent mortgage loans on or before March 20, 2001.
The mortgage loans were or will be originated or acquired in accordance
with underwriting guidelines that are not as restrictive as federal agency
guidelines. As a result, the mortgage loans may experience higher rates of
delinquency, foreclosure and bankruptcy than if they had been underwritten in
accordance with more restrictive standards.
----------------
AN INVESTMENT IN THE OFFERED CERTIFICATES, AND PARTICULARLY THE CLASS
A-IO CERTIFICATES AND THE CLASSES OF SUBORDINATE CERTIFICATES, INVOLVES
SIGNIFICANT RISKS. YOU SHOULD CAREFULLY CONSIDER THE RISK FACTORS BEGINNING ON
PAGE S-10 OF THIS PROSPECTUS SUPPLEMENT AND PAGE 3 OF THE PROSPECTUS.
----------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or passed upon the
accuracy or adequacy of this prospectus supplement or prospectus. Any
representation to the contrary is a criminal offense.
The underwriters will offer the certificates offered by this prospectus
supplement from time to time at varying prices to be determined at the time of
sale. The certificates will be available for delivery to investors in book-entry
form through the facilities of The Depository Trust Company, Clearstream and the
Euroclear System on or about December 20, 2000.
CREDIT SUISSE FIRST BOSTON
BANC OF AMERICA SECURITIES LLC
CHASE SECURITIES INC.
GREENWICH CAPITAL MARKETS, INC.
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
You should rely only on the information contained or incorporated by
reference in this prospectus supplement and the accompanying prospectus. No one
has been authorized to provide you with different information.
The offered certificates are not being offered in any state where the
offer is not permitted.
The depositor does not claim the accuracy of the information in this
prospectus supplement and the accompanying prospectus as of any date other than
the dates stated on their cover pages.
Dealers will deliver a prospectus supplement and prospectus when acting
as underwriters of the certificates and with respect to their unsold allotments
or subscriptions. In addition, all dealers selling the offered certificates,
whether or not participating in this offering, may be required to deliver a
prospectus supplement and prospectus until 90 days after the date of the
prospectus supplement.
<PAGE>
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED
IN THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS
The offered certificates are described in two separate documents that
progressively provide more detail:
o the accompanying prospectus, which provides general
information, some of which may not apply to a particular
series of certificates, and
o this prospectus supplement, which describes the specific terms
of your certificates.
This prospectus supplement does not contain complete information about
the offering of these securities. We suggest that you read both this prospectus
supplement and the prospectus in full. We cannot sell these securities to you
unless you have received both this prospectus supplement and the prospectus.
THIS PROSPECTUS SUPPLEMENT DESCRIBES THE TERMS OF THE OFFERED
CERTIFICATES AND THE MORTGAGE LOANS IN GREATER DETAIL THAN OUR PROSPECTUS, AND
MAY PROVIDE INFORMATION THAT DIFFERS FROM OUR PROSPECTUS. IF THE DESCRIPTION OF
THE TERMS OF YOUR CERTIFICATES VARIES BETWEEN THIS PROSPECTUS SUPPLEMENT AND THE
PROSPECTUS, YOU SHOULD RELY ON THE INFORMATION IN THIS PROSPECTUS SUPPLEMENT.
Investors can find a glossary of certain significant defined terms used
in this prospectus supplement beginning on page S-78.
Saxon Asset Securities Company's principal offices are located at 4880
Cox Road, Glen Allen, Virginia 23060 and its phone number is (804) 967-7400.
---------------
This prospectus supplement and the accompanying prospectus contain
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933. Specifically, forward-looking statements, together with related
qualifying language and assumptions, are found in the material, including
tables, under the headings "Risk Factors" and "Prepayment and Yield
Considerations." Forward-looking statements are also found in other places
throughout this prospectus supplement and the prospectus, and may be identified
by accompanying language, including "expects," "intends," "anticipates,"
"estimates" or analogous expressions, or by qualifying language or assumptions.
These statements involve known and unknown risks, uncertainties and other
important factors that could cause the actual results or performance to differ
materially from the forward-looking statements. These risks, uncertainties and
other factors include, among others, general economic and business conditions,
competition, changes in political, social and economic conditions, regulatory
initiatives and compliance with governmental regulations, customer preference
and various other matters, many of which are beyond the depositor's control.
These forward-looking statements speak only as of the date of this prospectus
supplement. The depositor expressly disclaims any obligation or undertaking to
distribute any updates or revisions to any forward-looking statements to reflect
changes in the depositor's expectations with regard to those statements or any
change in events, conditions or circumstances on which any forward-looking
statement is based.
S-2
<PAGE>
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
Offered Certificates............................S-4
Summary of Terms................................S-5
Risk Factors...................................S-10
Recent Developments............................S-16
The Mortgage Loan Pool.........................S-16
Prepayment and Yield
Considerations...............................S-37
Description of Offered Certificates............S-51
The Trust Agreement............................S-63
Material Federal Income Tax
Consequences.................................S-68
ERISA Considerations...........................S-69
Ratings........................................S-74
Legal Investment Considerations................S-75
Use of Proceeds................................S-75
Legal Matters..................................S-76
Underwriting...................................S-76
Glossary.......................................S-78
Annex I; Scheduled Notional
Amounts......................................S-89
PROSPECTUS
Important Notice About Information
Presented in this Prospectus and
the Prospectus Supplement.......................2
Risk Factors......................................3
Description of the Certificates...................9
Registration of the Offered
Securities.....................................10
Maturity, Prepayment and Yield
Considerations.................................22
The Trusts.......................................25
Credit Enhancement...............................34
Origination of Mortgage Loans....................41
Servicing of Mortgage Loans......................43
The Agreement....................................53
Material Legal Aspects of
Mortgage Loans.................................57
The Depositor....................................68
Use of Proceeds..................................69
Material Federal Income Tax
Consequences...................................69
State and Local Tax
Considerations................................104
ERISA Considerations............................105
Legal Investment Matters........................108
Plan of Distribution............................109
Available Information...........................110
Incorporation of Certain Documents
by Reference..................................111
S-3
<PAGE>
OFFERED CERTIFICATES
The trust will issue the following classes of certificates that are
being offered by this prospectus supplement and the accompanying prospectus.
<TABLE>
<CAPTION>
Initial Final
Certificate Annual Scheduled
Principal Pass Through Ratings Distribution
Class Balance Rates Moody's/Fitch Date(3) Type
----- ------- ----- ------------- ------- ----
GROUP I - FIXED RATE MORTGAGE LOANS
<S> <C> <C> <C> <C> <C>
AF-1(1) $ 44,600,000 7.07% Aaa/AAA 11/25/15 Senior
AF-2(1) 37,000,000 6.72% Aaa/AAA 11/25/15 Senior
AF-3(1) 16,600,000 6.78% Aaa/AAA 1/25/16 Senior
AF-4(1) 28,800,000 7.03% Aaa/AAA 1/25/23 Senior
AF-5(1) 14,350,000 7.34% Aaa/AAA 1/25/32 Senior
AF-6(1) 15,700,000 6.92% Aaa/AAA 11/25/15 Senior
MF-1(1) 10,800,000 7.63% Aa2/AA 1/25/32 Subordinate
MF-2(1) 7,650,000 8.08% A2/A 1/25/32 Subordinate
BF-1(1) 4,500,000 8.61% Baa2/BBB 1/25/32 Subordinate
Spreads over
One Month
LIBOR
------------
GROUP II - ADJUSTABLE RATE MORTGAGE LOANS
AV-1(1)(2) $ 233,100,000 0.24% Aaa/AAA 1/25/32 Senior
MV-1(1)(2) 22,400,000 0.62% Aa2/AA 1/25/32 Subordinate
MV-2(1) 15,400,000 1.10% A2/A 1/25/32 Subordinate
BV-1(1) 9,100,000 1.95% Baa2/BBB 1/25/32 Subordinate
Annual
Pass Through
Rate
------------
INTEREST ONLY CERTIFICATES
A-IO(4) 6.75% Aaa/AAA 7/25/03 Senior IO
</TABLE>
--------------------------------------
(1) The pass through rates are subject to a cap. After the clean-up call
date, the pass through rates on the class AF-5, class MF-1 and class
MF-2 certificates step up by 0.50% and the spread over one month LIBOR
for the class AV-1, class MV-1, class MV-2 and class BV-1 certificates
increases to 0.48%, 0.93%, 1.65% and 2.925%, respectively.
(2) "Mortgage related security" for SMMEA purposes upon termination of the
funding period relating to the pre-funding account.
(3) Calculated as described herein under "Prepayment and Yield
Considerations." The actual final distribution date of the offered
certificates may be substantially earlier or later than the final
scheduled distribution date.
(4) This class will not receive any principal payments but will consist of
two payment components, the A-IO-I component and the A-IO-II component,
as further described in this prospectus supplement.
S-4
<PAGE>
SUMMARY OF TERMS
This summary highlights selected information from this document. It
does not contain all the information that you need to consider in making your
investment decision. To understand the terms of the offered certificates and the
characteristics of the underlying mortgage loans, read carefully the entire
prospectus supplement and the accompanying prospectus.
o This summary provides an overview of structural provisions,
calculations, cash flows and other information to aid your
understanding and is qualified by the full description of the
structural provisions, calculations, cash flows and other
information in this prospectus supplement and the accompanying
prospectus.
THE TRUST
The issuer of the certificates is Saxon Asset Securities Trust 2000-4. The trust
was created for the sole purpose of issuing the certificates. The certificates
represent individual ownership interests in the trust and are not the obligation
of any other entity. Neither the certificates nor the mortgage loans will be
insured by any governmental agency or instrumentality.
SELLER
Saxon Mortgage, Inc., the parent of the depositor.
DEPOSITOR
Saxon Asset Securities Company
MASTER SERVICER
Saxon Mortgage, Inc.
SERVICER
Meritech Mortgage Services, Inc., an affiliate of the seller and the depositor.
TRUSTEE AND CALCULATION AGENT
Bankers Trust Company
CUT OFF DATE
As of the close of business on December 1, 2000 for the mortgage loans to be
sold to the trust on the closing date.
CLOSING DATE
On or about December 20, 2000.
OFFERED CERTIFICATES
The offered certificates include the group I certificates, the group II
certificates and the class A-IO certificates specified on page S-4. In general,
the trust will distribute collections on mortgage loans in group I to the group
I certificates and collections on mortgage loans in group II to the group II
certificates. However, collections of interest on both group I and group II
mortgage loans will be distributed to the class A-IO certificates in the manner
described herein.
DISTRIBUTION DATE
The trust will make distributions on the 25th day of each month, or if that day
is not a business day, the next business day. The first distribution date will
be January 25, 2001.
PASS THROUGH RATES
o Pass through rates on the group I certificates and on the class A-IO
certificates are fixed and are shown on page S-4. The pass through rates
for the group I certificates will be capped as described in this prospectus
supplement.
o Whenever a pass through rate for a group I certificate is capped, any
shortfall in interest resulting from the application of the cap will be
carried over to subsequent distribution dates and paid from available
pledged prepayment penalty cashflow received in respect of group I mortgage
loans as more fully described in this prospectus supplement.
S-5
<PAGE>
o For the group I certificates and the class A-IO certificates, the amount of
interest distributable on each distribution date is the interest accrued
during the month immediately preceding the month in which that distribution
date occurs. All calculations are made on the basis of a 360-day year
consisting of twelve 30 day months (30/360).
o Pass through rates on the group II certificates adjust on each distribution
date, generally to one month LIBOR plus the spread shown on page S-4 for
each class.
o Pass through rates on any distribution date for the group II certificates
will be subject to a cap equal to the rate that results generally from
dividing net scheduled interest for the mortgage loans in group II minus
the amount of interest distributable in respect of the A-IO-II component
for the related distribution date by the outstanding principal balances of
the group II certificates.
o Whenever a pass through rate for a group II certificate is capped, any
shortfall in interest on that certificate resulting from the application of
the cap will be carried over to subsequent distribution dates and paid from
available pledged prepayment penalty cashflow and excess interest in
respect of group II mortgage loans as described in this prospectus
supplement.
o The trust will keep track of carryover amounts on both groups of offered
certificates. If, before a class is retired, funds are available for that
purpose, the trust will distribute an amount equal to the carryover amount
for that class.
o For the group II certificates interest accrues on each distribution date
from and including the prior distribution date (or from the closing date,
in the case of the first distribution date) to and excluding that
distribution date. All calculations are made on the basis of an actual
number of days and a year of 360 days (actual/360).
o The class A-IO certificates will not receive any principal payments but
will consist of two payment components, the A-IO-I component and the
A-IO-II component.
INTEREST DISTRIBUTIONS
On each distribution date, the trust will apply interest collected from a group
to make distributions in the following order:
o all interest due to the related class A certificates and with respect to
the related component of the class A-IO certificates, pro rata if funds are
not sufficient to distribute all interest due, at the applicable pass
through rates;
o in order of seniority, all interest due to the other related classes at the
applicable pass through rates; and
o any remaining interest as described under "Excess Interest and Pledged
Prepayment Penalty Cashflow" below.
EXCESS INTEREST AND PLEDGED PREPAYMENT PENALTY CASHFLOW
On each distribution date, the trust will generally apply a specified percentage
of prepayment penalties collected from a group to pay any shortfall in interest
on certificates in the group resulting from the application of a cap.
S-6
<PAGE>
On each distribution date, the trust will generally apply any pledged prepayment
penalties remaining after the payment of interest shortfalls resulting from the
application of a cap as described above and any excess interest from a group in
the following order:
o to distribute an extra principal distribution amount on the related
certificates, but only to the limited extent described in this prospectus
supplement;
o to distribute to the related subordinate certificates, in order of
seniority, the amount of unpaid interest for prior distribution dates
(excluding any carryover amount for a group) on the related certificates
and amounts in repayment of any realized losses previously allocated to
those certificates;
o in the case of group II, in order of seniority, to distribute any carryover
amount;
o to distribute to the certificates of the other group amounts needed to
cover realized losses not otherwise repaid on those certificates; and
o to distribute any remainder to the class C and class R certificates.
PRINCIPAL DISTRIBUTIONS
On each distribution date, the trust will apply principal collected for a group
to make distributions on the related certificates (other than the class A-IO
certificates) as described under "Description of the Offered
Certificates--Distributions" on page S-52. Initially, principal in respect of
the mortgage loans in a group will generally be distributed exclusively to the
class A certificates of the group until their principal balances have been
reduced to specified levels. At that time, principal distributions not required
to maintain the principal balances of the class A certificates at the required
levels will be distributed to the subordinate classes (provided a Trigger Event
has not occurred).
CREDIT ENHANCEMENT
Credit enhancement refers to various mechanisms that are intended to protect
owners of classes of certificates against losses due to defaults on the mortgage
loans.
The certificates have the benefit of the following types of credit enhancement:
o the use of excess interest and a specified portion of pledged prepayment
penalties, if any, from a group to distribute principal to a limited extent
to create over-collateralization, to pay in limited circumstances
shortfalls in payments due to certificates of the related group and to
reimburse the other group for losses;
o the subordination of distributions on the subordinate certificates to the
required distributions on the more senior certificates;
o the allocation of realized losses on the mortgage loans first to the
subordinate certificates; and
o in the case of the group II certificates, a reserve fund relating to
payments under an interest rate cap agreement described under "Description
of the Certificates - Group II Reserve Fund."
THE MORTGAGE LOANS
The mortgage loans in the trust were or will be originated or acquired in
accordance with the seller's program for non-conforming credits. We refer you to
"Risk Factors - Non-Conforming Underwriting Standards" in this prospectus
supplement at page S-13 for additional information.
S-7
<PAGE>
The mortgage loans in the trust are separated into two groups, each containing
mortgage loans secured by one-to-four family residential properties:
o Group I consists of fixed rate, first or second lien mortgage loans.
o Group II consists of adjustable rate, first lien mortgage loans.
PRE-FUNDING FEATURE
The trust may purchase additional mortgage loans on or before March 20, 2001 for
inclusion in either group of loans. At the closing, the trustee will hold in
trust, from the proceeds of the sale of the offered certificates, approximately
$65,000,000, which may be applied to the purchase of additional fixed rate
mortgage loans for inclusion in group I, and approximately $96,000,000, which
may be applied to the purchase of additional adjustable rate mortgage loans for
inclusion in group II. Pre-funding account funds allocated to one group may not
be used to purchase mortgage loans in another group. If those funds are not
completely used by March 20, 2001, any remaining pre-funding amounts will be
distributed as principal prepayments on the group I certificates, to the extent
the remaining funds had been allocated for the purchase of fixed rate mortgage
loans, and on the group II certificates, to the extent the remaining funds had
been allocated to the purchase of adjustable rate mortgage loans. This
distribution will be made on the March 25, 2001 distribution date.
At the closing date, funds will also be deposited in a capitalized interest
account for use as needed during the pre-funding period to ensure that all
required interest distributions are made on the offered certificates.
OPTIONAL TERMINATION
The master servicer has the right to exercise a clean-up call on any
distribution date that the aggregate scheduled principal balances of the
mortgage loans have declined to less than 10% of the sum of the scheduled
principal balances of the mortgage loans as of the cut off date and the amount
initially deposited in the pre-funding account. Exercise of this clean-up call
will result in the early retirement of your certificates.
REALIZED LOSSES
If the trust disposes of a mortgage loan for less than its scheduled principal
balance plus accrued interest, reimbursement of liquidation expenses, and
servicer advances, the trust will incur a realized loss.
If on any distribution date, the certificate principal balance of a group
exceeds the loan balance of the related mortgage loans, the trust will generally
reduce the certificate principal balances of the subordinate certificates of the
related group in reverse order of seniority, beginning with the class B-1
certificates of the group, then the class M-2 certificates of the group, and
then the remaining classes of the group in reverse order of seniority, except
that the certificate principal balances of the class A certificates of a group
will not be reduced on account of realized losses. After a reduction, the
holders of any of these certificates will generally only be entitled to
distributions of both principal and interest on the reduced certificate
principal balance of their certificates.
PRIVATE CERTIFICATES
The class PF-1, class PV-1, class C and class R certificates are not being
offered by this prospectus supplement or the accompanying prospectus. The class
C and class R certificates represent the most junior ownership interests in the
assets of the trust.
S-8
<PAGE>
DENOMINATIONS
The trust will issue the offered certificates in book-entry form in minimum
denominations of $1,000 in original principal amount and integral multiples.
STATISTICAL MORTGAGE LOAN DATA
As of the date of this prospectus supplement, information relating to only a
portion of the mortgage loans to be included in the trust as of the closing date
was available. Accordingly, information presented with respect to the mortgage
loans in this prospectus supplement is derived solely from those identified
mortgage loans. Additional mortgage loans will be included in the pool of
mortgage loans to be conveyed to the trust on the closing date. After the
closing date additional mortgage loans may, because of the application of funds
in the pre-funding account, be conveyed to the trust until March 20, 2001. The
characteristics of the mortgage loans to be conveyed to the trust on the closing
date will vary from the characteristics of the identified mortgage loans and
from the subsequent mortgage loans to be conveyed to the trust after the closing
date.
At December 1, 2000 (which is both the statistical cut off date and the cut off
date), there were 1,954 mortgage loans secured by mortgages on residential
properties.
GROUP I MORTGAGE LOANS
Aggregate Scheduled Principal Balance $81,384,688.02
Average Scheduled Principal Balance $81,466.15
Range of Scheduled Principal
Balances $9,998.01 to $555,579.47
Range of Mortgage Interest Rates 6.833% to 16.280%
Weighted Average Mortgage Interest Rate 11.447%
Weighted Average Original Loan-to-Value Ratio 73.17%
Weighted Average Combined Original
Loan-to-Value Ratio 76.69%
Weighted Average Remaining Scheduled Term
to Maturity 222 Months
Range of Remaining Scheduled Terms to
Maturity 118 to 360 Months
Weighted Average Remaining
Amortization Term 341 Months
Range of Remaining Amortization Terms 118 to 360 Months
Second Liens 6.05%
Balloon Mortgage Loans 66.21%
Mortgaged Premises
Single-family detached dwellings 85.90%
Single-family attached dwellings 0.53%
Planned unit developments 3.00%
Condominiums 4.18%
2-4 Family 3.65%
Townhouse 0.23%
Manufactured Home 2.51%
Weighted Average Servicing Fee Rate 0.52%
Master Servicing Fee Rate 0.05%
GROUP II MORTGAGE LOANS
Aggregate Scheduled Principal Balance $122,122,017.50
Average Scheduled Principal Balance $127,876.46
Range of Scheduled Principal
Balances $21,547.56 to $983,313.99
Mortgage Interest Rates
Loan Type:
2/28 LIBOR 51.87%
3/27 LIBOR 48.13%
Weighted Average Gross Margin:
2/28 LIBOR 6.070%
3/27 LIBOR 6.048%
Current Weighted Average Mortgage
Interest Rate 10.841%
Range of Current Mortgage Interest
Rate 8.200% to 14.500%
Weighted Average Maximum Lifetime
Mortgage Interest Rate 17.362%
Range of Maximum Lifetime
Mortgage Interest Rates 14.500% to 21.500%
Weighted Average Lifetime Minimum
Mortgage Interest Rate 10.781%
Range of Minimum Lifetime
Mortgage Interest Rates 5.850% to 14.500%
Weighted Average Original Loan-to-Value Ratio 78.76%
Weighted Average Remaining Scheduled Term
to Maturity 358 Months
Range of Remaining Scheduled Terms to
Maturity 349 to 360 Months
Weighted Average Remaining
Amortization Term 358 Months
Range of Remaining Amortization Terms 173 to 360 Months
Second Lien Mortgage Loans 0.00%
Mortgaged Premises
Single-family detached dwelling 78.48%
Single-family attached dwelling 1.16%
Planned unit developments 8.60%
Condominiums 4.39%
2-4 Family 6.06%
Townhouse 0.33%
Manufactured Home 0.98%
Weighted Average Servicing Fee Rate 0.50%
Master Servicing Fee Rate 0.05%
See "Risk Factors - Loan characteristics of the mortgage pool may vary from the
characteristics of the mortgage loans disclosed in this prospectus supplement"
on page S-12 and "The Mortgage Loan Pool - Characteristics of the Mortgage
Loans" on page S-16.
S-9
<PAGE>
RISK FACTORS
You should consider the following risk factors and the information set
forth under "Risk Factors" in the accompanying prospectus before you purchase
any of the offered certificates.
MORTGAGE INTEREST Generally, the pass through rates on the group II
RATES MAY LIMIT certificates adjust monthly based upon one month LIBOR.
PASS THROUGH RATES However, the group II mortgage interest rates adjust
OF CERTAIN OTHER periodically based upon various indices beginning a
CLASSES specified period after origination.
o In a rising interest rate environment, the pass
through rates on the group II certificates may rise
before the interest rates on the group II mortgage
loans.
o One month LIBOR may respond to different economic
and market factors than the other indices. It could
rise while the other indices are stable or are
falling. Even if they move in the same direction,
one month LIBOR may rise more rapidly than the
other indices in a rising interest rate environment
or fall less rapidly in a declining interest rate
environment.
In any of these interest rate environments, the pass
through rates on the group II certificates may be
limited by application of an available funds cap,
expressed as a percentage per annum and generally based
on the total net scheduled interest on the mortgage
loans in group II for the related due period less the
amount of interest distributable on the A-IO-II
component divided by the group II certificate principal
balance. If, on any distribution date, the pass through
rate on any group II certificate is so limited, a group
II carryover amount will result. This amount will
generally equal the excess of interest that would have
been distributable absent application of the cap over
interest at the capped rate. On any distribution date,
the trust will repay any carryover amounts to the extent
of a specified portion of pledged prepayment penalties
and excess interest in respect of group II available for
such purpose. There can be no assurance that such
amounts will be sufficient to repay such carryover
amounts. The ratings on the group II certificates do not
represent an assessment of the likelihood of the
distribution of any amounts that might be carried over.
S-10
<PAGE>
The otherwise fixed pass through rates of the group I
certificates are similarly capped at the Group I
Available Funds Cap. To the extent mortgage loans in the
related group bearing net interest rates above the pass
through rates of those classes prepay, the weighted
average net rate of a group will be reduced and the pass
through rates of those classes of certificates may be
capped. However, if the pass through rates of any of the
group I certificates are capped on any distribution
date, holders of those certificates will be entitled to
any additional amounts on any distribution date from a
specified portion of available pledged prepayment
penalties for group I to make up for the application of
the cap. There can be no assurance that such amounts
will be sufficient to repay such carryover amounts. The
ratings on the group I certificates do not represent an
assessment of the likelihood of the distribution of any
amounts that might be carried over.
MECHANICS OF THE TRUST Under the interest distribution mechanics of the trust:
PLACE RISK OF LOSS
PRINCIPALLY ON o Class M-1 certificates receive distributions only
SUBORDINATE after required distributions to the related class A
CERTIFICATES certificates;
o Class M-2 certificates receive distributions only
after required distributions to the related class A
and the class M-1 certificates; and
o Class B-1 certificates receive distributions only
after required distributions to the related class
A, class M-1 and class M-2 certificates
If the trust does not have sufficient funds to
distribute interest to all classes of certificates, the
shortfall will be borne by the certificates in reverse
order of seniority.
If the trust disposes of a mortgage loan at a loss, the
aggregate certificate principal balances of the related
certificates may exceed the scheduled principal balances
of the group. In that event, the trust will generally
reduce the certificate principal balances of the related
class B-1 certificates of that group, and then the
remaining classes of the group in reverse order of
seniority.
You should fully consider the subordination risks
associated with an investment in the class M-1, class
M-2 or class B-1 certificates. These include the
possibility that you may not fully recover your initial
investment as a result of losses on the mortgage loans.
S-11
<PAGE>
OWNERS OF CLASS The class A-IO certificates are entitled to
A-IO CERTIFICATES distributions of interest only and are not entitled to
MAY NOT RECOVER distributions of principal. In addition, interest is
THEIR INITIAL calculated on the class A-IO certificates on the basis
INVESTMENTS of scheduled notional principal balances which, in each
case, are reduced to zero after the thirty-first
distribution date after the closing date. Following such
date, the class A-IO certificates will not be entitled
to further distributions of interest. The yield to
investors in the class A-IO certificates will be
sensitive to high rates of principal payments (including
prepayments) on the mortgage loans, which could affect
the ability of investors in the class A-IO certificates
to recover their initial investments. See "Prepayment
and Yield Considerations - The Class A-IO Certificates."
A DEFAULT OR DOWNGRADE The only assets available to fund the group II reserve
OF THE COUNTERPARTY fund are payments made by the counterparty under an
UNDER THE CAP interest rate cap agreement. In the event that the
AGREEMENT MAY RESULT counterparty were to default under the cap agreement or
IN THE DOWNGRADE OF if the cap agreement were to terminate for any reason,
THE GROUP II the ratings on the group II certificates may be
CERTIFICATES downgraded. Any such downgrade may affect the value and
marketability of the group II certificates.
LOAN CHARACTERISTICS This prospectus supplement describes only a portion of
OF THE MORTGAGE the mortgage loans to be sold to the trust on the
POOL MAY VARY FROM closing date. The additional mortgage loans to be
THE CHARACTERISTICS delivered on the closing date may have characteristics
OF THE IDENTIFIED that differ somewhat from the identified mortgage loans
MORTGAGE LOANS described in this prospectus supplement. In addition,
DISCLOSED IN THIS subsequent mortgage loans to be purchased by the trust
PROSPECTUS SUPPLEMENT after the closing date with amounts on deposit in the
pre-funding account may have characteristics that differ
from the identified mortgage loans described in this
prospectus supplement. However, each of the subsequent
mortgage loans must satisfy the criteria described under
"The Mortgage Loan Pool - Conveyance of Subsequent
Mortgage Loans" on page S-31. The trust will file
current reports on Form 8-K following the purchase of
additional and subsequent mortgage loans by the trust
after the termination of the pre-funding period. The
current reports on Form 8-K will include the same type
of information regarding the additional and subsequent
mortgage loans that is included in this prospectus
supplement with respect to the identified mortgage
loans.
S-12
<PAGE>
THERE IS A RISK OF The seller anticipates that the trust will use
EARLY PREPAYMENT substantially all of the funds in the pre-funding
OF PRINCIPAL account to purchase subsequent mortgage loans for the
ASSOCIATED WITH trust. However, if the principal amount of eligible
THE PRE-FUNDING subsequent mortgage loans available during the
ACCOUNT pre-funding period is less than the full pre-funded
amount, the seller will not have sufficient subsequent
mortgage loans to sell to the trust. This could result
in a prepayment of principal to holders of certificates
as described in this prospectus supplement, which could
adversely affect the yield of such certificates to the
extent they were purchased at a premium. The seller does
not expect that a material amount of principal
prepayment will occur due to insufficient amounts of
subsequent mortgage loans.
THE FOLLOWING CHARACTERISTICS OF THE MORTGAGE LOANS MAY
INCREASE RISK OF LOSS:
NONCONFORMING As a general matter, the seller originated or purchased
UNDERWRITING or will originate or purchase the mortgage loans in
STANDARDS accordance with its mortgage loan program for
non-conforming credits -- a mortgage loan which is
ineligible for purchase by Fannie Mae or Freddie Mac due
to credit characteristics that do not meet Fannie Mae or
Freddie Mac guidelines.
The mortgage loans may experience rates of delinquency,
bankruptcy and loss that are higher, perhaps
significantly, than mortgage loans originated under
Fannie Mae or Freddie Mac guidelines.
On November 21, 2000, less than one-half of 1% of the
initial mortgage loans were delinquent. Approximately
5.39% of identified group I mortgage loans and
approximately 21.30% of identified group II mortgage
loans had first monthly payments due before November 1,
2000. Because only those identified mortgage loans could
have a monthly payment delinquent 30 days or more,
current information about delinquencies may not be
representative of future experience.
GEOGRAPHIC The mortgaged premises for approximately 12.46% of the
CONCENTRATION identified group I mortgage loans and approximately
34.04% of the identified group II mortgage loans are
located in California. An overall decline in the
residential real estate market, or the occurrence of a
natural disaster such as an earthquake, in California
could adversely affect the values of the mortgaged
premises located in California and increase the risk of
loss on the related mortgage loans.
S-13
<PAGE>
SECOND LIENS Approximately 6.05% of the aggregate scheduled principal
balance of identified group I mortgage loans are secured
by second liens subordinate to the rights of the
mortgagee under the related first mortgage. The trust
will have no source of funds to satisfy the first
mortgage or make payments due to the first mortgagee
and, accordingly, its ability to realize on its second
lien may be limited.
BALLOON LOANS Approximately 66.21% of the aggregate scheduled
principal balances of identified group I mortgage loans
are "balloon loans" that provide for the payment of the
unamortized principal balance in a single payment at
maturity. If the borrower is unable to repay the loan at
maturity or refinance the amount owed, you may suffer a
loss if the collateral for the loan is insufficient and
the other forms of credit enhancement are insufficient
or unavailable to cover the loss.
HIGH LOAN-TO-VALUE Mortgage loans with high loan-to-value ratios may
RATIOS INCREASE present a greater risk of loss than mortgages with
RISK OF LOSS loan-to-value ratios of 80% or below. Approximately
34.84% for group I and 38.97% for group II of the
identified mortgage loans based on aggregate cut off
date principal balances had combined loan-to-value
ratios in excess of 80%.
OTHER LEGAL Federal and state laws, public policy and general
CONSIDERATIONS principles of equity relating to the protection of
consumers, unfair and deceptive practices and debt
collection practices:
o regulate interest rates and other charges on
mortgage loans;
o require certain disclosures to borrowers;
o require licensing of the seller and the other
originators; and
o regulate generally the origination, servicing and
collection process for the mortgage loans.
Violations of these laws:
o may limit the ability of the trust to collect on
the mortgage loans;
o may entitle a borrower to a refund of amounts
previously paid; and
o could result in liability for damages and
administrative enforcement against the originator
or the servicer of the mortgage loans.
The seller has represented that all applicable federal
and state laws were or will be complied with in
connection with the origination of the mortgage loans
that are or will be part of the trust. If there is a
material and adverse breach of this representation, the
seller must repurchase any affected mortgage loan or
substitute a new complying mortgage loan.
S-14
<PAGE>
Approximately 0.03% of the identified group I mortgage
loans and approximately 0.00% of the identified group II
mortgage loans are subject to the Home Ownership and
Equity Protection Act of 1994 which amended the Truth in
Lending Act as it applies to mortgages subject to the
Home Ownership and Equity Protection Act of 1994. The
Home Ownership and Equity Protection Act of 1994
requires additional disclosures, specifies the timing of
these disclosures and limits or prohibits inclusion of
some provisions in mortgages subject to the Home
Ownership and Equity Protection Act of 1994. The Home
Ownership and Equity Protection Act of 1994 also
provides that any purchaser or assignee of a mortgage
covered by the Home Ownership and Equity Protection Act
of 1994, including the trust, is subject to all of the
claims and defenses which the borrower could assert
against the original lender. The maximum damages that
may be recovered under the Home Ownership and Equity
Protection Act of 1994 from an assignee is the remaining
amount of indebtedness plus the total amount paid by the
borrower in connection with 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 mortgage loans,
may entitle the borrower to a refund of amounts
previously paid and, in addition, could subject the
trust, as owner of the mortgage loans, to damages and
administrative enforcement.
LIMITATIONS ON HAZARD Standard hazard insurance policies do not insure against
INSURANCE physical damage arising from earth movement, including
earthquakes, landslides and mudflows.
INSOLVENCY OF SELLER The seller believes that the transfers of the mortgage
COULD CAUSE PAYMENT loans by the seller to the depositor and by the
DELAYS depositor to the trust constitute sales by the seller to
the depositor and by the depositor to the trust and
that, accordingly, the mortgage loans will not be part
of the assets of the seller or the depositor in the
event of an insolvency proceeding. Nevertheless, a
bankruptcy trustee or a creditor may argue that the
transfers were pledges in connection with a borrowing
rather than true sales. Even if this argument proves
unsuccessful, delays in distributions could result.
The trustee, the depositor and the rating agencies
rating the offered certificates will receive an opinion
of McGuireWoods LLP, counsel to the depositor, with
respect to the true sale of the mortgage loans, in form
and substance satisfactory to the rating agencies.
S-15
<PAGE>
RECENT DEVELOPMENTS
MERGER OF DOMINION RESOURCES, INC.
On January 28, 2000, Dominion Resources, Inc. ("Dominion"), the
indirect parent of the seller, the depositor, the master servicer and the
servicer, announced the completion of its merger with Consolidated Natural Gas
Company. In connection with the merger and the registration by Dominion as a
public utility holding company under the Public Utility Holding Company Act of
1935, the Securities and Exchange Commission issued an order requiring Dominion
to divest Dominion Capital, Inc., the indirect parent of the seller, the
depositor, the master servicer and the servicer, within three years after the
date the merger was completed. Dominion is in the process of divesting
substantial portions of the assets of First Source Financial LLP and First
Dominion Capital, LLC, which are owned by Dominion Capital. While Dominion plans
to divest the seller, the depositor, the master servicer and the servicer, as
required by the order, there can be no assurance as to the timing or the form of
the divestiture transaction or whether any acquiror will be of the same credit
quality or have the same financial resources as Dominion.
THE MORTGAGE LOAN POOL
GENERAL
The seller originated or acquired or will originate or acquire all the
mortgage loans to be included in the trust in accordance with its mortgage loan
program as described in this prospectus supplement and in the accompanying
prospectus. As a general matter, the seller's mortgage loan program consists of
the origination, or purchase, and packaging of mortgage loans relating to
non-conforming credits. A non-conforming credit is a mortgage loan which is
ineligible for purchase by Fannie Mae or Freddie Mac due to credit
characteristics that do not meet Fannie Mae or Freddie Mac guidelines. Mortgage
loans originated or purchased under the seller's mortgage loan program are
likely to experience rates of delinquency, bankruptcy and loss that are higher
than mortgage loans originated under Fannie Mae or Freddie Mac guidelines.
CHARACTERISTICS OF THE MORTGAGE LOANS
The mortgaged premises consist of residential properties which may be
detached or attached:
o one-to-four family dwellings;
o condominium units;
o townhouses;
o manufactured housing; and
o units in a planned unit development.
S-16
<PAGE>
The mortgaged premises may be owner-occupied or non-owner-occupied
investment properties. Owner-occupied properties include second and vacation
homes. The mortgage loans are or will be secured by first and second mortgages
on the mortgaged premises.
This prospectus supplement contains statistical information with
respect to only a portion of the mortgage loans to be sold to the trust on the
closing date. Accordingly, except where otherwise specifically indicated,
statistical information presented with respect to the mortgage loans included in
this prospectus supplement is derived solely from the identified mortgage loans
as of December 1, 2000, the statistical cut off date; no information is
included, therefore, with respect to additional mortgage loans to be conveyed to
the trust on the closing date or subsequent mortgage loans to be purchased by
the trust after the closing date. Whenever reference is made to the
characteristics of the identified mortgage loans or to a percentage of the
identified mortgage loans, the reference is based on the scheduled principal
balances of those mortgage loans. The trust may purchase subsequent mortgage
loans after the closing date until March 20, 2001. See "-Conveyance of
Subsequent Mortgage Loans" on page S-31. The characteristics of the mortgage
loans as a whole will change at the closing date and upon the acquisition of
subsequent mortgage loans. See "-Additional Information" on page S-32.
The identified mortgage loans satisfy certain criteria including:
o a remaining term to stated maturity of no more than 360 months;
o a mortgage interest rate of at least 6.83% with respect to group
I; and
o a mortgage interest rate of at least 8.20% with respect to group
II.
None of the identified mortgage loans had an original loan-to-value
ratio or, in the case of second lien mortgage loans, combined loan-to-value
ratio in excess of 100.00%. In addition, substantially all of the identified
mortgage loans were originated less than six months prior to the statistical cut
off date. Each mortgage loan in the trust will be assigned to one of the two
groups comprised of mortgage loans which bear fixed interest rates only, in the
case of group I, and mortgage loans which bear adjustable interest rates only,
in the case of group II. Additional mortgage loans to be delivered on the
closing date and subsequent mortgage loans to be purchased after the closing
date will be included in group I and group II and will be selected using
generally the same criteria used to select the identified mortgage loans. In
addition, generally the same representations and warranties will be made with
respect to those additional and subsequent mortgage loans. The group I
certificates generally represent undivided ownership interests in all mortgage
loans contained in group I. The group II certificates generally represent
undivided ownership interests in all mortgage loans contained in group II.
Portions of excess interest from one group may be applied to payments for the
other group as a result of limited cross collateralization arrangements
described under the heading "Description of the Offered Certificates - Excess
Interest and Pledged Prepayment Penalty Cashflow" beginning on page S-55 of this
prospectus supplement.
Of the identified mortgage loans, 755 mortgage loans representing
approximately 80.99% of the principal balance of the mortgage loans in group I
as of the statistical cut off date and 831 mortgage loans in group II
representing approximately 87.08% of the principal balance of the mortgage loans
S-17
<PAGE>
in group II as of the statistical cut off date contain prepayment penalties.
Prepayment penalties provide that if the borrower were to prepay the mortgage
loan in excess of a specified amount at any time from the origination of the
mortgage loan to a date set forth in the related note (the "Prepayment Penalty
Period"), the borrower would also have to pay a fee in addition to the amount
necessary to repay the mortgage loan. The Prepayment Penalty Period for the
mortgage loans varies from one to five years, depending on the terms set forth
in the related mortgage note. In some instances, applicable state laws limit the
amount of the prepayment penalty that a lender may charge. The specific
Prepayment Penalty Periods and the amounts of the prepayment penalties
applicable to the mortgage loans are set forth in more detail in the table
entitled "Prepayment Penalty Type" on page S-30 of this prospectus supplement. A
specified percentage of prepayment penalties will be distributed to holders of
the offered certificates to the extent and in the manner described under
"Description of the Offered Certificates - Excess Interest and Pledged
Prepayment Penalty Cashflow.".
All the identified mortgage loans in group II as of the statistical cut
off date are subject to:
o periodic interest rate adjustment caps;
o lifetime interest rate ceilings; and
o lifetime interest rate floors.
Substantially all of the identified mortgage loans in group II had
interest rates which were not fully indexed as of the statistical cut off date.
This means the mortgage interest rates did not equal the sum of the gross margin
and the applicable index as of that date. Group II mortgage loans have interest
rate factors that fall into the following categories:
o 3/27 LIBOR mortgage loans and 2/28 LIBOR mortgage loans bear
interest initially at a rate fixed at origination for three or
two years and thereafter at a rate that adjusts semiannually
based on six month LIBOR.
It is expected that additional and subsequent mortgage loans included in group
II will not have materially different interest rate features.
The information in the following tables, including the textual
information beneath each table and elsewhere in this prospectus supplement, is
approximate and is based solely on the scheduled principal balances of the
identified mortgage loans as of the statistical cut off date. This information
does not include information about additional mortgage loans that are expected
to be delivered on the closing date or subsequent mortgage loans to be purchased
after the closing date. Totals may not add completely to 100% because of
rounding. All the calculations are a percent of the given group.
S-18
<PAGE>
<TABLE>
<CAPTION>
1) CURRENT SCHEDULED PRINCIPAL BALANCE
Group I Group II
---------------------------- ----------------------------
No. Of Scheduled No. Of Scheduled
Current Scheduled Mortgage Principal Mortgage Principal
Principal Balance ($) Loans (%) Balance (%) Loans (%) Balance (%)
--------------------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C>
9,998.01 - 25,000.00 6.71 1.76 0.73 0.13
25,000.01 - 50,000.00 29.13 13.74 11.31 3.60
50,000.01 - 75,000.00 26.03 19.86 18.85 9.19
75,000.01 - 100,000.00 14.51 15.41 17.70 12.31
100,000.01 - 125,000.00 9.11 12.45 14.03 12.45
125,000.01 - 150,000.00 5.51 9.29 9.32 9.95
150,000.01 - 175,000.00 2.70 5.40 7.85 9.91
175,000.01 - 200,000.00 1.20 2.83 4.50 6.57
200,000.01 - 225,000.00 0.70 1.84 4.29 7.12
225,000.01 - 250,000.00 0.80 2.40 2.83 5.22
250,000.01 - 275,000.00 0.90 2.91 1.88 3.86
275,000.01 - 300,000.00 0.30 1.05 2.72 6.14
300,000.01 - 325,000.00 0.80 3.11 0.73 1.80
325,000.01 - 350,000.00 0.40 1.66 0.73 1.91
350,000.01 - 375,000.00 0.20 0.88 0.21 0.60
375,000.01 - 400,000.00 0.20 0.94 0.63 1.93
400,000.01 - 425,000.00 0.30 1.54 0.00 0.00
425,000.01 - 450,000.00 0.20 1.06 0.21 0.74
450,000.01 - 475,000.00 0.10 0.58 0.31 1.13
475,000.01 - 500,000.00 0.10 0.60 0.31 1.21
500,000.01 - 525,000.00 0.00 0.00 0.10 0.43
550,000.01 - 575,000.00 0.10 0.68 0.21 0.92
600,000.01 - 625,000.00 0.00 0.00 0.21 1.00
625,000.01 - 650,000.00 0.00 0.00 0.10 0.53
675,000.01 - 700,000.00 0.00 0.00 0.10 0.56
975,000.01 - 983,313.99 0.00 0.00 0.10 0.81
------ ------ ------ ------
Totals: 100.00 100.00 100.00 100.00
====== ====== ====== ======
</TABLE>
The average scheduled principal balance is (a) $104,148.77 for the mortgage
loans, (b) $81,466.15 for group I and (c) $127,876.46 for group II. The minimum
and maximum scheduled principal balances of the mortgage loans are $9,998.01 and
$983,313.99, respectively.
S-19
<PAGE>
<TABLE>
<CAPTION>
2) CURRENT MORTGAGE INTEREST RATES
Group I Group II
---------------------------- ----------------------------
No. Of Scheduled No. Of Scheduled
Current Scheduled Mortgage Principal Mortgage Principal
Principal Balance (%) Loans (%) Balance (%) Loans (%) Balance (%)
--------------------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C>
6.833 - 7.500 0.10 0.12 0.00 0.00
7.751 - 8.000 0.20 0.21 0.00 0.00
8.001 - 8.250 0.00 0.00 0.10 0.09
8.251 - 8.500 0.30 0.66 0.21 0.25
8.501 - 8.750 0.70 0.55 0.31 0.55
8.751 - 9.000 1.50 1.70 1.36 1.48
9.001 - 9.250 1.60 2.05 1.99 2.74
9.251 - 9.500 2.80 4.70 3.04 3.78
9.501 - 9.750 3.00 3.51 3.87 5.55
9.751 - 10.000 5.31 5.86 9.95 12.87
10.001 - 10.250 2.80 3.08 6.39 6.02
10.251 - 10.500 5.11 4.99 8.38 8.17
10.501 - 10.750 6.11 8.65 8.38 9.20
10.751 - 11.000 7.21 8.05 11.83 12.30
11.001 - 11.250 3.50 3.50 6.60 6.67
11.251 - 11.500 6.91 8.48 7.96 7.65
11.501 - 11.750 5.91 5.70 6.28 5.50
11.751 - 12.000 7.31 6.28 7.23 5.83
12.001 - 12.250 4.00 3.78 3.04 2.29
12.251 - 12.500 5.71 5.10 3.25 2.45
12.501 - 12.750 5.81 5.34 1.57 1.05
12.751 - 13.000 4.80 3.98 3.56 2.44
13.001 - 13.250 3.10 1.62 1.57 0.97
13.251 - 13.500 3.90 3.12 0.63 0.37
13.501 - 13.750 3.10 1.92 0.73 0.44
13.751 - 14.000 2.70 2.13 0.94 1.06
14.001 - 14.250 2.10 1.67 0.42 0.16
14.251 - 14.500 1.90 1.18 0.42 0.14
14.501 - 14.750 1.30 0.81 0.00 0.00
14.751 - 15.000 0.60 0.30 0.00 0.00
15.251 - 15.500 0.20 0.23 0.00 0.00
15.501 - 15.750 0.10 0.11 0.00 0.00
15.751 - 16.000 0.10 0.07 0.00 0.00
16.001 - 16.280 0.20 0.57 0.00 0.00
------ ------ ------ ------
Totals: 100.00 100.00 100.00 100.00
====== ====== ====== ======
</TABLE>
The weighted average current mortgage interest rate is (a) 11.084% per annum for
the mortgage loans, (b) 11.447% per annum for group I and (c) 10.841% per annum
for group II.
S-20
<PAGE>
3) ORIGINAL COMBINED LOAN-TO-VALUE RATIO ON GROUP I (1)
Group I
-------------------------------------
Original Combined No. Of Scheduled Principal
Loan-to-Value Ratio (%) Mortgage Loans(%) Balance (%)
----------------------- ----------------- -----------
15.91 - 20.00 0.30 0.10
20.01 - 25.00 0.70 0.51
25.01 - 30.00 1.00 0.37
30.01 - 35.00 0.90 0.41
35.01 - 40.00 1.40 0.71
40.01 - 45.00 1.40 0.82
45.01 - 50.00 3.20 2.32
50.01 - 55.00 3.00 2.08
55.01 - 60.00 4.70 3.34
60.01 - 65.00 6.51 6.56
65.01 - 70.00 9.21 9.31
70.01 - 75.00 10.21 10.52
75.01 - 80.00 24.32 28.13
80.01 - 85.00 14.41 15.39
85.01 - 90.00 14.21 16.59
90.01 - 95.00 1.50 1.31
95.01 - 100.00 3.00 1.55
------ ------
Totals: 100.00 100.00
====== ======
(1) The combined loan-to-value ratio of a mortgage loan (including a second
mortgage loan) is equal to the ratio (expressed as a percentage) of the original
scheduled principal balance of the mortgage loan plus any senior lien balances
and the fair market value of the mortgage premises at the time of origination.
The fair market value is the lower of (i) the purchase price and (ii) the
appraised value in the case of purchases and is the appraised value in all other
cases. The weighted average combined original loan-to-value ratio is 76.69% for
group I.
S-21
<PAGE>
4) ORIGINAL LOAN-TO-VALUE RATIO ON GROUP II (1)
Group II
---------------------------------------
Original No. Of Scheduled Principal
Loan-to-Value Ratio (%) Mortgage Loans(%) Balance (%)
----------------------- ----------------- -----------
17.32 - 20.00 0.10 0.03
20.01 - 25.00 0.21 0.12
25.01 - 30.00 0.42 0.12
30.01 - 35.00 0.10 0.08
35.01 - 40.00 0.21 0.07
40.01 - 45.00 0.42 0.25
45.01 - 50.00 0.84 0.98
50.01 - 55.00 1.05 0.77
55.01 - 60.00 2.83 3.47
60.01 - 65.00 5.65 5.03
65.01 - 70.00 9.63 8.01
70.01 - 75.00 13.30 12.94
75.01 - 80.00 30.26 29.17
80.01 - 85.00 17.80 18.45
85.01 - 90.00 16.54 19.97
90.01 - 95.00 0.63 0.55
------ ------
Totals: 100.00 100.00
====== ======
(1) The weighted average original loan-to-value ratio is 78.76% for group II.
5) REMAINING SCHEDULED TERM TO MATURITY
<TABLE>
<CAPTION>
Group I Group II
---------------------------- ---------------------------
No. Of Scheduled No. Of Scheduled
Remaining Term Mortgage Principal Mortgage Principal
(Months) Loans (%) Balance (%) Loans (%) Balance (%)
-------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C>
118 - 120 1.40 0.54 0.00 0.00
169 - 180 73.57 73.84 0.00 0.00
229 - 240 2.90 2.12 0.00 0.00
289 - 300 0.20 0.13 0.00 0.00
337 - 348 0.10 0.43 0.00 0.00
349 - 360 21.82 22.94 100.00 100.00
------ ------ ------ ------
Totals: 100.00 100.00 100.00 100.00
====== ====== ====== ======
</TABLE>
The weighted average remaining schedule term to maturity is 222 months for group
I and 358 months for group II. The calculations in this table were based on the
number of remaining payments.
S-22
<PAGE>
6) REMAINING AMORTIZATION TERM
<TABLE>
<CAPTION>
Group I Group II
---------------------------- ----------------------------
Remaining Term No. Of Scheduled No. Of Scheduled
Amortization Mortgage Principal Mortgage Principal
Term (Months) Loans (%) Balance (%) Loans (%) Balance (%)
------------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C>
118 - 120 1.40 0.54 0.00 0.00
169 - 180 12.61 7.63 0.10 0.09
229 - 240 2.90 2.12 0.10 0.10
253 - 264 0.10 0.17 0.00 0.00
289 - 300 0.20 0.13 0.10 0.10
313 - 324 0.10 0.14 0.00 0.00
325 - 336 0.20 0.51 0.00 0.00
337 - 348 0.20 0.15 0.31 0.19
349 - 360 82.28 88.61 99.37 99.52
------ ------ ------ ------
Totals: 100.00 100.00 100.00 100.00
====== ====== ======
</TABLE>
The weighted average remaining amortization term is 341 months for group I and
358 months for group II. The calculations in this table were based on the number
of payments that would be remaining assuming the mortgage loans are repaid in
equal monthly installments for the balance of the original loan amortization
term.
S-23
<PAGE>
7) GROSS MARGIN ON GROUP II
Group II
-------------------------------------------
No. Of Scheduled Principal
Gross Margin (%) Mortgage Loans(%) Balance (%)
---------------- ----------------- -----------
3.640 - 3.750 0.10 0.09
3.751 - 4.000 0.21 0.69
4.001 - 4.250 1.05 1.95
4.251 - 4.500 1.68 2.47
4.501 - 4.750 2.51 2.98
4.751 - 5.000 5.45 7.03
5.001 - 5.250 8.59 8.14
5.251 - 5.500 8.59 8.84
5.501 - 5.750 7.85 7.70
5.751 - 6.000 10.68 10.75
6.001 - 6.250 8.69 7.87
6.251 - 6.500 10.16 11.11
6.501 - 6.750 9.01 8.37
6.751 - 7.000 8.90 8.41
7.001 - 7.250 4.50 4.38
7.251 - 7.500 4.29 3.53
7.501 - 7.750 1.99 1.73
7.751 - 8.000 2.72 1.71
8.001 - 8.250 1.15 1.19
8.251 - 8.500 0.94 0.54
8.501 - 8.750 0.52 0.32
8.751 - 9.000 0.31 0.12
9.001 - 9.125 0.10 0.06
------ ------
Totals: 100.00 100.00
====== ======
The weighted average gross margin is 6.06% for group II.
S-24
<PAGE>
8) MAXIMUM LIFETIME MORTGAGE INTEREST RATES ON GROUP II
Group II
--------------------------------------
Maximum Lifetime No. Of Scheduled Principal
Mortgage Interest Rates (%) Mortgage Loans(%) Balance (%)
--------------------------- ----------------- -----------
14.500 - 14.750 0.21 0.28
14.751 - 15.000 0.94 0.84
15.001 - 15.250 1.26 1.82
15.251 - 15.500 2.62 3.14
15.501 - 15.750 2.51 3.16
15.751 - 16.000 6.70 6.95
16.001 - 16.250 4.50 4.29
16.251 - 16.500 5.55 5.62
16.501 - 16.750 5.86 6.63
16.751 - 17.000 8.80 10.96
17.001 - 17.250 5.34 5.18
17.251 - 17.500 6.81 6.54
17.501 - 17.750 7.33 7.94
17.751 - 18.000 11.31 11.42
18.001 - 18.250 5.76 5.38
18.251 - 18.500 6.07 5.71
18.501 - 18.750 3.56 3.13
18.751 - 19.000 4.61 3.32
19.001 - 19.250 1.78 1.38
19.251 - 19.500 2.20 1.66
19.501 - 19.750 1.47 1.04
19.751 - 20.000 1.88 1.39
20.001 - 20.250 1.36 0.87
20.251 - 20.500 0.31 0.11
20.501 - 20.750 0.31 0.18
20.751 - 21.000 0.52 0.92
21.001 - 21.250 0.10 0.02
21.251 - 21.500 0.31 0.12
------ ------
Totals: 100.00 100.00
====== ======
The weighted average maximum lifetime mortgage interest rate is 17.36% for group
II.
S-25
<PAGE>
9) MINIMUM LIFETIME MORTGAGE INTEREST RATES ON GROUP II
Group II
-----------------------------------------
Minimum Lifetime No. Of Scheduled Principal
Mortgage Interest Rates (%) Mortgage Loans(%) Balance (%)
--------------------------- ----------------- -----------
5.850 - 7.500 1.26 1.18
7.751 - 8.000 0.21 0.10
8.001 - 8.250 0.63 0.68
8.251 - 8.500 0.31 0.30
8.501 - 8.750 0.52 0.64
8.751 - 9.000 1.36 1.38
9.001 - 9.250 1.88 2.69
9.251 - 9.500 3.04 3.78
9.501 - 9.750 3.87 5.55
9.751 - 10.000 9.63 12.71
10.001 - 10.250 5.86 5.44
10.251 - 10.500 8.06 7.97
10.501 - 10.750 7.96 8.76
10.751 - 11.000 11.31 11.76
11.001 - 11.250 6.49 6.63
11.251 - 11.500 7.96 7.74
11.501 - 11.750 6.28 5.50
11.751 - 12.000 7.23 5.83
12.001 - 12.250 3.04 2.29
12.251 - 12.500 3.25 2.45
12.501 - 12.750 1.57 1.05
12.751 - 13.000 3.56 2.44
13.001 - 13.250 1.57 0.97
13.251 - 13.500 0.63 0.37
13.501 - 13.750 0.73 0.44
13.751 - 14.000 0.94 1.06
14.001 - 14.250 0.42 0.16
14.251 - 14.500 0.42 0.14
------ ------
Totals: 100.00 100.00
====== ======
The weighted average minimum lifetime mortgage interest rate is 10.78% for group
II. 99.30% of the group II mortgage loans have a minimum lifetime mortgage rate
greater than the applicable gross margin.
S-26
<PAGE>
10) NEXT INTEREST RATE ADJUSTMENT DATES ON GROUP II
Group II
------------------------------------------
No. Of Scheduled Principal
Interest Adjustment Date Mortgage Loans(%) Balance (%)
------------------------ ----------------- -----------
2002-May 0.10 0.08
2002-Jun 0.10 0.14
2002-July 0.42 0.57
2002-Aug 2.62 2.96
2002-Sep 5.65 5.85
2002-Oct 17.38 18.76
2002-Nov 23.98 21.92
2002-Dec 1.68 1.60
2003-Jan 0.10 0.10
2003-Mar 0.10 0.08
2003-Apr 0.10 0.05
2003-Jul 0.63 0.66
2003-Aug 2.30 2.29
2003-Sep 7.43 8.06
2003-Oct 15.39 15.76
2003-Nov 20.31 19.65
2003-Dec 1.68 1.48
------ ------
Totals: 100.00 100.00
====== ======
The weighted average next interest adjustment date is April 2003 for group II.
11) OCCUPANCY TYPE OF MORTGAGE PREMISES
<TABLE>
<CAPTION>
Group I Group II
--------------------------- ---------------------------
No. Of Scheduled No. Of Scheduled
Mortgage Principal Mortgage Principal
Occupancy Type (1) Loans (%) Balance (%) Loans (%) Balance (%)
------------------ --------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Primary 93.39 95.22 91.94 94.95
Investor 6.11 4.44 7.85 4.98
Second Home 0.50 0.34 0.21 0.07
------ ------ ------ ------
Totals: 100.00 100.00 100.00 100.00
====== ====== ====== ======
</TABLE>
(1) As represented by the borrowers on their mortgage loan applications.
S-27
<PAGE>
12) ORIGINATION PROGRAM
<TABLE>
<CAPTION>
Group I Group II
--------------------------- ---------------------------
No. Of Scheduled No. Of Scheduled
Mortgage Principal Mortgage Principal
Origination Program Loans (%) Balance (%) Loans (%) Balance (%)
------------------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Full Documentation 83.78 80.97 75.71 75.39
Stated Documentation 10.31 11.15 18.64 17.86
Limited Documentation 3.80 6.56 5.55 6.58
No Ratio 2.10 1.32 0.10 0.16
------ ------ ------ ------
Totals: 100.00 100.00 100.00 100.00
====== ====== ====== ======
</TABLE>
(1) See "The Mortgage Loan Pool - Underwriting Standards" on page S-32.
13) MORTGAGE LOAN PURPOSE
<TABLE>
<CAPTION>
Group I Group II
--------------------------- ---------------------------
No. Of Scheduled No. Of Scheduled
Mortgage Principal Mortgage Principal
Loan Purpose Loans (%) Balance (%) Loans (%) Balance (%)
------------ --------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Cash Out Refinance 70.27 67.08 53.40 52.75
Purchase 21.72 23.23 36.65 37.17
Refinance 8.01 9.69 9.95 10.08
------ ------ ------ ------
Totals: 100.00 100.00 100.00 100.00
====== ====== ====== ======
</TABLE>
14) PROPERTY TYPES OF MORTGAGE PREMISES
<TABLE>
<CAPTION>
Group I Group II
--------------------------- ---------------------------
No. Of Scheduled No. Of Scheduled
Mortgage Principal Mortgage Principal
Property Type Loans (%) Balance (%) Loans (%) Balance (%)
------------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Single Family Detached 85.89 85.90 78.32 78.48
PUD 2.40 3.00 6.39 8.60
Two-Four Family 3.70 3.65 6.91 6.06
High Rise 0.70 0.98 0.52 0.33
Condominiums
Low Rise 3.10 3.20 4.82 4.06
Condominiums
Manufactured Housing 3.30 2.51 1.68 0.98
Single Family Attached 0.70 0.53 1.05 1.16
Townhouse 0.20 0.23 0.31 0.33
------ ------ ------ ------
Totals: 100.00 100.00 100.00 100.00
====== ====== ====== ======
</TABLE>
15) LOAN TYPES IN GROUP II
Group II
-----------------------------------------
No. Of Scheduled Principal
Loan Type Mortgage Loans(%) Balance (%)
--------- ----------------- -----------
2/28 6 Mo LIBOR ARM 51.94 51.87
3/27 6 Mo LIBOR ARM 48.06 48.13
------ ------
Totals: 100.00 100.00
====== ======
S-28
<PAGE>
16) GEOGRAPHIC DISTRIBUTION OF MORTGAGED PREMISES
<TABLE>
<CAPTION>
Group I Group II
--------------------------- ---------------------------
No. Of Scheduled No. Of Scheduled
Mortgage Principal Mortgage Principal
State Loans (%) Balance (%) Loans (%) Balance (%)
----- --------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Alaska 0.30 0.27 0.31 0.36
Arizona 1.00 1.07 2.20 1.93
Arkansas 1.70 0.76 0.73 0.46
California 8.01 12.46 23.66 34.04
Colorado 1.50 2.03 3.14 3.56
Connecticut 1.70 1.53 2.41 2.94
Delaware 0.90 1.33 0.10 0.05
Florida 6.01 5.33 5.24 4.36
Georgia 5.91 5.19 3.04 3.54
Hawaii 0.30 0.36 0.73 0.57
Idaho 0.10 0.32 0.31 0.18
Illinois 5.91 5.97 7.54 6.22
Indiana 4.30 3.94 3.14 1.53
Iowa 1.50 1.30 0.94 0.48
Kansas 1.00 0.54 0.94 0.45
Kentucky 1.70 1.91 0.63 0.36
Louisiana 2.50 2.10 1.88 1.38
Maine 0.30 0.22 0.21 0.08
Maryland 1.60 1.55 0.21 0.18
Massachusetts 0.80 1.21 0.84 1.45
Michigan 7.61 6.53 6.60 5.12
Minnesota 1.10 1.13 2.72 2.76
Mississippi 1.60 0.93 0.21 0.07
Missouri 2.00 1.36 2.62 1.54
Montana 0.20 0.51 0.00 0.00
Nebraska 0.60 0.52 0.21 0.16
Nevada 0.50 0.62 1.36 1.46
New Hampshire 0.40 0.64 0.10 0.06
New Jersey 2.60 3.75 1.15 1.39
New Mexico 0.40 0.37 0.10 0.08
New York 1.50 2.72 0.10 0.46
North Carolina 2.20 1.52 0.94 0.51
Ohio 5.61 4.48 4.71 3.18
Oklahoma 2.50 1.59 1.26 0.70
Oregon 1.50 2.31 1.88 1.76
Pennsylvania 4.50 4.39 2.83 2.37
Rhode Island 0.10 0.16 0.42 1.05
South Carolina 0.50 0.48 0.73 0.35
South Dakota 0.10 0.10 0.31 0.17
Tennessee 3.10 2.19 1.78 1.51
Texas 6.41 5.36 4.40 4.00
Utah 0.60 0.67 0.84 0.84
Virginia 3.30 2.87 1.36 1.29
Washington 2.40 4.12 3.25 3.86
Washington DC 0.10 0.12 0.00 0.00
West Virginia 0.20 0.13 0.31 0.13
Wisconsin 1.30 1.01 1.57 1.05
------ ------ ------ ------
Totals: 100.00 100.00 100.00 100.00
====== ====== ====== ======
</TABLE>
S-29
<PAGE>
17) CREDIT SCORE (1)
<TABLE>
<CAPTION>
Group I Group II
--------------------------- ---------------------------
No. Of Scheduled No. Of Scheduled
Mortgage Principal Mortgage Principal
Range of Credit Scores Loans (%) Balance (%) Loans (%) Balance (%)
---------------------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C>
<= 400 3.30 2.69 1.36 0.89
401 - 450 0.20 0.11 0.00 0.00
451 - 500 8.41 8.69 6.18 5.27
501 - 550 28.13 28.81 37.80 38.24
551 - 600 25.33 27.68 32.88 32.96
601 - 650 20.42 19.19 15.60 16.35
651 - 700 10.71 8.87 4.61 4.59
701 - 750 2.20 2.50 1.05 0.88
751 - 800 1.20 1.36 0.52 0.82
> 800 0.10 0.09 0.00 0.00
------ ------ ------ ------
Totals: 100.00 100.00 100.00 100.00
====== ====== ====== ======
</TABLE>
(1) Credit score is a tri-merged score. A tri-merged score is based on the
number of scores available from the three national repositories and determined
as follows: If three scores exist for a borrower then credit score will equal
the middle score. If two scores exist then the credit score will equal the lower
of the two scores. If only one score exists the credit score will equal that
score. The weighted average score is equal to approximately 572.
18) PREPAYMENT PENALTY TYPE
<TABLE>
<CAPTION>
Group I Group II
--------------------------- ---------------------------
No. Of Scheduled No. Of Scheduled
Mortgage Principal Mortgage Principal
Prepayment Penalty Type* Loans (%) Balance (%) Loans (%) Balance (%)
------------------------ --------- ----------- --------- -----------
<S> <C> <C> <C> <C>
1 Year - 6 months interest/80% UPB 0.90 1.77 1.15 1.66
1.5 Year - 6 months interest/80% UPB 0.00 0.00 0.10 0.27
2 Year - 6 months interest/80% UPB 1.20 1.13 25.03 26.06
3 Year - 3 months interest/80% UPB 0.10 0.58 0.63 1.21
3 Year - 6 months interest/80% UPB 16.82 19.75 41.57 42.12
4 Year - 6 months interest/80% UPB 0.40 0.30 0.10 0.10
5 Year - 6 months interest/80% UPB 49.55 51.25 12.98 10.55
6 Month - 6 months interest/80% UPB 0.10 0.05 0.00 0.00
No prepayment penalty 24.42 19.01 12.98 12.92
Miscellaneous prepayment penalties 6.51 6.17 5.45 5.11
------ ------ ------ ------
Totals: 100.00 100.00 100.00 100.00
====== ====== ====== ======
</TABLE>
-----------------------------
*"6 months interest/80% UPB" means a prepayment penalty is payable during the
time period specified in an amount equal to 80% of the unpaid principal balance
of the mortgage loan at the date of prepayment, if the loan is paid in full, or
80% of the amount of the unscheduled principal payment, in the case of partial
prepayments, TIMES a percentage equal to one-half of the annual interest rate
then in effect under the terms of the related mortgage loan promissory note.
S-30
<PAGE>
CONVEYANCE OF SUBSEQUENT MORTGAGE LOANS
The depositor will deliver additional mortgage loans on the closing
date that are not included in the mortgage loan pool on which the statistical
information in this prospectus supplement was based. In addition, the trust may
acquire with amounts on deposit in the pre-funding account after the closing
date approximately $63,000,000 in aggregate scheduled principal balance of
mortgage loans for addition to group I and $98,000,000 in aggregate scheduled
principal balance for addition to group II. Accordingly, the initial
characteristics of the mortgage loan pool as a whole and of group I and group II
will change after the acquisition by the trust of these additional mortgage
loans. The depositor has agreed to include additional mortgage loans on the
closing date and to deliver subsequent mortgage loans for inclusion in the trust
that will not materially change the initial characteristics of group I or group
II.
The inclusion of additional mortgage loans on the closing date and the
delivery of subsequent mortgage loans will be subject to the following
requirements:
o no subsequent mortgage loan will be selected in a manner
adverse to the interests of certificateholders;
o the addition of subsequent mortgage loans will not result in
the reduction, qualification or withdrawal of the then current
ratings of the certificates;
o each subsequent mortgage loan will be underwritten in
accordance with the seller's underwriting guidelines;
o no subsequent mortgage loan may have a remaining term to
maturity exceeding 360 months;
o no subsequent mortgage loan may have a loan-to-value ratio
greater than 100%;
o no subsequent mortgage loan added to group II may be a junior
mortgage loan; and
o each subsequent mortgage loan added to group I must be a fixed
rate mortgage loan and each subsequent mortgage loan added to
group II must be an adjustable rate mortgage loan.
Following the purchase of all of the subsequent mortgage loans by the
trust, the pool of mortgage loans in the trust will have the following
characteristics as of their respective cut off dates:
o a weighted average mortgage interest rate of at least 11.25%
for group I and 10.70% for group II, and, with respect to
group II, a weighted average gross margin of at least 6.00%;
o a weighted average combined loan-to-value ratio of not more
than 77.50% for group I;
o a weighted average loan-to-value ratio of not more than 79.50%
for group II;
o no more than 5% of the mortgage loans for group I and 5.5% of
the mortgage loans for group II will be secured by investment
properties;
S-31
<PAGE>
o no more than 38% of the mortgage loans for group I and 39.50%
of the mortgage loans for group II will have a combined
loan-to-value ratio in excess of 80%;
o an average loan balance of not more than $84,000 for group I
and not more than $130,000 for group II; and
o in the case of group I, at least 54% of the mortgage loans
will have credit grades of A- or better and not more than 25%
will have credit grades of C or D, and, in the case of group
II, at least 47% of the mortgage loan will have credit grades
of A- or better and not more than 22% of the mortgage loans
will have credit grades of C or D.
ADDITIONAL INFORMATION
The description in this prospectus supplement of the mortgage loans and
the mortgaged premises is based upon the pool of identified mortgage loans, as
constituted at the close of business on the statistical cut off date, except
where otherwise specifically indicated. The pool of mortgage loans will include
additional loans to be delivered on the closing date and subsequent mortgage
loans to be acquired during the pre-funding period. In addition, the depositor
may remove mortgage loans prior to closing
o as a result of incomplete documentation or non-compliance with
representations and warranties or
o if the depositor believes that removal is necessary or
appropriate.
The depositor may substitute other mortgage loans subject to specified terms and
conditions set forth in the trust agreement creating the trust. The seller
believes that the information set forth in this prospectus supplement with
respect to group I and group II is representative of the characteristics of the
respective group as it will be constituted at the closing date.
The depositor will file a current report on Form 8-K with the
Commission, together with the trust agreement, within fifteen days after the
initial issuance of the offered certificates. The depositor will note the effect
of any changes in the pool in the current report on Form 8-K as a result of
adding or removing any mortgage loans. The depositor also intends to file
additional yield tables and other computational materials with the Commission in
a current report on Form 8-K. The underwriters of the offered certificates
prepared the yield tables and computational materials at the request of
prospective investors, based on assumptions provided by, and satisfying the
special requirements of, such prospective investors. Those tables and
assumptions may be based on assumptions that differ from the modeling
assumptions used in preparing tables set forth under the heading "Prepayment and
Yield Considerations" on page S-37. Accordingly, those tables and other
materials may not be relevant to or appropriate for investors other than those
specifically requesting them.
UNDERWRITING STANDARDS
The seller's underwriting philosophy is to analyze the overall
situation of the borrower and to take into account compensating factors which
may be used to offset certain areas of weakness. Specific compensating factors
include:
S-32
<PAGE>
o loan-to-value ratio;
o mortgage payment history;
o employment stability; and
o number of years at residence.
The seller underwrites each loan individually. The seller bases its
underwriting decision on the risk profile of the loan, even in instances where
the seller purchases a group of mortgage loans in bulk. In some of these bulk
purchases, the seller engages contract underwriters to underwrite individual
mortgage loans under the direct supervision of the seller's senior underwriting
staff.
The seller customarily employs underwriting guidelines to aid in
assessing:
o the borrower's ability and willingness to repay a loan
according to its terms; and
o whether the value of the property securing the loan will allow
the lender to recover its investment if a loan default occurs.
The seller has established classifications with respect to the credit
profile of the borrower. The terms of the loans and the maximum loan-to-value
ratios and debt-to-income ratios vary based on the classification of the
borrower. The seller generally offers borrowers with less favorable credit
ratings loans with higher interest rates and lower loan-to-value ratios than
borrowers with more favorable credit ratings.
The seller's underwriting standards are applied in accordance with
applicable federal and state laws and regulations and require a qualified
appraisal of the mortgaged property which conforms to Fannie Mae and Freddie Mac
standards. Each appraisal includes a market data analysis based on recent sales
of comparable homes in the area and a replacement cost analysis based on the
current cost of building a similar home. The appraisal may be no more than 180
days old on the day the loan is originated. In most instances, the seller
requires a second drive-by appraisal for properties that have a value of
$300,000 to $500,000 and a second full appraisal for properties that have a
value over $500,000.
The seller has four loan documentation programs:
o Full Documentation -- underwriter review of the borrower's
credit report, handwritten loan application, property
appraisal, and the documents that are provided to verify
employment and bank deposits, such as W-2's and pay stubs, or
signed tax returns for the past two years;
o Limited Documentation -- only available for self-employed
borrowers; six months of personal and/or business bank
statements are acceptable documentation of the borrower's
stated cash flow; loan-to value ratios of 80% to 90% require
two years of personal bank statements;
S-33
<PAGE>
o Stated Income -- the borrower's income as stated on the loan
application must be reasonable for the related occupation
because the income is not independently verified. The seller
does, however, verify the existence of the business and
employment; and the business must have been in existence for
at least two years; and
o No Ratio -- specifically created for borrowers that want to be
qualified based primarily on their equity positions in their
homes and their individual credit profiles.
The seller may, from time to time, apply underwriting criteria which are either
more stringent or more flexible depending on the economic conditions of a
particular market.
The seller's general guidelines are set forth below:
<TABLE>
<CAPTION>
A+ A A- B C D
MORTGAGE HISTORY
<S> <C> <C> <C> <C> <C>
No late payments Maximum of one Maximum of two Maximum of four Maximum of five Maximum of six
30-day late 30-day late 30-day late 30-day and one 30-day, two
payment payments in last payments or two 60-day late 60-day and one
12 months 30-day and one payments or four 90-day late
(maximum of one 60-day late 30-day and one payments
30-day late payments in last 90-day late
payment if LTV 12 months payments in last
is greater than 12 months
85%)
SECONDARY CREDIT
Maximum of three Maximum of three Maximum of three Maximum of four Discretionary Discretionary
30-day late 30-day late 30-day late 30-day and one
payments on payments on payments on 60-day late
revolving credit; revolving credit; revolving payments on
two 30-day late three 30-day late credit; three revolving credit;
payment on payments on 30-day late three 30-day and
installment credit installment credit payments on one 60-day late
installment payments on
credit (isolated installment
60-day late credit (isolated
payments 90-day late
acceptable) payments
acceptable)
BANKRUPTCY FILINGS
Chapters 7 & 13 - Chapter 7 - Chapter 7 - Chapter 7 - Chapter 7 - Chapter 7 & 13 -
Discharged 2 years Discharged 2 years Discharged 2 years Discharged 1 1/2 Discharged 1 year 1 day from
(re-established Chapter 13 - Chapter 13 -1 years Chapter 13 -1 day discharge
credit since the Discharged 1 year year from date of Chapter 13 -1 after discharge
discharge) (re-established filing with proof year from date of with proof paid
credit since paid as agreed filing with proof as agreed
discharge) (must be paid as agreed
discharged) (must be
discharged)
DEBT-TO-INCOME RATIO
32%/42% 45% 50% 50% 55% 60%
MAXIMUM COMBINED LOAN-TO-VALUE(1)
95% - Owner Occupied 100% - Owner 90% - Owner 85% - Owner 80% - Owner 70% - Owner
90% - Non Owner Occupied Occupied Occupied Occupied Occupied
Occupied 80% - Non Owner 75% - Non Owner 75% - Non Owner 65% - Non Owner 60% - Non Owner
Occupied Occupied Occupied Occupied Occupied
MAXIMUM LOAN-TO-VALUE
95% 90% 90% 85% 80% 70%
</TABLE>
(1) The combined loan-to-value ratio of a mortgage loan (including a second
mortgage loan) is equal to the ratio (expressed as a percentage) of the original
scheduled principal balance of the mortgage loan plus any senior lien balances
and the fair market value of the mortgage premises at the time of origination.
The fair market value is the lower of (i) the purchase price and (ii) the
appraised value in the case of purchases and is the appraised value in all other
cases.
S-34
<PAGE>
The following tables show the distribution of the identified mortgage
loans as of the statistical cut off date in relation to the classifications
described above:
<TABLE>
<CAPTION>
Group I Group II
Saxon -------------------------------------------------- --------------------------------------------------
Credit Number of Number Current Current Number of Number Current Current
Grade Loans of Loans (%) Balance($) Balance(%) Loans of Loans (%) Balance($) Balance(%)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
A+ 76 7.61 $ 6,877,938.82 8.45 14 1.47 $ 1,472,390.70 1.21
A 174 17.42 13,832,207.64 17.00 31 3.25 5,477,626.60 4.49
A- 294 29.43 25,777,127.44 31.67 366 38.32 54,170,774.07 44.36
B 207 20.72 16,101,784.46 19.78 322 33.72 38,192,574.01 31.27
C 193 19.32 14,580,356.30 17.92 175 18.32 17,385,480.78 14.24
D 55 5.51 4,215,273.36 5.18 47 4.92 5,423,171.34 4.44
--- ------ -------------- ------ --- ------ --------------- ------
Totals 999 100.00% $81,384,688.02 100.00% 955 100.00% $122,122,017.50 100.00%
=== ====== ============== ====== === ====== =============== ======
</TABLE>
SERVICING OF THE MORTGAGE LOANS
GENERAL. Meritech Mortgage Services, Inc., an affiliate of the
depositor, will service the mortgage loans. The servicer began its servicing
operations in 1960 and operated under the name Cram Mortgage Service, Inc.,
before September 1994. The principal offices of the servicer are located in Fort
Worth, Texas. The servicer is a HUD-approved originator and is approved by and
in good standing with Fannie Mae and Freddie Mac. The servicer will provide
customary servicing functions with respect to the mortgage loans. Among other
things, the servicer is obligated under some circumstances to advance delinquent
payments of principal and interest with respect to the mortgage loans and to pay
month end interest with respect to mortgage loans serviced by it. The servicer
must obtain approval of the master servicer with respect to some of its
servicing activities. See "Servicing of Mortgage Loans" in the prospectus.
As of September 30, 2000, the servicer serviced a portfolio of
approximately 58,700 one-to-four family conventional residential mortgage loans
totaling approximately $5.46 billion. The following table sets forth certain
unaudited information concerning the delinquency experience, including loans in
foreclosure, and mortgage loans foreclosed with respect to the servicer's
conventional loan servicing portfolio as of the end of the indicated periods.
The indicated periods of delinquency are based on the number of days past due on
a contractual basis. No mortgage loan is considered delinquent for these
purposes until it is 31 days past due on a contractual basis.
<TABLE>
<CAPTION>
Percentage of Total Portfolio
--------------------------------------------------------------------------------------------------
September 30, 2000 December 31, 1999 December 31, 1998 December 31, 1997 December 31, 1996
------------------ ----------------- ----------------- ----------------- -----------------
By No. By Dollar By No. By Dollar By No. By Dollar By No. By Dollar By No. By Dollar
of Loans Amount of Loans Amount of Loans Amount of Loans Amount of Loans Amount
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Period of
Delinquency
31-60 days 5.18% 5.48% 5.62% 5.48% 6.48% 6.36% 5.82% 6.25% 3.72% 3.10%
61-90 days 1.43% 1.46% 1.67% 1.62% 1.28% 1.34% 1.61% 1.49% 1.02% 1.03%
91 days or more 2.61% 2.62% 1.96% 1.97% 1.46% 1.60% 1.37% 1.20% 1.33% 1.48%
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total Delinquency(1) 9.22% 9.56% 9.25% 9.07% 9.22% 9.30% 8.80% 8.94% 6.07% 5.61%
Loans in foreclosure 3.33% 3.42% 2.88% 3.04% 2.03% 2.45% 2.07% 1.47% 0.91% 1.31%
</TABLE>
-------------------------------------------------
(1)Totals may not sum due to rounding
These statistics represent the recent experience of the servicer. There
can be no assurance that the delinquency and foreclosure experience of the
mortgage loans in the trust will be comparable. In addition, these statistics
are based on all the one-to-four family residential mortgage loans in the
servicer's servicing portfolio, including mortgage loans with a variety of
S-35
<PAGE>
payment and other characteristics, including geographic locations and
underwriting standards. Not all the mortgage loans in the servicer's servicing
portfolio constitute non-conforming credits. Accordingly, there can be no
assurance that the delinquency and foreclosure experience of the trust's
mortgage loans in the future will correspond to the future delinquency and
foreclosure experience of the servicer's one-to-four family conventional
residential mortgage loan servicing portfolio. The actual delinquency and
foreclosure experience of the mortgage loans will depend, among other things,
upon:
o the value of real estate securing the mortgage loans; and
o the ability of borrowers to make required payments.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES; REPURCHASE
The servicing fee rate applicable to each mortgage loan equals
one-twelfth of a fixed percentage per annum of the scheduled principal balance
of the mortgage loan on the first day of the due period with respect to each
distribution date. A due period is the period from and including the second day
of a month to and including the first day of the following month. In addition,
late payment fees with respect to the mortgage loans, revenue from miscellaneous
servicing administration fees, and any interest or other income earned on
collections with respect to the mortgage loans pending remittance, will be paid
to or retained by the servicer as additional servicing compensation. The
servicer must pay certain insurance premiums and ongoing expenses. The servicer
may, with the consent of the master servicer, transfer its servicing to
successor servicers that meet the criteria for servicers approved by the rating
agencies.
The servicer and/or the depositor will have the right, but not the
obligation, to repurchase from the trust any mortgage loan delinquent as to
three consecutive scheduled payments, at a price equal to the unpaid principal
balance thereof plus accrued interest on that balance.
ADVANCES AND MONTH END INTEREST
Before each distribution date, the servicer and any successor servicer
must advance its own funds with respect to delinquent payments of principal of
and interest on the mortgage loans, net of the servicing fees with respect to
any mortgage loan for which it is making an advance, unless the servicer
believes that the advance is non-recoverable. Advances of principal and interest
will be considered non-recoverable only to the extent those amounts are not
reimbursable from:
o late collections;
o insurance proceeds;
o liquidation proceeds; and
o other assets of the trust.
Any failure by the servicer to make any required advance will constitute an
event of default under the servicing agreement. If the servicer fails to make a
required advance of principal and interest, the master servicer will be
obligated to make the advance. The total advance obligations of the master
S-36
<PAGE>
servicer may be subject to a dollar limitation that is acceptable to the rating
agencies as set forth in the trust agreement for the trust. See "Servicing of
Mortgage Loans -- Advances" in the prospectus.
In addition, the servicer must deposit in its custodial account on or
before each remittance date (the 21st day of each month or the preceding
business day if the 21st day is not a business day) an amount equal to month end
interest with respect to the preceding prepayment period (the period from and
including the 18th day of a month to and including the 17th day of the following
month), but only to the extent of the servicing fee payable with respect to the
remittance date. Month end interest means, with respect to any mortgage loan
prepaid in full during a prepayment period, the difference between the interest
that would have been paid on the mortgage loan through the last day of the month
in which liquidation or prepayment occurred and interest actually received by
the servicer with respect to the mortgage loan, in each case net of the
servicing fee, except that month end interest does not accrue with respect to a
prepayment of a mortgage loan during the period from the first day of a month
through the last day of the prepayment period ending during the month. If the
servicer fails to deposit month end interest as required, the master servicer
will be obligated to deposit the amount that the servicer was required to have
deposited.
THE MASTER SERVICER
Saxon Mortgage, Inc., will act as master servicer of the mortgage
loans. The master servicer has limited experience master servicing mortgage
loans. The master servicer will:
o supervise the servicing of the mortgage loans;
o provide specified reports to the trustee regarding the
mortgage loans;
o make advances to the extent described in this prospectus
supplement with respect to the mortgage loans if the servicer
fails to make a required advance; and
o appoint a successor servicer if a servicer is terminated.
The master servicer is entitled to a master servicing fee, payable on
each distribution date, in the amount equal to one-twelfth of the master
servicing fee rate multiplied by the scheduled principal balance of the mortgage
loans on the first day of the due period with respect to each distribution date.
The master servicer will pay the trustee its monthly fees out of the master
servicing fee.
PREPAYMENT AND YIELD CONSIDERATIONS
GENERAL
The weighted average life of, and, if purchased at other than par, the
yield to maturity on, each class of the offered certificates will be directly
related to the rate of payment of principal of the mortgage loans in the related
group, including:
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<PAGE>
o payments in full prior to stated maturity;
o liquidations due to defaults;
o casualties and condemnations; and
o repurchases of mortgage loans by the depositor.
If the actual rate of principal payments on the mortgage loans in a
group is slower than the rate anticipated by an investor who purchases an
offered certificate at a discount, the actual yield to the investor will be
lower than that investor's anticipated yield. If the actual rate of principal
payments on the mortgage loans in a group is faster than the rate anticipated by
an investor who purchases an offered certificate at a premium, the actual yield
to that investor will be lower than such investor's anticipated yield.
The actual rate of principal prepayments on pools of mortgage loans is
influenced by a variety of economic, tax, geographic, demographic, social, legal
and other factors and has fluctuated considerably in recent years. In addition,
the rate of principal prepayments may differ among pools of mortgage loans at
any time because of specific factors relating to the mortgage loans in the
particular pool, including, among other things:
o the age of the mortgage loans;
o the geographic locations of the properties securing the loans;
o the extent of the mortgagors' equity in the properties;
o changes in the mortgagors' housing needs, job or employment
status; and
o the credit quality of the mortgage loans.
The timing of changes in the rate of prepayments may significantly
affect the actual yield to investors who purchase the offered certificates at
prices other than par, even if the average rate of principal prepayments is
consistent with the expectations of investors. In general, the earlier the
payment of principal of the mortgage loans the greater the effect on an
investor's yield to maturity. As a result, the effect on an investor's yield of
principal prepayments occurring at a rate higher or lower than the rate
anticipated by the investor during the period immediately following the issuance
of the offered certificates may not be offset by a subsequent like reduction or
increase in the rate of principal prepayments. Investors must make their own
decisions as to the appropriate prepayment assumptions to be used in deciding
whether to purchase any of the offered certificates. The depositor does not make
any representations or warranties as to the rate of prepayment or the factors to
be considered in connection with an investor's determination.
The term weighted average life refers to the average amount of time
that will elapse from the date of issuance of a certificate until each dollar of
principal of that certificate will be distributed to the investor. The weighted
average life and yield to maturity, if purchased at a price other than par, of
each class of the offered certificates will be influenced by the rate at which
principal payments on the mortgage loans in the related group are paid. These
payments may be in the form of scheduled amortization or prepayments which
include prepayments, liquidations due to default or early termination of the
trust.
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<PAGE>
The class AF-6 certificates will not be entitled to distributions of
principal, either scheduled or unscheduled, until the January 2004 distribution
date, except as otherwise described in this prospectus supplement. After that
date, the relative entitlement of the class AF-6 certificates to payments in
respect of principal is subject to increase in accordance with the calculation
of the Class AF-6 Distribution Amount. See "Description of the Offered
Certificates - Distributions" on page S-52.
As described herein, excess interest and Net Pledged Prepayment
Penalties will be applied, to the extent available, as an additional payment of
principal on the offered certificates to create limited overcollateralization.
See "Description of the Offered Certificates --Excess Interest and Pledged
Prepayment Penalty Cashflow" on page S-55. The level of excess interest
available on any distribution date will be influenced by, among other things:
o The overcollateralization level of the related mortgage loans.
This means the extent to which interest on the mortgage loans
is accruing on a higher principal balance than the certificate
principal balances of the related certificates;
o The loss experience of the mortgage loans. For example, excess
interest will be reduced as a result of realized losses on the
mortgage loans;
o In the case of group II, the level of one month LIBOR and the
indices for the adjustable rate mortgage loans. For example,
for the mortgage loans in group II, excess interest is largely
a function of the extent to which the values of the indices
applicable to those mortgage loans plus the applicable gross
margin exceed the applicable pass through rates; and
o In the case of group I, the extent to which the weighted
average net rate of the fixed rate loans in the group exceeds
the weighted average of the pass through rates of the group I
certificates.
No assurances can be given as to the amount of excess interest or Net Pledged
Prepayment Penalties distributable at any time or in the aggregate.
MANDATORY PREPAYMENT
Amounts, other than interest or investment earnings, remaining in the
pre-funding account on the first distribution date after the end of the
pre-funding period will be applied as a prepayment of principal on the
certificates as described in this prospectus supplement under the heading
"Description of the Offered Certificate - Distributions" beginning on page S-52.
The seller believes that almost all of the original pre-funded amount will be
used by the trust to purchase subsequent mortgage loans. It is unlikely,
however, that the aggregate amount of subsequent mortgage loans purchased will
be identical to the original pre-funded amount. Consequently, certificateholders
will receive some prepayment of principal. See "Description of the Offered
Certificates - Pre-Funding Account and Capitalized Interest Account" on page
S-61.
S-39
<PAGE>
PREPAYMENTS AND YIELDS FOR OFFERED CERTIFICATES
All the mortgage loans in group I are or will be fixed rate mortgage
loans. The rate of prepayments with respect to conventional fixed rate mortgage
loans has fluctuated significantly in recent years. In general, if prevailing
interest rates fall significantly below the interest rates on fixed rate
mortgage loans, those mortgage loans are likely to be subject to higher
prepayment rates than if prevailing rates remain at or above the interest rates
on the mortgage loans. Conversely, if prevailing interest rates rise appreciably
above the interest rates on fixed rate mortgage loans, those mortgage loans are
likely to experience a lower prepayment rate than if prevailing rates remain at
or below the interest rates on such mortgage loans.
The pass through rates applicable to the group I certificates on any
distribution date will equal the lesser of:
o a fixed rate as set forth on page S-4, and
o the weighted average of the interest rates for the mortgage
loans in group I net of servicing fees and master servicing
fees and reduced by a percentage equal to the product of (1)
the pass through rate for the A-IO-I component and (2) a
fraction, the numerator of which is the notional principal
balance of the A-IO-I component for such distribution date,
and the denominator of which is the aggregate principal
balance of the mortgage loans in loan group I before giving
effect to any distributions on such distribution date.
As a result, payments of principal on the mortgage loans in group I
having net mortgage interest rates which exceed the weighted average net rate
may reduce the pass through rates and yields on the related certificates. The
mortgage interest rates of the identified group II mortgage loans as of the
statistical cut off date range from 8.200% to 14.500% per annum. Under certain
scenarios, it is likely that principal prepayments will be concentrated among
mortgage loans with higher mortgage interest rates, thus potentially reducing
the pass through rates on those certificates. The weighted average mortgage rate
of identified group I mortgage loans as of the statistical cut off date is
11.447% per annum. The weighted average mortgage rate of the identified group II
mortgage loans as of the statistical cut off date is 10.841% per annum.
All the mortgage loans in group II are or will be adjustable rate
mortgage loans. As is the case with conventional fixed rate mortgage loans,
adjustable rate mortgage loans may be subject to a greater rate of principal
prepayments in a declining interest rate environment. For example, if prevailing
interest rates fall significantly, adjustable rate mortgage loans could be
subject to higher prepayment rates than if prevailing interest rates remain
constant because the availability of fixed rate mortgage loans at lower interest
rates may encourage mortgagors to refinance their adjustable rate mortgage loans
to a lower fixed interest rate. Nevertheless, no assurance can be given as to
the level of prepayments that the mortgage loans will experience.
The final scheduled distribution date for each of the class AF-1, class
AF-2, class AF-3 and class AF-4 and class AF-6 certificates is the date on which
the certificate principal balance of the class would be reduced to zero
assuming, among other things, that no prepayments are received on the mortgage
loans in the related group, scheduled monthly payments of principal of and
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<PAGE>
interest on each of those mortgage loans are timely received, the optional
termination does not occur, the modeling assumptions expressed below are
followed and principal is paid in accordance with the priorities set forth in
this prospectus supplement. The final scheduled distribution date for each of
the class AF-5, class MF-1, class MF-2, class BF-1, class AV-1, class MV-1,
class MV-2 and class BV-1 certificates is the 13th distribution date following
the latest possible maturing mortgage loan in the related group.
The final scheduled distribution date for the class A-IO certificates
is the thirty-first distribution date following the closing date.
The actual final distribution date with respect to each class of
offered certificates could occur significantly earlier than its final scheduled
distribution date because:
o prepayments are likely to occur which will be distributed in
reduction of the related certificate principal balances, and
o the master servicer will have the right to purchase all of the
mortgage loans on any distribution date when the aggregate
scheduled principal balances of the mortgage loans have
declined to less than 10% of the sum of:
o the aggregate scheduled principal balances of the
initial mortgage loans as of the cut off date, and
o any amounts initially deposited in the pre-funding
account.
The actual final distribution date with respect to each class of the
offered certificates will also be affected by the default and recovery
experience of the mortgage loans. The actual final distribution date of the
offered certificates may be earlier or later than the final scheduled
distribution date.
Prepayments on mortgage loans are commonly measured relative to a
prepayment model or standard, called the prepayment assumption. A separate
prepayment assumption has been calculated for each group and represents an
assumed rate of constant prepayment relative to the then outstanding principal
balance of a pool of mortgage loans for a specified period. 100% of the
prepayment assumption for group I (Scenario IV for group I) assumes prepayment
rates of 2.00% per annum of the then outstanding principal balance of the
related mortgage loans in the first month of the life of those mortgage loans
and an additional approximately 2.22% per annum in each month thereafter up to
and including the tenth month. Beginning in the eleventh month and in each month
thereafter during the life of those mortgage loans, 100% of the prepayment
assumption for group I assumes a constant prepayment rate of 22% per annum. 100%
of the prepayment assumption for group II (Scenario IV for group II) assumes
prepayment rates of 4.0% per annum of the then outstanding principal balance of
the related mortgage loans in the first month of the life of those mortgage
loans and an additional approximately 1.476% per annum in each month thereafter
up to and including the 22nd month. Beginning in the 23rd month and in each
month thereafter during the life of those mortgage loans, 100% of the prepayment
assumption for group II assumes a constant prepayment rate of 35% per annum. As
used in the tables below, 0% prepayment assumption (Scenario I for each group
below) assumes prepayment rates equal to 0% of the prepayment assumption. No
prepayment assumption purports to be a historical description of prepayment
experience or a prediction of the anticipated rate of prepayment of any pool of
mortgage loans, including the related mortgage loans.
S-41
<PAGE>
The following tables have been prepared on the basis of the following
assumptions known as modeling assumptions:
o the mortgage loans of the related groups prepay at the
indicated percentage of the related prepayment assumption;
o distributions on the offered certificates are received, in
cash, on the 25th day of each month, commencing in January
2001, in accordance with the payment priorities set forth in
this prospectus supplement;
o no defaults or delinquencies in, or modifications, waivers or
amendments respecting, the payment by the mortgagors of
principal and interest on the mortgage loans occur;
o scheduled payments on the mortgage loans are assumed to be
received on the first day of each due period commencing in
January 2001, and prepayments represent payment in full of
individual mortgage loans and are assumed to be received on
the last day of each prepayment period, commencing in December
2000, and include 30 days' interest thereon;
o the level of six month LIBOR remains constant at 6.60%;
o the pass through rates for the group II certificates are based
on constant one month LIBOR of 6.7788%;
o the closing date for the offered certificates is December 20,
2000;
o all subsequent mortgage loans are conveyed to the trust on
January 2, 2000;
o prior to the conveyance of the subsequent mortgage loans to
the trust, all amounts in the capitalized interest account are
used to offset exactly any related interest shortfalls;
o the weighted average servicing fee for the group I mortgage
loans is 0.57%;
o the prepayment charge has been calculated as 80% of 6 months
interest on the prepaid amount for prepayments which occur
before the expiration of the prepayment penalty term as
indicated in the loan tables below;
o the periodic cap has been assumed to be the same for all
distribution dates even though the initial periodic cap for
the loans is actually higher;
o the mortgage interest rate for each mortgage loan in group II
is adjusted on its next mortgage interest rate change date and
on subsequent mortgage interest rate change dates, if
necessary, to equal the sum, subject to the applicable
periodic adjustment caps and floors, of:
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<PAGE>
o the assumed level of the applicable index and
o the respective gross margin;
o for purposes of the "Weighted Average Life-- Optional
Termination" in the tables, the offered certificates are
redeemed on the clean-up call date;
o credit enhancement percentages for each group were derived
from the certificate principal balances of the offered
certificates set forth in this prospectus supplement; and
o each group consists of mortgage loans having the approximate
characteristics set forth in the following tables.
The actual amount of pre-funding account proceeds at the closing date
may vary from the assumed amount of pre-funding proceeds used in preparing the
following tables, and the actual servicing fee paid will vary from that assumed
above.
S-43
<PAGE>
<TABLE>
<CAPTION>
INITIAL GROUP I LOANS
NET ORIGINAL PREPAYMENT
AMORTIZATION CURRENT GROSS SERVICING WAC AMORTIZATION REMAINING REMAINING PENALTY
METHODOLOGY BALANCE ($) WAC (%) (%) (%) TERM TERM TERM TO BALLOON TERM
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Level $19,951,610.51 11.704 0.57 11.134 290 289 N/A 0
Level 2,220,883.51 11.737 0.57 11.167 350 349 N/A 14
Level 5,792,047.68 11.537 0.57 10.967 330 327 N/A 33
Level 17,656,988.88 10.974 0.57 10.404 314 313 N/A 59
Balloon 14,044,665.56 11.830 0.57 11.260 360 359 179 0
Balloon 1,749,673.00 11.095 0.57 10.525 360 359 179 17
Balloon 22,059,802.21 11.252 0.57 10.682 360 359 179 35
Balloon 51,524,328.66 11.479 0.57 10.909 360 359 179 59
SUBSEQUENT GROUP I LOANS
NET ORIGINAL PREPAYMENT
AMORTIZATION CURRENT GROSS SERVICING WAC AMORTIZATION REMAINING REMAINING PENALTY
METHODOLOGY BALANCE ($) WAC (%) (%) (%) TERM TERM TERM TO BALLOON TERM
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Level $ 6,650,536.90 11.704 0.57 11.134 290 290 N/A 0
Level 740,294.50 11.737 0.57 11.167 350 350 N/A 15
Level 1,930,682.56 11.537 0.57 10.967 330 330 N/A 36
Level 5,885,662.99 10.974 0.57 10.404 315 315 N/A 60
Balloon 4,681,555.12 11.830 0.57 11.260 360 360 180 0
Balloon 583,224.34 11.095 0.57 10.525 360 360 180 18
Balloon 7,353,267.40 11.252 0.57 10.682 360 360 180 36
Balloon 17,174,776.17 11.479 0.57 10.909 360 360 180 60
INITIAL GROUP II LOANS
GROSS GROSS
GROSS NET GROSS LIFE LIFE PREPAYMENT
CURRENT WAC SERVICING WAC ORIGINAL REMAINING MARGIN PERIODIC CAP FLOOR RESET NEXT PENALTY
BALANCE ($) (%) (%) (%) TERM TERM (%) CAP (%) (%) (%) FREQUENCY RESET TERM
Six Month LIBOR Loans
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
24,230,442.13 10.880 0.55 10.330 360 358 5.956 1.047 17.210 10.844 Semiannual 22 0
2,762,278.56 10.779 0.55 10.229 360 358 6.582 1.452 17.236 10.779 Semiannual 22 12
52,649,699.69 10.830 0.55 10.280 360 358 6.012 1.269 17.299 10.826 Semiannual 22 22
18,533,700.94 10.940 0.55 10.390 360 358 6.178 1.295 17.817 10.929 Semiannual 22 34
12,296,494.91 10.964 0.55 10.414 360 359 6.268 1.132 17.666 10.884 Semiannual 23 58
14,169,136.80 10.845 0.55 10.295 360 357 6.047 1.157 17.448 10.787 Semiannual 34 0
4,190,929.97 10.723 0.55 10.173 360 358 5.943 1.216 17.286 10.723 Semiannual 34 18
73,775,130.24 10.762 0.55 10.212 360 358 5.973 1.136 17.299 10.636 Semiannual 34 34
10,392,186.75 11.103 0.55 10.553 360 358 6.628 1.005 17.263 11.057 Semiannual 34 58
SUBSEQUENT GROUP II LOANS
GROSS GROSS
GROSS NET GROSS LIFE LIFE PREPAYMENT
CURRENT WAC SERVICING WAC ORIGINAL REMAINING MARGIN PERIODIC CAP FLOOR RESET NEXT PENALTY
BALANCE ($) (%) (%) (%) TERM TERM (%) CAP (%) (%) (%) FREQUENCY RESET TERM
Six Month LIBOR Loans
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$7,621,782.32 10.880 0.55 10.330 360 360 5.956 1.047 17.210 10.844 Semiannual 24 0
868,885.74 10.779 0.55 10.229 360 360 6.582 1.452 17.236 10.779 Semiannual 24 14
16,561,173.10 10.830 0.55 10.280 360 360 6.012 1.269 17.299 10.826 Semiannual 24 24
5,829,849.63 10.940 0.55 10.390 360 360 6.178 1.295 17.817 10.929 Semiannual 24 36
3,867,911.51 10.964 0.55 10.4l4 360 360 6.268 1.132 17.666 10.884 Semiannual 24 59
4,456,958.51 10.845 0.55 10.295 360 360 6.047 1.157 17.448 10.787 Semiannual 36 0
1,318,273.74 10.723 0.55 10.173 360 360 5.943 1.216 17.286 10.723 Semiannual 36 20
23,206,261.61 10.762 0.55 10.212 360 360 5.973 1.136 17.299 10.636 Semiannual 36 36
3,268,903.77 11.103 0.55 10.553 360 360 6.628 1.005 17.263 11.057 Semiannual 36 60
</TABLE>
S-44
<PAGE>
<TABLE>
<CAPTION>
PREPAYMENT SCENARIOS
SCENARIO I SCENARIO II SCENARIO III SCENARIO IV SCENARIO V SCENARIO VI SCENARIO VII
<S> <C> <C> <C> <C> <C> <C> <C>
Group I Prepayment 0% 50% 75% 100% 125% 150% 175%
Assumption:
Group II 0% 50% 75% 100% 125% 150% 175%
Prepayment
Assumption:
</TABLE>
The following tables set forth the approximate percentages of the
initial principal amount of the offered certificates that would be outstanding
after each of the dates shown assuming the Clean-up Call is not exercised, and
the approximate weighted average life in years of the offered certificates,
based on prepayment scenarios described in the table entitled "Prepayment
Scenarios." The percentages have been rounded to the nearest 1%.
S-45
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE OF INITIAL CERTIFICATE PRINCIPAL BALANCE
CLASS AF-1 SCENARIO CLASS AF-2 SCENARIO
-------------------------------------------- --------------------------------------------
I II III IV V VI VII I II III IV V VI VII
- -- --- -- - -- --- - -- --- -- - -- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial 100 100 100 100 100 100 100 Initial 100 100 100 100 100 100 100
Percent Percent
12/25/2001 91 61 46 31 16 * 0 12/25/2001 100 100 100 100 100 100 81
12/25/2002 88 18 0 0 0 0 0 12/25/2002 100 100 82 44 8 0 0
12/25/2003 85 0 0 0 0 0 0 12/25/2003 100 75 21 0 0 0 0
12/25/2004 82 0 0 0 0 0 0 12/25/2004 100 37 0 0 0 0 0
12/25/2005 79 0 0 0 0 0 0 12/25/2005 100 4 0 0 0 0 0
12/25/2006 76 0 0 0 0 0 0 12/25/2006 100 0 0 0 0 0 0
12/25/2007 72 0 0 0 0 0 0 12/25/2007 100 0 0 0 0 0 0
12/25/2008 69 0 0 0 0 0 0 12/25/2008 100 0 0 0 0 0 0
12/25/2009 65 0 0 0 0 0 0 12/25/2009 100 0 0 0 0 0 0
12/25/2010 61 0 0 0 0 0 0 12/25/2010 100 0 0 0 0 0 0
12/25/2011 57 0 0 0 0 0 0 12/25/2011 100 0 0 0 0 0 0
12/25/2012 52 0 0 0 0 0 0 12/25/2012 100 0 0 0 0 0 0
12/25/2013 45 0 0 0 0 0 0 12/25/2013 100 0 0 0 0 0 0
12/25/2014 39 0 0 0 0 0 0 12/25/2014 100 0 0 0 0 0 0
12/25/2015 0 0 0 0 0 0 0 12/25/2015 0 0 0 0 0 0 0
12/25/2016 0 0 0 0 0 0 0 12/25/2016 0 0 0 0 0 0 0
12/25/2017 0 0 0 0 0 0 0 12/25/2017 0 0 0 0 0 0 0
12/25/2018 0 0 0 0 0 0 0 12/25/2018 0 0 0 0 0 0 0
12/25/2019 0 0 0 0 0 0 0 12/25/2019 0 0 0 0 0 0 0
12/25/2020 0 0 0 0 0 0 0 12/25/2020 0 0 0 0 0 0 0
12/25/2021 0 0 0 0 0 0 0 12/25/2021 0 0 0 0 0 0 0
12/25/2022 0 0 0 0 0 0 0 12/25/2022 0 0 0 0 0 0 0
12/25/2023 0 0 0 0 0 0 0 12/25/2023 0 0 0 0 0 0 0
12/25/2024 0 0 0 0 0 0 0 12/25/2024 0 0 0 0 0 0 0
12/25/2025 0 0 0 0 0 0 0 12/25/2025 0 0 0 0 0 0 0
12/25/2026 0 0 0 0 0 0 0 12/25/2026 0 0 0 0 0 0 0
12/25/2027 0 0 0 0 0 0 0 12/25/2027 0 0 0 0 0 0 0
12/25/2028 0 0 0 0 0 0 0 12/25/2028 0 0 0 0 0 0 0
12/25/2029 0 0 0 0 0 0 0 12/25/2029 0 0 0 0 0 0 0
12/25/2030 0 0 0 0 0 0 0 12/25/2030 0 0 0 0 0 0 0
12/25/2031 0 0 0 0 0 0 0 12/25/2031 0 0 0 0 0 0 0
Weighted Weighted
Average Average
Life(1) Life(1)
Optional Optional
Termination 10.3 1.3 1.0 0.8 0.7 0.7 0.6 Termination 14.9 3.8 2.6 2.0 1.7 1.4 1.2
Maturity 10.3 1.3 1.0 0.8 0.7 0.7 0.6 Maturity 14.9 3.8 2.6 2.0 1.7 1.4 1.2
CLASS AF-3 SCENARIO CLASS AF-4 SCENARIO
-------------------------------------------- --------------------------------------------
I II III IV V VI VII I II III IV V VI VII
- -- --- -- - -- --- - -- --- -- - -- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial 100 100 100 100 100 100 100 Initial 100 100 100 100 100 100 100
Percent Percent
12/25/2001 100 100 100 100 100 100 100 12/25/2001 100 100 100 100 100 100 100
12/25/2002 100 100 100 100 100 43 0 12/25/2002 100 100 100 100 100 100 84
12/25/2003 100 100 100 38 0 0 0 12/25/2003 100 100 100 100 66 17 0
12/25/2004 100 100 44 0 0 0 0 12/25/2004 100 100 100 76 35 * 0
12/25/2005 100 100 0 0 0 0 0 12/25/2005 100 100 90 41 4 0 0
12/25/2006 100 48 0 0 0 0 0 12/25/2006 100 100 64 19 0 0 0
12/25/2007 100 11 0 0 0 0 0 12/25/2007 100 100 45 3 0 0 0
12/25/2008 100 0 0 0 0 0 0 12/25/2008 100 95 37 0 0 0 0
12/25/2009 100 0 0 0 0 0 0 12/25/2009 100 82 26 0 0 0 0
12/25/2010 100 0 0 0 0 0 0 12/25/2010 100 69 15 0 0 0 0
12/25/2011 100 0 0 0 0 0 0 12/25/2011 100 57 5 0 0 0 0
12/25/2012 100 0 0 0 0 0 0 12/25/2012 100 45 0 0 0 0 0
12/25/2013 100 0 0 0 0 0 0 12/25/2013 100 33 0 0 0 0 0
12/25/2014 100 0 0 0 0 0 0 12/25/2014 100 23 0 0 0 0 0
12/25/2015 37 0 0 0 0 0 0 12/25/2015 100 0 0 0 0 0 0
12/25/2016 0 0 0 0 0 0 0 12/25/2016 54 0 0 0 0 0 0
12/25/2017 0 0 0 0 0 0 0 12/25/2017 47 0 0 0 0 0 0
12/25/2018 0 0 0 0 0 0 0 12/25/2018 40 0 0 0 0 0 0
12/25/2019 0 0 0 0 0 0 0 12/25/2019 32 0 0 0 0 0 0
12/25/2020 0 0 0 0 0 0 0 12/25/2020 23 0 0 0 0 0 0
12/25/2021 0 0 0 0 0 0 0 12/25/2021 12 0 0 0 0 0 0
12/25/2022 0 0 0 0 0 0 0 12/25/2022 1 0 0 0 0 0 0
12/25/2023 0 0 0 0 0 0 0 12/25/2023 0 0 0 0 0 0 0
12/25/2024 0 0 0 0 0 0 0 12/25/2024 0 0 0 0 0 0 0
12/25/2025 0 0 0 0 0 0 0 12/25/2025 0 0 0 0 0 0 0
12/25/2026 0 0 0 0 0 0 0 12/25/2026 0 0 0 0 0 0 0
12/25/2027 0 0 0 0 0 0 0 12/25/2027 0 0 0 0 0 0 0
12/25/2028 0 0 0 0 0 0 0 12/25/2028 0 0 0 0 0 0 0
12/25/2029 0 0 0 0 0 0 0 12/25/2029 0 0 0 0 0 0 0
12/25/2030 0 0 0 0 0 0 0 12/25/2030 0 0 0 0 0 0 0
12/25/2031 0 0 0 0 0 0 0 12/25/2031 0 0 0 0 0 0 0
Weighted Weighted
Average Average
Life(1) Life(1)
Optional Optional
Termination 15.0 6.1 4.0 3.0 2.4 2.0 1.8 Termination 17.5 11.6 7.3 5.0 3.7 2.8 2.3
Maturity 15.0 6.1 4.0 3.0 2.4 2.0 1.8 Maturity 17.5 11.7 7.4 5.0 3.7 2.8 2.3
</TABLE>
(1) The weighted average life is determined by (i) multiplying the amount of
each principal payment by the number of years from the date of issuance to the
related distribution date, (ii) adding the results and (iii) dividing the sum by
the initial certificate principal balance for the applicable class.
S-46
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE OF INITIAL CERTIFICATE PRINCIPAL BALANCE
CLASS AF-5 SCENARIO CLASS AF-6 SCENARIO
-------------------------------------------- --------------------------------------------
I II III IV V VI VII I II III IV V VI VII
- -- --- -- - -- --- - -- --- -- - -- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial 100 100 100 100 100 100 100 Initial 100 100 100 100 100 100 100
percent Percent
12/25/2001 100 100 100 100 100 100 100 12/25/2001 100 100 100 100 100 100 100
12/25/2002 100 100 100 100 100 100 100 12/25/2002 100 100 100 100 100 100 100
12/25/2003 100 100 100 100 100 100 49 12/25/2003 100 100 100 100 100 100 100
12/25/2004 100 100 100 100 100 100 42 12/25/2004 100 93 89 89 90 92 97
12/25/2005 100 100 100 100 100 50 5 12/25/2005 99 86 82 79 77 76 78
12/25/2006 100 100 100 100 73 28 0 12/25/2006 98 75 70 64 59 55 50
12/25/2007 100 100 100 100 53 19 0 12/25/2007 97 66 58 50 43 37 31
12/25/2008 100 100 100 100 52 19 0 12/25/2008 93 45 32 22 17 18 19
12/25/2009 100 100 100 84 44 19 0 12/25/2009 89 30 18 10 6 6 10
12/25/2010 100 100 100 68 34 15 0 12/25/2010 84 20 10 4 2 2 4
12/25/2011 100 100 100 54 25 9 0 12/25/2011 79 14 5 2 1 * *
12/25/2012 100 100 92 42 18 4 0 12/25/2012 73 9 3 1 * * 0
12/25/2013 100 100 76 32 12 1 0 12/25/2013 67 6 2 * * * 0
12/25/2014 100 100 62 25 7 0 0 12/25/2014 61 4 1 * * 0 0
12/25/2015 100 63 25 7 0 0 0 12/25/2015 0 0 0 0 0 0 0
12/25/2016 100 34 11 0 0 0 0 12/25/2016 0 0 0 0 0 0 0
12/25/2017 100 28 7 0 0 0 0 12/25/2017 0 0 0 0 0 0 0
12/25/2018 100 23 4 0 0 0 0 12/25/2018 0 0 0 0 0 0 0
12/25/2019 100 19 2 0 0 0 0 12/25/2019 0 0 0 0 0 0 0
12/25/2020 100 15 0 0 0 0 0 12/25/2020 0 0 0 0 0 0 0
12/25/2021 100 10 0 0 0 0 0 12/25/2021 0 0 0 0 0 0 0
12/25/2022 100 5 0 0 0 0 0 12/25/2022 0 0 0 0 0 0 0
12/25/2023 76 1 0 0 0 0 0 12/25/2023 0 0 0 0 0 0 0
12/25/2024 47 0 0 0 0 0 0 12/25/2024 0 0 0 0 0 0 0
12/25/2025 30 0 0 0 0 0 0 12/25/2025 0 0 0 0 0 0 0
12/25/2026 11 0 0 0 0 0 0 12/25/2026 0 0 0 0 0 0 0
12/25/2027 1 0 0 0 0 0 0 12/25/2027 0 0 0 0 0 0 0
12/25/2028 0 0 0 0 0 0 0 12/25/2028 0 0 0 0 0 0 0
12/25/2029 0 0 0 0 0 0 0 12/25/2029 0 0 0 0 0 0 0
12/25/2030 0 0 0 0 0 0 0 12/25/2030 0 0 0 0 0 0 0
12/25/2031 0 0 0 0 0 0 0 12/25/2031 0 0 0 0 0 0 0
Weighted Weighted
Average Average
Life(1) Life(1)
Optional Optional
Termination 24.2 14.5 9.9 7.4 5.8 4.6 3.5 Termination 13.2 8.0 7.1 6.3 5.4 4.6 4.0
Maturity 24.2 16.6 14.4 11.7 8.8 6.2 3.7 Maturity 13.2 8.0 7.2 6.7 6.5 6.4 6.4
CLASS MF-1 SCENARIO CLASS MF-2 SCENARIO
-------------------------------------------- --------------------------------------------
I II III IV V VI VII I II III IV V VI VII
- -- --- -- - -- --- - -- --- -- - -- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial 100 100 100 100 100 100 100 Initial 100 100 100 100 100 100 100
Percent Percent
12/25/2001 100 100 100 100 100 100 100 12/25/2001 100 100 100 100 100 100 100
12/25/2002 100 100 100 100 100 100 100 12/25/2002 100 100 100 100 100 100 100
12/25/2003 100 100 100 100 100 100 100 12/25/2003 100 100 100 100 100 100 100
12/25/2004 100 100 100 79 61 46 33 12/25/2004 100 100 100 79 61 46 33
12/25/2005 100 100 84 61 44 30 20 12/25/2005 100 100 84 61 44 30 20
12/25/2006 100 99 69 47 31 20 12 12/25/2006 100 99 69 47 31 20 12
12/25/2007 100 87 57 36 22 13 8 12/25/2007 100 87 57 36 22 13 4
12/25/2008 100 77 47 28 16 9 3 12/25/2008 100 77 47 28 16 6 0
12/25/2009 100 67 39 22 11 6 0 12/25/2009 100 67 39 22 11 * 0
12/25/2010 100 59 32 17 8 1 0 12/25/2010 100 59 32 17 5 0 0
12/25/2011 100 52 26 13 6 0 0 12/25/2011 100 52 26 13 * 0 0
12/25/2012 100 45 21 10 2 0 0 12/25/2012 100 45 21 8 0 0 0
12/25/2013 100 39 18 7 0 0 0 12/25/2013 100 39 18 3 0 0 0
12/25/2014 100 34 14 5 0 0 0 12/25/2014 100 34 14 0 0 0 0
12/25/2015 78 14 5 0 0 0 0 12/25/2015 78 14 0 0 0 0 0
12/25/2016 47 8 0 0 0 0 0 12/25/2016 47 4 0 0 0 0 0
12/25/2017 44 6 0 0 0 0 0 12/25/2017 44 1 0 0 0 0 0
12/25/2018 41 4 0 0 0 0 0 12/25/2018 41 0 0 0 0 0 0
12/25/2019 37 2 0 0 0 0 0 12/25/2019 37 0 0 0 0 0 0
12/25/2020 33 0 0 0 0 0 0 12/25/2020 33 0 0 0 0 0 0
12/25/2021 28 0 0 0 0 0 0 12/25/2021 28 0 0 0 0 0 0
12/25/2022 23 0 0 0 0 0 0 12/25/2022 23 0 0 0 0 0 0
12/25/2023 17 0 0 0 0 0 0 12/25/2023 17 0 0 0 0 0 0
12/25/2024 11 0 0 0 0 0 0 12/25/2024 10 0 0 0 0 0 0
12/25/2025 7 0 0 0 0 0 0 12/25/2025 2 0 0 0 0 0 0
12/25/2026 0 0 0 0 0 0 0 12/25/2026 0 0 0 0 0 0 0
12/25/2027 0 0 0 0 0 0 0 12/25/2027 0 0 0 0 0 0 0
12/25/2028 0 0 0 0 0 0 0 12/25/2028 0 0 0 0 0 0 0
12/25/2029 0 0 0 0 0 0 0 12/25/2029 0 0 0 0 0 0 0
12/25/2030 0 0 0 0 0 0 0 12/25/2030 0 0 0 0 0 0 0
12/25/2031 0 0 0 0 0 0 0 12/25/2031 0 0 0 0 0 0 0
Weighted Weighted
Average Average
Life(1) Life(1)
Optional Optional
Termination 18.2 11.1 7.6 5.7 4.6 4.0 3.8 Termination 18.1 11.1 7.6 5.7 4.6 4.0 3.6
Maturity 18.2 11.5 8.7 6.8 5.5 4.8 4.4 Maturity 18.1 11.4 8.7 6.7 5.4 4.6 4.1
</TABLE>
(1) The weighted average life is determined by (i) multiplying the amount of
each principal payment by the number of years from the date of issuance to the
related distribution date, (ii) adding the results and (iii) dividing the sum by
the initial certificate principal balance for the applicable class.
S-47
<PAGE>
PERCENTAGE OF INITIAL CERTIFICATE PRINCIPAL BALANCE
CLASS BF-1 SCENARIO
--------------------------------------------
I II III IV V VI VII
- -- --- -- - -- ---
Initial 100 100 100 100 100 100 100
Percent
12/25/2001 100 100 100 100 100 100 100
12/25/2002 100 100 100 100 100 100 100
12/25/2003 100 100 100 100 100 100 100
12/25/2004 100 100 100 79 61 46 33
12/25/2005 100 100 84 61 44 30 17
12/25/2006 100 99 69 47 31 16 2
12/25/2007 100 87 57 36 20 4 0
12/25/2008 100 77 47 28 9 0 0
12/25/2009 100 67 39 19 1 0 0
12/25/2010 100 59 32 10 0 0 0
12/25/2011 100 52 26 3 0 0 0
12/25/2012 100 45 19 0 0 0 0
12/25/2013 100 39 12 0 0 0 0
12/25/2014 100 34 6 0 0 0 0
12/25/2015 78 5 0 0 0 0 0
12/25/2016 47 0 0 0 0 0 0
12/25/2017 44 0 0 0 0 0 0
12/25/2018 41 0 0 0 0 0 0
12/25/2019 37 0 0 0 0 0 0
12/25/2020 33 0 0 0 0 0 0
12/25/2021 28 0 0 0 0 0 0
12/25/2022 21 0 0 0 0 0 0
12/25/2023 11 0 0 0 0 0 0
12/25/2024 0 0 0 0 0 0 0
12/25/2025 0 0 0 0 0 0 0
12/25/2026 0 0 0 0 0 0 0
12/25/2027 0 0 0 0 0 0 0
12/25/2028 0 0 0 0 0 0 0
12/25/2029 0 0 0 0 0 0 0
12/25/2030 0 0 0 0 0 0 0
12/25/2031 0 0 0 0 0 0 0
Weighted
Average
Life(1)
Optional
Termination 17.9 11.1 7.6 5.7 4.6 3.9 3.5
Maturity 17.9 11.3 8.5 6.4 5.1 4.4 3.9
CLASS AV-1 SCENARIO
--------------------------------------------
I II III IV V VI VII
- -- --- -- - -- ---
Initial 100 100 100 100 100 100 100
Percent
12/25/2001 97 88 84 80 75 71 66
12/25/2002 95 70 58 47 36 26 17
12/25/2003 94 53 36 22 10 0 0
12/25/2004 94 39 26 18 10 0 0
12/25/2005 93 31 19 11 6 0 0
12/25/2006 92 25 14 7 4 0 0
12/25/2007 92 21 10 5 2 0 0
12/25/2008 91 17 8 3 1 0 0
12/25/2009 90 14 6 2 * 0 0
12/25/2010 88 11 4 1 0 0 0
12/25/2011 87 9 3 1 0 0 0
12/25/2012 86 8 2 * 0 0 0
12/25/2013 84 6 2 0 0 0 0
12/25/2014 82 5 1 0 0 0 0
12/25/2015 80 4 1 0 0 0 0
12/25/2016 77 3 * 0 0 0 0
12/25/2017 74 3 * 0 0 0 0
12/25/2018 71 2 0 0 0 0 0
12/25/2019 67 2 0 0 0 0 0
12/25/2020 63 1 0 0 0 0 0
12/25/2021 58 1 0 0 0 0 0
12/25/2022 53 1 0 0 0 0 0
12/25/2023 47 * 0 0 0 0 0
12/25/2024 40 * 0 0 0 0 0
12/25/2025 34 0 0 0 0 0 0
12/25/2026 28 0 0 0 0 0 0
12/25/2027 22 0 0 0 0 0 0
12/25/2028 16 0 0 0 0 0 0
12/25/2029 8 0 0 0 0 0 0
12/25/2030 0 0 0 0 0 0 0
12/25/2031 0 0 0 0 0 0 0
Weighted
Average
Life(1)
Optional
Termination 20.5 4.5 3.2 2.5 1.9 1.5 1.4
Maturity 20.6 4.7 3.3 2.5 2.0 1.5 1.4
(1) The weighted average life is determined by (i) multiplying the amount of
each principal payment by the number of years from the date of issuance to the
related distribution date, (ii) adding the results and (iii) dividing the sum by
the initial certificate principal balance for the applicable class.
S-48
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE OF INITIAL CERTIFICATE PRINCIPAL BALANCE
CLASS MV-1 SCENARIO CLASS MV-2 SCENARIO
-------------------------------------------- --------------------------------------------
I II III IV V VI VII I II III IV V VI VII
- -- --- -- - -- --- - -- --- -- - -- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial 100 100 100 100 100 100 100 Initial 100 100 100 100 100 100 100
Percent Percent
12/25/2001 100 100 100 100 100 100 100 12/25/2001 100 100 100 100 100 100 100
12/25/2002 100 100 100 100 100 100 100 12/25/2002 100 100 100 100 100 100 100
12/25/2003 100 100 100 100 100 97 94 12/25/2003 100 100 100 100 100 100 71
12/25/2004 100 100 73 49 49 89 48 12/25/2004 100 100 73 49 31 19 10
12/25/2005 100 86 54 32 18 42 18 12/25/2005 100 86 54 32 18 9 0
12/25/2006 100 71 39 21 10 20 3 12/25/2006 100 71 39 21 10 0 0
12/25/2007 100 58 29 13 5 6 0 12/25/2007 100 58 29 13 3 0 0
12/25/2008 100 47 21 9 1 0 0 12/25/2008 100 47 21 9 0 0 0
12/25/2009 100 39 15 6 0 0 0 12/25/2009 100 39 15 3 0 0 0
12/25/2010 100 32 11 3 0 0 0 12/25/2010 100 32 11 0 0 0 0
12/25/2011 100 26 8 0 0 0 0 12/25/2011 100 26 8 0 0 0 0
12/25/2012 100 21 6 0 0 0 0 12/25/2012 100 21 4 0 0 0 0
12/25/2013 100 17 4 0 0 0 0 12/25/2013 100 17 * 0 0 0 0
12/25/2014 100 14 2 0 0 0 0 12/25/2014 100 14 0 0 0 0 0
12/25/2015 100 11 0 0 0 0 0 12/25/2015 100 11 0 0 0 0 0
12/25/2016 100 9 0 0 0 0 0 12/25/2016 100 9 0 0 0 0 0
12/25/2017 100 7 0 0 0 0 0 12/25/2017 100 7 0 0 0 0 0
12/25/2018 100 6 0 0 0 0 0 12/25/2018 100 3 0 0 0 0 0
12/25/2019 100 5 0 0 0 0 0 12/25/2019 100 1 0 0 0 0 0
12/25/2020 100 3 0 0 0 0 0 12/25/2020 100 0 0 0 0 0 0
12/25/2021 100 1 0 0 0 0 0 12/25/2021 100 0 0 0 0 0 0
12/25/2022 100 0 0 0 0 0 0 12/25/2022 100 0 0 0 0 0 0
12/25/2023 100 0 0 0 0 0 0 12/25/2023 100 0 0 0 0 0 0
12/25/2024 100 0 0 0 0 0 0 12/25/2024 100 0 0 0 0 0 0
12/25/2025 94 0 0 0 0 0 0 12/25/2025 94 0 0 0 0 0 0
12/25/2026 79 0 0 0 0 0 0 12/25/2026 79 0 0 0 0 0 0
12/25/2027 62 0 0 0 0 0 0 12/25/2027 62 0 0 0 0 0 0
12/25/2028 43 0 0 0 0 0 0 12/25/2028 43 0 0 0 0 0 0
12/25/2029 22 0 0 0 0 0 0 12/25/2029 22 0 0 0 0 0 0
12/25/2030 0 0 0 0 0 0 0 12/25/2030 0 0 0 0 0 0 0
12/25/2031 0 0 0 0 0 0 0 12/25/2031 0 0 0 0 0 0
Weighted Weighted
Average Average
Life(1) Life(1)
Optional Optional
Termination 27.3 8.6 5.9 4.7 4.3 4.5 3.8 Termination 27.3 8.6 5.9 4.6 4.0 3.8 3.3
Maturity 27.6 9.1 6.2 4.8 4.4 5.1 4.2 Maturity 27.6 9.0 6.1 4.7 4.1 3.9 3.3
</TABLE>
CLASS BV-1 SCENARIO
--------------------------------------------
I II III IV V VI VII
- -- --- -- - -- ---
Initial 100 100 100 100 100 100 100
Percent
12/25/2001 100 100 100 100 100 100 100
12/25/2002 100 100 100 100 100 100 100
12/25/2003 100 100 100 100 100 100 26
12/25/2004 100 100 73 49 31 19 5
12/25/2005 100 86 54 32 18 2 0
12/25/2006 100 71 39 21 4 0 0
12/25/2007 100 58 29 11 0 0 0
12/25/2008 100 47 21 2 0 0 0
12/25/2009 100 39 15 0 0 0 0
12/25/2010 100 32 7 0 0 0 0
12/25/2011 100 26 1 0 0 0 0
12/25/2012 100 21 0 0 0 0 0
12/25/2013 100 17 0 0 0 0 0
12/25/2014 100 12 0 0 0 0 0
12/25/2015 100 7 0 0 0 0 0
12/25/2016 100 3 0 0 0 0 0
12/25/2017 100 0 0 0 0 0 0
12/25/2018 100 0 0 0 0 0 0
12/25/2019 100 0 0 0 0 0 0
12/25/2020 100 0 0 0 0 0 0
12/25/2021 100 0 0 0 0 0 0
12/25/2022 100 0 0 0 0 0 0
12/25/2023 100 0 0 0 0 0 0
12/25/2024 100 0 0 0 0 0 0
12/25/2025 94 0 0 0 0 0 0
12/25/2026 79 0 0 0 0 0 0
12/25/2027 62 0 0 0 0 0 0
12/25/2028 43 0 0 0 0 0 0
12/25/2029 22 0 0 0 0 0 0
12/25/2030 0 0 0 0 0 0 0
12/25/2031 0 0 0 0 0 0 0
Weighted
Average
Life(1)
Optional
Termination 27.3 8.6 5.9 4.5 3.9 3.6 3.1
Maturity 27.5 8.7 5.9 4.6 3.9 3.6 3.1
(1) The weighted average life is determined by (i) multiplying the amount of
each principal payment by the number of years from the date of issuance to the
related distribution date, (ii) adding the results and (iii) dividing the sum by
the initial certificate principal balance for the applicable class.
S-49
<PAGE>
THE CLASS A-IO CERTIFICATES
The class A-IO certificates are entitled to distributions of interest
only and are not entitled to distributions of principal. In addition, interest
is calculated on each component of the class A-IO certificates on the basis of
scheduled notional principal balances which, in each case, are reduced to zero
after the thirty-first distribution date after the closing date. Following such
date, the class A-IO certificates will not be entitled to further distributions
of interest.
As indicated in the table below, the yield to investors in the class
A-IO certificates will be sensitive to an extremely high rate of principal
payments (including prepayments) on the mortgage loans, which generally can be
repaid at any time (subject, in certain cases, to payment of a penalty). On the
basis of the assumptions described below, and assuming that the purchase price
for the class A-IO certificates (expressed as a percentage of its original
notional principal balance) is as indicated in the tables below, the pre-tax
yield to maturity on the class A-IO certificates would be 0% if prepayments were
to occur at a CPR of 67.5% per annum. If the actual prepayment rate of the
mortgage loans were to exceed the applicable level for as little as one month
while equaling that level for the remaining months, the investors in the class
A-IO certificates would not recover fully their investments.
The information set forth in the following tables was prepared on the
basis of the modeling assumptions beginning on page S-42 and the assumption that
the purchase price of the class A-IO certificates (expressed as a percentage of
their original notional principal balance) is as indicated in such tables. The
assumed purchase price is not necessarily that at which actual sales will occur.
Additionally, the yields set forth in the tables below were calculated by
determining the monthly discounted rates that, when applied to the applicable
assumed stream of cash flow to be paid on the class A-IO certificates, would
cause the discounted present value of such assumed stream of cash flow to equal
the assumed purchase price of that class plus accrued interest and converting
such monthly rates to corporate bond equivalent rates. Such calculations do not
take into account variations that may occur in the interest rates at which
investors may be able to reinvest funds received by them as distributions on the
class A-IO certificates and consequently do not purport to reflect the return on
any investment in that class when such reinvestment rates are considered.
SENSITIVITY OF CLASS A-IO CERTIFICATES TO PREPAYMENTS
(PRE-TAX YIELDS TO MATURITY)
ASSUMED PRICE 11.7267%
CPR
50% 55% 60% 65% 70%
-----------------------------------------------------------------------------
7.50% 7.50% 5.90% 2.29% -2.54%
-----------------------------------------------------------------------------
THERE IS NO ASSURANCE THAT PREPAYMENTS WILL OCCUR AT ANY CONSTANT
PERCENTAGE OR IN ACCORDANCE WITH ANY OF THE PREPAYMENT ASSUMPTIONS.
S-50
<PAGE>
PAYMENT DELAY FEATURE OF GROUP I CERTIFICATES AND THE CLASS A-IO CERTIFICATES
The effective yield to the holders of group I certificates and the
class A-IO certificates, will be lower than the yield otherwise produced by the
related pass through rate and the purchase price of those certificates because
principal and interest distributions will not be payable to holders until at
least the 25th day of the month following the month of accrual (without any
additional distributions of interest or earnings thereon in respect of such
delay).
DESCRIPTION OF THE OFFERED CERTIFICATES
GENERAL
The certificates to be issued by the trust will consist of:
o the following group I certificates, all of which are offered
by this prospectus supplement:
o class AF-1, class AF-2, class AF-3, class AF-4, class
AF-5 and class AF-6 certificates;
o class MF-1 and class MF-2 certificates; and
o class BF-1 certificates.
o the following group II certificates, all of which are offered
by this prospectus supplement:
o class AV-1 certificates;
o class MV-1 and class MV-2 certificates; and
o class BV-1 certificates.
o the class A-IO certificates, which are offered by this
prospectus supplement; and
o the class PF-1, class PV-1, class C and class R certificates,
which are private certificates.
References to class A, class M-1, class M-2 and class B-1 are, as the
context requires, references to certificates of either or both groups of similar
designations (and in the case of class A also include references, as the context
requires, to the class A-IO certificates). The class M-1, class M-2 and class
B-1 certificates are subordinated certificates.
The sum of the initial scheduled principal balances of each mortgage loan
group and related amounts on hand in the pre-funding account will equal the
initial certificate principal balances of the related group of certificates. The
class A-IO certificates will have the notional principal balance described
herein. The class M-1 certificates are subordinate in right of payment to the
class A certificates; the class M-2 certificates are subordinate in right of
payment to the class A and class M-1 certificates; and the class B-1
certificates are subordinate in right of payment to the class A, class M-1 and
class M-2 certificates, in each case to the extent described herein. See
"--Distributions - Distributions of Principal."
S-51
<PAGE>
The class A-IO certificates will consist of two non-separable payment
components, the "A-IO-I component" and the "A-IO-II component." The notional
principal balances of the A-IO-I component and the A-IO-II component initially
will be equal to $52,700,000 and $24,000,000, respectively, and thereafter will
be calculated as described in the definition of "notional principal balance" set
forth in the Glossary at the end of this prospectus supplement. Interest
distributable to holders of the class A-IO certificates will be calculated on
the basis of interest accrued on the notional principal balances of the A-IO-I
component and the A-IO-II component during the first 31 accrual periods.
Thereafter, no further interest will accrue on the class A-IO certificates and
no further distributions will be made on the class A-IO certificates.
Significant defined terms that are necessary to develop an
understanding of the manner in which distributions will be made on the offered
certificates appear in the Glossary at the end of this prospectus supplement.
Persons in whose names certificates are registered in the certificate
register maintained by the trustee are the holders of the certificates. For as
long as the offered certificates are in book-entry form with DTC, the only
holder of the offered certificates as the term holder is used in the trust
agreement for the trust will be Cede & Co., a nominee of DTC. No beneficial
owner will be entitled to receive a definitive certificate representing the
beneficial owner's interest in the trust, except in the event that physical
certificates are issued under limited circumstances set forth in the trust
agreement. All references in this prospectus supplement and the accompanying
prospectus to the holders of offered certificates shall mean and include the
rights of holders as such rights may be exercised through DTC and its
participating organizations, except as otherwise specified in the Agreement. See
"Description of the Offered Certificates - Book-entry Registration of the
Offered Certificates" on page S-63.
As described under "The Mortgage Loan Pool" on page S-16, the mortgage
loan pool is divided into group I, which contains mortgage loans having fixed
interest rates, and group II, which contains mortgage loans having adjustable
interest rates.
The trust agreement for the trust requires that the trustee create an
asset proceeds account and a distribution account. All funds in those accounts
must be invested and reinvested, as directed by the master servicer, in
permitted investments. See "The Agreement -- Administration of Accounts" in the
prospectus.
One day prior to the related distribution date or, if that day is not a
business day, the immediately preceding business day, the master servicer is
required to withdraw from the master servicer custodial account and remit to the
asset proceeds account and then to the distribution account an amount equal to
the interest funds and principal funds with respect to each group for that
distribution date.
DISTRIBUTIONS
General. Distributions on each class of the certificates will be made
on each distribution date to holders of record as of the last business day of
the month immediately preceding the calendar month in which the distribution
date occurs, or the closing date in the case of the first distribution date, in
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an amount equal to the product of the holder's percentage interest and the
amount to be distributed to that class on the distribution date. The percentage
interest represented by any certificate will be equal to the percentage obtained
by dividing the certificate principal balance of the certificate by the
certificate principal balance of all certificates of the same class.
Distributions of Interest. On each distribution date, the amount of
interest distributable with respect to the group I certificates and the class
A-IO certificates is the interest which has accrued on those certificates at the
related pass through rate during the calendar month immediately preceding the
calendar month in which the distribution date occurs. On each distribution date,
interest distributable with respect to the group II certificates is the interest
which has accrued on those certificates at the then applicable pass through rate
from and including the preceding distribution date (or from the closing date in
the case of the first distribution date) to and including the day prior to the
current distribution date. Each period referred to in the prior sentence
relating to the accrual of interest is an accrual period for the related
distribution date. The pass through rates for the certificates can be found on
page S-4 above.
All calculations of interest on the group I certificates and on the
class A-IO certificates will be made on the basis of a 360-day year assumed to
consist of twelve 30-day months (30/360). All calculations of interest on the
group II certificates will be made on the basis of the actual number of days and
a year of 360 days.
On each distribution date, the interest funds (and any amounts
transferred from the capitalized interest account for that distribution date)
with respect to each group are required to be distributed in the following order
of priority until the interest funds and any amounts transferred from the
capitalized interest account have been fully distributed:
o first, to each class of the class A certificates for such
group and the related component of the class A-IO
certificates, the Current Interest and any Interest Carry
Forward Amount for such class on that distribution date;
provided, however, if the interest funds and any amount
transferred from the capitalized interest account are not
sufficient to make a full distribution of the Current Interest
and any Interest Carry Forward Amount with respect to the
class A certificates and the related component of the class
A-IO certificates of such group, the interest funds and other
amounts transferred will be distributed pro rata among each
such class of the class A certificates based on the ratio of:
o the Current Interest and Interest Carry Forward
Amount for that class to
o the total amount of Current Interest and any Interest
Carry Forward Amount for the class A certificates of
the group;
o second, to the class M-1 certificates of the group, the
Current Interest for that class and distribution date;
o third, to the class M-2 certificates of the group, the Current
Interest for that class and distribution date;
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o fourth, to the class B-1 certificates of the group, the
Current Interest for that class and distribution date; and
o fifth, any remainder as described below under the subheading
"-- Excess Interest and Pledged Prepayment Penalty Cashflow"
on page S-55.
The pass through rates for the group II certificates on any
distribution date are capped at the Group II Available Funds Cap for that date.
On any distribution date that the pass through rate for a class of group II
certificates is based upon the Group II Available Funds Cap, the excess of the
amount of interest that the class would have been entitled to receive on that
distribution date based on LIBOR plus the applicable spread, but not more than
the weighted average of the maximum lifetime net mortgage interest rates for
group II over the amount of interest the class received on that distribution
date based on the Group II Available Funds Cap, together with the unpaid portion
of any excess from prior distribution dates (and interest accrued at the then
applicable pass through rate, without giving effect to the Group II Available
Funds Cap) is the Group II Certificates Carryover Amount for that class. Group
II Certificates Carryover Amounts will be payable on any distribution date, to
the extent there are sufficient available funds but only on or prior to the last
distribution date with respect to a class as described in this prospectus
supplement. The rating of the group II certificates does not address the
likelihood of the payment of any Group II Certificates Carryover Amount. All of
the group I certificates are also subject to a cap at the Group I Available
Funds Cap and will be entitled to a similarly calculated carryover amount known
as the Group I Certificates Carryover Amount. The group I certificates are only
entitled to amounts in respect of shortfalls resulting from the application of
the cap to the extent of available Pledged Prepayment Penalties on group I
mortgage loans as described below.
After the Clean-Up Call Date, the pass-through rates on the class AF-5,
class MF-1 and class MF-2 certificates will increase by 0.50% and the spread
over one month LIBOR for the class AV-1, class MV-1, class MV-2 and class BV-1
certificates increases to 0.48%, 0.93%, 1.65% and 2.925%, respectively.
Distributions of Principal. On each distribution date, the Principal
Distribution Amount for that distribution date with respect to each group is
required to be distributed in the following order of priority until the
Principal Distribution Amount has been fully distributed:
o to the class A certificates of the group, the Class A
Principal Distribution Amount for the group; provided,
however, the Class A Principal Distribution Amount for group I
is required to be distributed as follows: first, the class
AF-6 Distribution Amount to the class AF-6 certificates, and
then the balance of the Class A Principal 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 so that no
distribution will be made to any class until the certificate
principal balances of all the class A certificates with a
lower numeral designation shall have been reduced to zero; and
the Class A Principal Distribution Amount for group II is
required to be distributed to the class AV-1 certificates
until the certificate principal balance of that class has been
reduced to zero; and provided, further, that, on any
distribution date on which the certificate principal balance
of the class A certificates with respect to group I is equal
to or greater than the scheduled principal balances of the
mortgage loans in that group, the Class A Principal
Distribution Amount for group I will be distributed pro rata
and not sequentially to those class A certificates;
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o to the class M-1 certificates of the group, the Class M-1
Principal Distribution Amount for that class;
o to the class M-2 certificates of the group, the Class M-2
Principal Distribution Amount for that class;
o to the class B-1 certificates of the group, the Class B-1
Principal Distribution Amount for that class; and
o if a Subordinated Trigger Event exists with respect to a group
on the distribution date, any remaining amounts will be
distributed sequentially to the class B-1, class M-2 and class
M-1 certificates of such group, in that order.
Notwithstanding the foregoing, before the related Stepdown Date, or
while a Trigger Event with respect to a group exists, the Principal Distribution
Amount for the group will be distributed in the following order of priority:
o exclusively to the class A certificates of the related group
(in accordance with the two provisos to the first item of the
immediately preceding paragraph) until the certificate
principal balances of the class A certificates have been
reduced to zero;
o after the certificate principal balance of the related class A
certificates has been reduced to zero, exclusively to the
class M-1 certificates of the group;
o after the certificate principal balance of the related class
M-1 certificates has been reduced to zero, exclusively to the
class M-2 certificates of the group; and
o after the certificate principal balance of the related class
M-2 certificates has been reduced to zero, exclusively to the
class B-1 certificates of the group.
EXCESS INTEREST AND PLEDGED PREPAYMENT PENALTY CASHFLOW
The certificates of each group will have the benefit of certain
prepayment penalties paid on mortgage loans in the related group. The prepayment
penalties not allocated to a group of certificates will be paid to the holders
of the class PF-1 and PV-1 certificates. On each distribution date, Pledged
Prepayment Penalties with respect to each group will be required to be
distributed to pay any shortfall in interest on certificates in the group
resulting from the application of a cap.
On each distribution date, interest funds with respect to each group
not otherwise required to be distributed as described under the heading
"--Distributions--Distributions of Interest" and Net Pledged Prepayment
Penalties will be required to be distributed in the following order of priority
until fully distributed:
o the Extra Principal Distribution Amount for the group;
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o to the class M-1 certificates of the group, the Interest Carry
Forward Amount for that class;
o to the class M-1 certificates of the group, the Unpaid
Realized Loss Amount for that class;
o to the class M-2 certificates of the group, the Interest Carry
Forward Amount for that class;
o to the class M-2 certificates of the group, the Unpaid
Realized Loss Amount for that class;
o to the class B-1 certificates of the group, the Interest Carry
Forward Amount for that class;
o to the class B-1 certificates of the group, the Unpaid
Realized Loss Amount for that class;
o in the case of group II, to the group II certificates, in the
order in which distributions of Current Interest are made, the
Group II Certificates Carryover;
o for distribution to the other group to the extent that any
Unpaid Realized Loss Amounts listed above with respect to the
other group have not otherwise been distributed in full for
that distribution date in accordance with the priorities set
forth above; and
o to the class C and class R certificates, the remaining amount.
The level of excess interest for a group will depend on, among other
things:
o the overcollateralization level of the related mortgage loans;
o the loss experience of the related mortgage loans;
o in the case of group II, the level of one month LIBOR and the
indices for the adjustable rate mortgage loans; and
o in the case of group I, the extent to which the weighted
average net rate of the fixed rate loans in the group exceeds
the weighted average of the pass through rates of the group I
certificates.
No assurance can be given as to the levels of excess interest or prepayment
penalties at any time. For a more detailed description of the factors affecting
the levels of excess interest and prepayment penalties see "Prepayment and Yield
Considerations--General."
REALIZED LOSSES
If, on any distribution date, the aggregate certificate principal
balances of the certificates with respect to a mortgage loan group (after giving
effect to all distributions to be made on that distribution date) exceed the
scheduled principal balances of the mortgage loans in the group, the certificate
principal balances of the subordinate certificates (but not the class A
certificates) of the group will be reduced by an amount equal to that excess,
which is an Applied Realized Loss Amount, in inverse order of seniority:
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<PAGE>
o first, to the related class B-1 certificates, until the
certificate principal balance of that class has been reduced
to zero;
o second, to the related class M-2 certificates, until the
certificate principal balance of that class has been reduced
to zero; and
o third, to the related class M-1 certificates, until the
certificate principal balance of that class has been reduced
to zero.
If the certificate principal balance of a class of subordinate
certificates is reduced, that class thereafter will be entitled to distributions
of interest and principal only with respect to the certificate principal balance
so reduced. On subsequent distribution dates, however, as described above,
interest funds and Net Pledged Prepayment Penalties with respect to each group
not otherwise required to be distributed will be applied to reduce Unpaid
Realized Loss Amounts in direct order of seniority.
Although the certificate principal balance of class A certificates will
not be reduced on account of Realized Losses even if the certificate principal
balances of all the subordinate certificates have been reduced to zero, the
amount available to be distributed to the class A certificates as principal may
be less than the certificate principal balances of the class A certificates.
GROUP II RESERVE FUND
The trust agreement provides for a reserve fund (the "Group II Reserve
Fund") which is held by the trustee on behalf of the holders of the group II
certificates. The Group II Reserve Fund will be an asset of the trust but not of
any REMIC. The master servicer will be the owner of the Group II Reserve Fund
for tax purposes only, and amounts on deposit in the Group II Reserve Fund will
be invested at the direction of the master servicer as provided in the trust
agreement.
The only asset of the Group II Reserve Fund will be payments, if any,
received under the Cap Agreement deposited into the Group II Reserve Fund.
Distributions from Group II Reserve Fund. On each distribution date
(after giving effect to the distributions described under "--Excess Interest and
Pledged Prepayment Penalty Cashflow"), the trustee will withdraw from the Group
II Reserve Fund an amount equal to the Group II Reserve Fund Transfer Amount and
apply such amount in the following order of priority:
o first, to the class AV-1 certificates any Unpaid Realized Loss
Amount for that class;
o second, to the class MV-1 certificates, any Unpaid Realized
Loss Amount for that class;
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o third, to the class MV-2 certificates, any Unpaid Realized
Loss Amount for that class;
o fourth, to the class BV-1 certificates, any Unpaid Realized
Loss Amount for that class; and
o fifth, any remainder to the master servicer.
"Group II Reserve Fund Transfer Amount" means an amount equal to the
lesser of (x) the amount on deposit in the Group II Reserve Fund and (y) the sum
of the principal portion of any Realized Losses incurred on the mortgage loans
in group II during the related due period to the extent not otherwise paid on
that distribution date PLUS the amount of any Unpaid Realized Loss Amount for
the class AV-1, class MV-1, class MV-2 and class BV-1 certificates, after taking
into account all other distributions in respect thereof on that distribution
date.
In accordance with the terms of the trust agreement, amounts on deposit
in the Group II Reserve Fund will be released (1) after all distributions are
made on each distribution date to the extent that the amount on deposit in the
Group II Reserve Fund exceeds the Specified Group II Reserve Fund Requirement
and (2) after all distributions are made on the distribution date in January
2004. All amounts released from the Group II Reserve Fund will be paid to the
master servicer. The "Specified Group II Reserve Fund Requirement" for the Group
II Reserve Fund and each distribution date shall equal the greater of the
overcollateralization shortfall for the group II certificates and $1,000 through
January 2004, and thereafter the Specified Group II Reserve Fund Requirement
will equal zero.
The Cap Agreement. The assets of the trust will include an interest
rate cap agreement documented pursuant to an ISDA Master Agreement
(Multicurrency-Cross Border), together with a Schedule and a Confirmation (the
"Cap Agreement") pursuant to which Bank of America, N.A. (together with any
successor, the "Counterparty") will agree to pay to the trust a monthly payment
in an amount equal to the product of:
(1) the excess, if any, of LIBOR over 6.97%;
(2) the Scheduled Notional Amount; and
(3) a fraction, the numerator of which is the actual number of
days elapsed from the previous distribution date to but
excluding the current distribution date (or, for the first
distribution date, the actual number of days elapsed from the
closing date to but excluding the first distribution date),
and the denominator of which is 360.
The trust will be entitled to receive an amount equal to the product of
(i) the excess of LIBOR over 6.97% and (ii) the lesser of (A) the Scheduled
Notional Amount and (B) the aggregate certificate principal balance of the class
AV-1, class MV-1, class MV-2 and class BV-1 certificates.
The "Scheduled Notional Amounts" are set forth with respect to each
distribution date in "Annex I; Scheduled Notional Amounts." The initial
Scheduled Notional Amount will be $280,000,000. The Cap Agreement will terminate
after the distribution date in January 2004.
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The Cap Agreement will be governed by and construed in accordance with
the laws of the State of New York and will be documented on the ISDA Master
Agreement, as supplemented by a schedule and a confirmation. The obligations of
the Counterparty are limited to those specifically set forth in the Cap
Agreement.
The trust agreement contains provisions permitting the trustee to enter
into any amendment to the Cap Agreement requested by the Counterparty to cure
any ambiguity in, or correct or supplement any provision of, the Cap Agreement,
so long as the trustee determines that the amendment will not adversely affect
the interests of the certificateholders.
The respective obligations of the Counterparty and the trust to pay
specified amounts due under the Cap Agreement will be subject to the following
conditions precedent: (1) no Cap Default (as defined below) or event that with
the giving of notice or lapse of time or both would become a Cap Default shall
have occurred and be continuing with respect to the Cap Agreement and (2) no
Termination Event (as defined below) has occurred or been effectively designated
with respect to the Cap Agreement.
"Events of Default" under the Cap Agreement (each a "Cap Default") are
limited to:
o the following standard events of default under the ISDA Master
Agreement:
o "Failure to Pay or Deliver" will apply to the
Counterparty and the trust,
o "Breach of Agreement" will apply only to the
Counterparty,
o "Credit Support Default" will apply only to the
Counterparty,
o "Misrepresentation" will apply only to the
Counterparty,
o "Default under Specified Transaction" will apply to
the Counterparty and the trust,
o "Bankruptcy" will apply to the Counterparty and the
trust,
o "Merger without Assumption" will apply to the
Counterparty and the trust,
as described in Sections 5(a)(i), 5(a)(ii), 5(a))(iii), 5(a)(iv), 5(a)(v),
5(a)(vii) and 5(a)(viii) of the ISDA Master Agreement.
"Termination Events" under the Cap Agreement consist of the following
standard events under the ISDA Master Agreement: "Illegality" (which generally
relates to changes in law causing it to become unlawful for either party to
perform its obligations under the Cap Agreement), "Tax Event" (which generally
relates to either party to the Cap Agreement receiving a payment under the Cap
Agreement from which an amount has been deducted or withheld for or on account
of taxes), "Tax Event Upon Merger" (which generally relates to either party to
the Cap Agreement receiving a payment under the Cap Agreement from which an
amount has been deducted or withheld for or on account of taxes resulting from a
merger) and "Credit Event Upon Merger" (which only applies to the Counterparty
and an entity providing credit support for it becoming weaker as a result of a
merger) as described in Section 5(b)(i), 5(b)(ii), 5(b)(iii) and 5(b)(iv) of the
ISDA Master Agreement. In addition, there are additional Termination Events
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relating to the trust if the trust should terminate, a rating agency downgrade
shall occur with respect to the Counterparty or if the trust agreement or
certain other transaction documents are amended in a manner adverse to the
Counterparty without the consent of the Counterparty.
Upon the occurrence of any Cap Default under the Cap Agreement, the
non-defaulting party will have the right to designate an Early Termination Date
(as defined in the ISDA Master Agreement). With respect to Termination Events,
an Early Termination Date may be designated by one of the parties (as specified
in the Cap Agreement) and will occur only upon notice and, in some
circumstances, after any affected party has used reasonable efforts to transfer
its rights and obligations under the Cap Agreement to a related entity within a
limited period after notice has been given of the Termination Event, all as set
forth in the Cap Agreement. The occurrence of an Early Termination Date under
the Cap Agreement will constitute a "Cap Early Termination."
If the long-term unsecured and unsubordinated debt rating of the
Counterparty (or any successor credit support provider) is withdrawn or reduced
below "A" by Fitch or "A1" by Moody's or such other higher rating specified in
the Cap Agreement (this withdrawal or reduction, a "Cap Rating Agency
Downgrade"), the Counterparty is required, no later than the 30th day following
the Cap Rating Agency Downgrade, at the Counterparty's expense, either to (1)
obtain a substitute counterparty that has a counterparty rating of at least "A"
by Fitch and "A1" by Moody's or such other high rating specified in the Cap
Agreement and is approved by the trust, which approval will not be unreasonably
withheld, or (2) enter into arrangements reasonably satisfactory to the trustee,
including collateral arrangements, guarantees or letters of credit, which
arrangements will result in the total negation of the effect or impact of the
Cap Rating Agency Downgrade on the holders of the group II certificates.
Certain Information Concerning the Counterparty. The Counterparty is a
national banking association organized under the laws of the United States, and
its principal executive offices are located in Charlotte, North Carolina. The
Counterparty is a wholly-owned indirect subsidiary of Bank of America
Corporation (the "Corporation") and is engaged in a general commercial banking
and trust business, offering a wide range of commercial, corporate,
international, financial market, retail and fiduciary banking services. As of
September 30, 2000 the Counterparty had consolidated assets of $607 billion,
consolidated deposits of $376 billion and shareholder equity of $49 billion
based on regulatory accounting principles.
The Corporation is a bank holding company registered under the Bank
Holding Company Act of 1956, as amended, with its principal executive offices
located in Charlotte, North Carolina. Additional information regarding the
Corporation is set forth in its Annual Report on Form 10-K for the fiscal year
ended December 31, 1999 (the "Form 10-K").
The Counterparty is the surviving entity in the July 23, 1999 merger
(the "Merger") of the two principal bank subsidiaries of the Corporation,
pursuant to which NationsBank, N.A. was merged with and into Bank of America
National Trust & Savings Association, which at the effective time of the Merger
changed its name to "Bank of America, N.A.".
Moody's Investors Service, Inc. ("Moody's") currently rates the
Counterparty's long-term certificates of deposit as "Aa1" and short-term
certificates of deposit as "P-1." Further information with respect to such
ratings may be obtained from Moody's. Standard & Poor's Rating Services
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("Standard & Poor's") rates the Counterparty's long-term certificates of deposit
as "AA-" and its short-term certificates of deposit as "A-1+." Further
information with respect to such ratings may be obtained from Standard & Poor's.
No assurances can be given that the current ratings of the Counterparty's
instruments will be maintained.
The Counterparty will provide copies of the most recent Annual Report
on Form 10-K of the Corporation and the publicly available portion of the most
recent quarterly Call Report of the Counterparty delivered to the Comptroller of
the Currency, without charge, to each person to whom this document is delivered,
on the written request of such person. Written requests should be directed to:
Bank of America Corporate Communications
Bank of America Corporate Center, 18th Floor
Charlotte, North Carolina 28255
Attention: Corporate Communications
The information set forth under the heading "Certain Information
Concerning the Counterparty" relates to and has been obtained from the
Counterparty, and neither the master servicer, the servicer, the seller, the
depositor or the trustee is responsible for any misstatement or omission in such
information. The information concerning the Corporation and the Counterparty
contained herein is furnished solely to provide limited introductory information
regarding the Corporation and the Counterparty and does not purport to be
comprehensive. Such information is qualified in its entirety by the detailed
information appearing in the documents and financial statements referenced
above.
The delivery of this prospectus supplement shall not create any
implication that there has been no change in the affairs of the Corporation or
the Counterparty since the date hereof, or that the information contained or
referred to in this heading is correct as of any time subsequent to its date.
PRE-FUNDING ACCOUNT AND CAPITALIZED INTEREST ACCOUNT
On the closing date, the seller will deposit approximately $161,000,000
into a separate pre-funding account to be maintained in the name of the trustee
for the benefit of the holders of the group I certificates and group II
certificates, as applicable. Approximately $65,000,000 of the original
pre-funded amount will be used to acquire group I subsequent mortgage loans and
approximately $96,000,000 of the original pre-funded amount will be used to
acquire group II subsequent mortgage loans, in each case during the period
beginning on the closing date and generally terminating on the earlier to occur
of:
o the date on which the amount on deposit in the pre-funding
account, excluding any interest or other investment earnings,
is less than $100,000; and
o March 20, 2001.
The original pre-funded amount will be reduced during the pre-funding
period by the amount used to purchase subsequent mortgage loans in accordance
with the trust agreement for the trust. Any pre-funded amount, excluding any
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interest or other investment earnings, remaining at the end of the pre-funding
period will be included as part of principal funds and will be distributed to
holders of group I certificates and group II certificates (in the case of group
II allocated appropriately between subgroup A and subgroup B), respectively, on
the first distribution date thereafter as a prepayment of principal in reduction
of the related certificate principal balances. This will result in an
unscheduled distribution of principal in respect of the related certificates on
that date.
On the closing date, the seller will deposit approximately $1,375,000
into a separate capitalized interest account to be maintained in the name of the
trustee for the benefit of holders of the group I certificates and group II
certificates, as applicable. Amounts on deposit in the capitalized interest
account will be applied during the pre-funding period to the extent necessary to
ensure that the full amount of interest required to be distributed to holders of
the related classes of offered certificates is distributed. Amounts remaining in
the capitalized interest account, excluding interest and any other investment
earnings, after the end of the pre-funding period will be paid to the seller.
Amounts on deposit in the pre-funding account and the capitalized
interest account will be invested in permitted investments. All interest and any
other investment earnings on amounts on deposit in the pre-funding account and
the capitalized interest account will be paid to the seller. Neither the
pre-funding account nor the capitalized interest account will be assets of any
REMIC established under the trust agreement for the trust. For federal income
tax purposes, the pre-funding account and the capitalized interest account will
be owned by, and all interest and other investment earnings on amounts in the
pre-funding account and the capitalized account will be taxable to, the seller.
CALCULATION AGENT
The master servicer has appointed Bankers Trust Company to serve as
calculation agent for the trust. As calculation agent, Bankers Trust Company
will be responsible for calculating and distributing to holders of certificates
all amounts of principal and interest due on each distribution date.
CALCULATION OF ONE MONTH LIBOR
On each interest determination date, which is the second business day
preceding each distribution date (December 18, 2000 for the first distribution
date), the calculation agent, as agent of the master servicer, will determine
one month LIBOR.
One month LIBOR means, as of any interest determination date, the rate
for one-month U.S. dollar deposits which appears on the Telerate Page 3750, as
of 11:00 a.m., London time, on that interest determination date. If that 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 for a period equal to the relevant
accrual period (commencing on the first day of that accrual period). The
calculation agent, as agent for the master servicer, will request the principal
London office of each of the reference banks to provide a quotation of its rate.
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If at least two such quotations are provided, the rate for that day will be the
arithmetic mean of the quotations. 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 master servicer, at
approximately 11:00 a.m., New York City time, on that day for loans in United
States dollars to leading European banks for a period equal to the relevant
accrual period (commencing on the first day of that accrual period).
Telerate Page 3750 means the display page currently so designated on
the Bridge Telerate Market Report (or another page that may replace that page on
that service for the purpose of displaying comparable rates or prices) and
reference banks means leading banks selected by the master servicer and engaged
in transactions in Eurodollar deposits in the international Eurocurrency market.
BOOK-ENTRY REGISTRATION OF THE OFFERED CERTIFICATES
The offered certificates will be book-entry certificates. Beneficial
owners may elect to hold their book-entry certificates directly through DTC in
the United States or Clearstream Banking, societe anonyme (formerly Cedelbank),
or Euroclear in Europe if they are participants of those systems or indirectly
through organizations which are participants. The book-entry certificates will
be issued in one or more certificates per class of offered certificates which in
the aggregate equal the principal balance of the offered certificates and will
initially be registered in the name of Cede & Co., the nominee of DTC. See
"Description of the Certificates -- Book-Entry Procedures" and "-- Global
Clearance, Settlement and Tax Documentation Procedures" in the prospectus.
THE TRUST AGREEMENT
The certificates will be issued in accordance with a trust agreement to
be dated as of December 1, 2000, among the depositor, the master servicer and
the trustee. In addition to the provisions of the trust agreement summarized
elsewhere in this prospectus supplement, there is set forth below a summary of
certain other provisions of the trust agreement. See also "The Agreement -- The
Trustee," "-- Administration of Accounts," "-- Events of Default and Remedies,"
"-- Amendment" and "-- Termination" in the prospectus.
FORMATION OF THE TRUST
On the closing date, the depositor will create and establish the trust
under the trust agreement and will sell without recourse the initial mortgage
loans to the trust, and the trust will issue the certificates under the terms of
the trust agreement. During the pre-funding period, the depositor may sell
without recourse subsequent mortgage loans. The prospectus contains important
additional information regarding the terms and conditions of the certificates.
The depositor will provide to any prospective or actual holder of offered
certificates, upon written request, a copy of the trust agreement without
exhibits. Requests should be addressed to Saxon Asset Securities Company, 4880
Cox Road, Glen Allen, Virginia 23060, Attention: Secretary.
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The trust will consist of:
o the mortgage loans;
o prepayment penalties to the extent described in this
prospectus supplement;
o an interest rate cap agreement and the related group II
reserve fund;
o those assets that are held in any account held for the benefit
of the certificateholders;
o any mortgaged premises acquired on behalf of the
certificateholders by foreclosure or by deed in lieu of
foreclosure;
o the rights of the trustee to receive the proceeds of
applicable insurance policies and funds, if any, required to
be maintained under the terms of the trust agreement;
o certain rights of the depositor to the enforcement of
representations and warranties made by the seller relating to
the mortgage loans; and
o the servicing agreement.
The offered certificates will not represent an interest in or an
obligation of, nor will the mortgage loans be guaranteed by, the seller, the
depositor, the servicer, the master servicer or the trustee.
REPORTS TO CERTIFICATEHOLDERS
On each distribution date, the master servicer will report or cause to
be reported in writing to each holder of an offered certificate:
o with respect to each class of offered certificates based on a
certificate in the original principal amount of $1,000:
o the amount of the distribution on the distribution
date;
o the amount of the distribution allocable to interest;
o the amount of the distribution allocable to
principal, separately identifying the aggregate
amount of any prepayments, substitution shortfalls,
repurchase amounts or other recoveries of principal
included therein, any Extra Principal Distribution
Amount and any Applied Realized Loss Amount with
respect to, and any Unpaid Realized Loss Amount at,
the distribution date;
o the principal balance after giving effect to any
distribution allocable to principal; and
o any Interest Carry Forward Amount;
o the weighted average of the mortgage interest rates on the
mortgage loans in each group less the servicing and master
servicing fee rates;
o the Realized Losses for each group for the related period and
cumulatively since the cut off date;
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o the largest mortgage loan balance outstanding in each group;
o the balance of funds in the group II reserve fund;
o the prepayment penalties collected by the servicer or the
master servicer;
o the servicing fees and master servicing fees allocable to each
group;
o one month LIBOR on the most recent interest determination
date;
o the pass through rates for the group I and group II
certificates, if subject to a cap; and
o for each distribution date during the pre-funding period, the
amount, if any, on deposit in the pre-funding account and the
capitalized interest account, stated separately.
DELIVERY AND SUBSTITUTION OF MORTGAGE LOANS
The depositor must repurchase any mortgage loan for which the required
documentation is not delivered on the closing date (or subsequent closing date
in the case of subsequent mortgage loans) or reasonably promptly thereafter.
Under the limited circumstances specified in the trust agreement, the depositor
may substitute substantially similar mortgage loans for mortgage loans initially
delivered. It is anticipated that any permitted substitution will not materially
change the characteristics of the mortgage pools, as set forth above. See "The
Trusts -- The Mortgage Loans -- General," and "-- Substitution of Mortgage
Loans" in the prospectus.
THE TRUSTEE
Bankers Trust Company will act as trustee of the trust. The mailing
address of the trustee's Corporate Trust Office is 1761 East St. Andrew Place,
Santa Ana, California 92705, Attention: Saxon 2000-4, and its telephone number
is (714) 247-6000.
VOTING RIGHTS
The voting rights of the trust will be allocated as follows:
o 2% to the class A-IO certificates;
o 96% to the classes of group I and group II offered
certificates in proportion to their respective outstanding
certificate principal balances; and
o 1% to each of the class C and class R certificates.
TERMINATION
The trust will terminate upon the payment to the holders of all
certificates of all amounts required to be paid to the holders and upon the last
to occur of:
o the final payment or other liquidation, or any related
advance, of the last mortgage loan;
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o the disposition of all property acquired in respect of any
mortgage loan remaining in the trust; and
o at any time when a qualified tax liquidation of the trust is
effected as described below under "--Termination Upon Loss of
REMIC Status."
BY THE MASTER SERVICER. At its option, the master servicer may, on any
distribution date when the aggregate outstanding scheduled principal balances of
the mortgage loans are less than 10% of the sum of:
o the aggregate scheduled principal balances of the initial
mortgage loans as of the cut off date, and
o any amounts initially deposited in the pre-funding account,
purchase from the trust all remaining mortgage loans, in whole only, and other
property acquired by foreclosure, deed in lieu of foreclosure or otherwise then
constituting the trust at a price equal to 100% of the aggregate scheduled
principal balances of the mortgage loans plus one month's interest computed as
provided in the trust agreement. The date on which this optional repurchase is
made is known as the clean-up call date.
TERMINATION UPON LOSS OF REMIC STATUS. Following a final determination
by the IRS or by a court of competent jurisdiction, in either case from which no
appeal is taken within the permitted time for such appeal, or if any appeal is
taken, following a final determination of the appeal from which no further
appeal may be taken, to the effect that any REMIC established under the trust
agreement does not and will no longer qualify as a REMIC according to Section
860D of the Code, at any time on or after the date which is 30 calendar days
following that final determination, holders of a majority in percentage
interests represented by the offered certificates then outstanding may direct
the trustee on behalf of the trust to adopt a plan of complete liquidation.
SALE OF MORTGAGE LOANS
In connection with the sale of mortgage loans, the depositor will be
required to deliver a file with respect to each mortgage loan consisting of:
o the original note endorsed in blank or to the order of the
trustee or a custodian acting on behalf of the trustee, or a
lost note affidavit in lieu thereof, with all prior and
intervening endorsements (the seller, in some instances,
having instructed the party selling a mortgage loan to the
seller to have required the originator to endorse the original
note directly to such custodian);
o the original recorded security instrument or a certified copy,
naming the originator of the related servicer, trustee or
custodian as mortgagee, or if the original security instrument
has been submitted for recordation but has not been returned
by the applicable public recording office, a photocopy
certified by an officer of the related servicer, title
company, closing/settlement-escrow agent or closing attorney;
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o each original recorded intervening assignment of the security
instrument as may be necessary to show a complete chain of
title to the related servicer, trustee or custodian (the
seller, in some instances, having instructed the party selling
a mortgage loan to the seller to record an assignment directly
from the originator to the custodian) or if any assignment has
been submitted for recordation but has not been returned from
the applicable public recording office or is otherwise not
available, a copy certified by an officer of the related
servicer;
o if an assignment of the security instrument to the related
servicer has been recorded or sent for recordation, an
original assignment of the security instrument from the
servicer in blank or to the trustee or custodian in recordable
form;
o except as to any second lien mortgage loan with a balance of
less than $50,000, an original title insurance policy,
certificate of title insurance or written commitment or a copy
certified as true and correct by the insurer; and
o if indicated on the applicable schedule, the original or
certified copies of each assumption agreement, modification
agreement, written assurance or substitution agreement, if
any.
The custodian is required to review each mortgage loan note on or before the
closing date and the remainder of the mortgage loan file within a specified
number of days after the closing date and provide a final certification on the
entire mortgage loan file again prior to the first anniversary of the closing
date.
On the closing date, the depositor will also assign to the trustee all
the depositor's right, title and interest in the sales agreement between the
seller and the depositor insofar as it relates to the representations and
warranties made therein by the seller in respect of the origination of the
mortgage loans and the remedies provided for breach of such representations and
warranties. Upon discovery by the trustee or the master servicer of a breach of
any representation, warranty or covenant which materially and adversely affects
the interests of the holders of the certificates, the discovering party will
promptly notify the depositor and the seller. The seller will have 60 days from
its discovery or its receipt of a notice to cure the breach or, if required, to
repurchase the mortgage loan or to substitute a qualified substitute mortgage
loan.
EVENTS OF DEFAULT
The master servicer will have the right to direct the termination of
the servicer if the servicer breaches its servicing agreement. In the event of a
termination, the master servicer must appoint a successor servicer to assume the
obligations of the servicer under the servicing agreement, including the
obligation to make advances. See "The Mortgage Loan Pool -Advances and Month End
Interest" on page S-36. If the master servicer is unable to appoint a successor
servicer, the master servicer will be obligated to service the mortgage loans.
Any successor servicer will be entitled to compensation arrangements similar to,
but no greater than, those provided to the predecessor servicer. See "Servicing
of Mortgage Loans" in the prospectus.
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GOVERNING LAW
The trust agreement and each certificate will be construed in
accordance with and governed by the laws of the State of New York applicable to
agreements made and to be performed therein.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following discussion of the material anticipated federal income tax
consequences of the purchase, ownership and disposition of the offered
certificates is to be considered only in connection with the information
discussed under the heading "Material Federal Income Tax Consequences" in the
prospectus. The discussion in this prospectus supplement and in the prospectus
is based upon laws, regulations, rulings and decisions now in effect, all of
which are subject to change. The discussion below and in the prospectus does not
purport to deal with all federal tax consequences applicable to all categories
of investors, some of which may be subject to special rules. Investors should
consult their own tax advisors in determining the federal, state, local and any
other tax consequences of the purchase, ownership and disposition of the offered
certificates.
REMIC ELECTIONS
The trustee will cause three elections to be made to treat certain
assets of the trust, other than the pre-funding account, the capitalized
interest account, the interest rate cap agreement and the group II reserve fund,
as REMICs for federal income tax purposes. The assets of the pooling REMIC will
consist of the mortgage loans and substantially all other property in the trust,
other than the pre-funding account, the capitalized interest account, the
interest rate cap agreement and the group II reserve fund; the pooling REMIC
will issue uncertificated interests, which will be designated as the regular
interests and the residual interest in the pooling REMIC. The assets of the
second-tier REMIC will consist of the pooling REMIC regular interests. The
second-tier REMIC will issue uncertificated interests, which will be designated
as the regular interests and the residual interest on the second-tier REMIC. The
assets of the issuing REMIC will consist of the second-tier REMIC regular
interests. The issuing REMIC will issue several classes of interests which will
be designated as regular interests and the residual interest in the issuing
REMIC. The offered certificates and the private certificates, other than the
class R certificate, will evidence ownership of the regular interests in the
issuing REMIC. The class R certificates will evidence ownership of the entire
residual interest in each of the pooling REMIC, the second-tier REMIC and the
issuing REMIC.
In the opinion of McGuireWoods LLP, special counsel to the depositor,
for federal income tax purposes, each REMIC will be treated as a REMIC and each
class of offered certificates will be treated as regular interests in the
issuing REMIC and generally will be treated as debt instruments issued by the
issuing REMIC, assuming that:
o the REMIC elections are made;
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o the trust agreement is fully executed, delivered and
enforceable against the parties in accordance with its terms;
o the transactions described in this prospectus supplement are
completed on substantially the terms and conditions described;
and
o the trust agreement is complied with by all parties.
The offered certificates generally will be treated as debt instruments
issued by the issuing REMIC for federal income tax purposes. Although not free
from doubt, the trustee will treat all stated interest on the offered
certificates, other than the class A-IO certificates, as qualified stated
interest within the meaning of the Treasury regulations related to original
issue discount. A holder must include this stated interest in income as it
accrues, regardless of the holder's regular method of accounting.
The class A-IO certificates will and other classes of offered
certificates may be issued with OID. The prepayment assumption to be used for
purposes of accrual of OID is 100% of the Prepayment Assumption for both group I
and group II. No representation is made, however, that the mortgage loans will
prepay at this rate or at any other rate.
For more information concerning the tax treatment of offered
certificates, see, "Material Federal Income Tax Consequences - REMIC
Certificates -Taxation of REMIC Regular Certificates" in the prospectus.
ERISA CONSIDERATIONS
Any employee benefit plan that proposes to purchase the offered
certificates should consult with its counsel with respect to the potential
consequences of such investment under the fiduciary responsibility provisions of
the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and
the prohibited transaction provisions of ERISA and the Internal Revenue Code of
1986, as amended (the "Code").
ERISA imposes certain requirements on employee benefit plans that are
subject to ERISA ("ERISA Plans"), and on persons who are fiduciaries with
respect to such plans. A person who exercises discretionary authority or control
with respect to the management of assets of an ERISA Plan will be considered a
fiduciary of that plan under ERISA. In accordance with ERISA's general fiduciary
standards, before investment in the certificates, an ERISA Plan fiduciary should
determine whether the investment is permitted under the governing plan
instruments and is appropriate for the plan in view of its overall investment
policy and the composition and diversification of its portfolio.
ERISA and the Code also prohibit various transactions involving the
assets of ERISA Plans and other retirement plans and arrangements, including
individual retirement accounts and annuities ("Plans"), and persons referred to
as parties in interest under ERISA or disqualified persons under the Code. A
prohibited transaction could subject disqualified persons to excise taxes and
impose other liabilities on ERISA Plan fiduciaries.
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On October 17, 1989, the U.S. Department of Labor ("DOL") issued an
individual prohibited transaction exemption, Prohibited Transaction Exemption
89-90 (the "Exemption"), to Credit Suisse First Boston Corporation, which
generally exempts from the application of the prohibited transaction provisions
of Section 406 of ERISA, and the excise taxes imposed on those prohibited
transactions pursuant to Sections 4975(a) and (b) of the Code, certain
transactions, among others, relating to the servicing and operation of mortgage
pools and the purchase, sale and holding of mortgage pass through certificates
underwritten by an underwriter, provided that certain conditions set forth in
the Exemption are satisfied. For purposes of the discussion under this heading,
the term underwriter includes:
o the underwriters named on the cover page of this prospectus
supplement;
o any person directly or indirectly, through one or more
intermediaries, controlling, controlled by or under common
control with any of those underwriters; and
o any member of the underwriting syndicate or selling group with
respect to the offered certificates.
As originally granted in 1990, the individual Exemption sets forth
seven general conditions which must be satisfied for a transaction involving the
purchase, sale and holding of the offered certificates to be eligible for
exemptive relief:
o the acquisition of the offered certificates by Plans must be
on terms that are at least as favorable to the Plan as they
would be in an arm's-length transaction with an unrelated
party;
o the rights and interests evidenced by the offered certificates
must not be subordinate to the rights and interests evidenced
by the other certificates of the same trust;
o the offered certificates at the time of acquisition by the
Plan must be rated in one of the three highest generic rating
categories by the following national credit rating agencies:
Standard & Poor's Ratings Services, a division of The
McGraw-Hill Companies, Inc., Moody's Investors Service, Inc.
or Fitch IBCA, Inc.;
o the trustee cannot be an affiliate of any member of a
restricted group consisting of any underwriter, the depositor,
the master servicer, the servicer, any sub-servicer and any
mortgagor with respect to mortgage loans constituting more
than 5% of the aggregate unamortized principal balance of the
mortgage loans in the trust as of the date of initial issuance
of the offered certificates;
o the sum of all payments made to and retained by:
o the underwriters must represent not more than reasonable
compensation for underwriting the offered certificates;
o the depositor under the assignment of the mortgage loans to
the trust must represent not more than the fair market value
of those obligations;
o the master servicer, the servicer and any subservicer must
represent not more than reasonable compensation for that
person's services under the trust agreement and reimbursement
of that person's reasonable expenses in connection with the
person's duties as master servicer, servicer or subservicer;
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o the investing Plan must be an accredited investor as defined
in Rule 501(a)(1) of Regulation D of the Commission under the
Securities Act of 1933, as amended;
o the following three conditions must be met:
o the investment pool may consist only of assets of the
type enumerated in the Exemption and which have been
included in other investment pools;
o certificates evidencing interests in the other
investment pools have been rated in one of the three
highest generic rating categories by one of the
specified national credit rating agencies for at
least one year prior to a Plan's acquisition of
certificates; and
o certificates evidencing interests in the other
investment pools have been purchased by investors
other than Plans for at least one year prior to a
Plan's acquisition of certificates.
The prohibition against subordinated certificates, and the rating requirements
applicable to the offered certificates, have since been altered by a subsequent
amendment to the Exemption. These changes are detailed below.
In addition, the Exemption will not apply to a Plan's investment in
offered certificates if the Plan fiduciary responsible for the decision to
invest in offered certificates is a mortgagor or obligor with respect to more
than 5% of the fair market value of the obligations constituting the mortgage
loans or an affiliate of the mortgagor or obligor, unless:
o in the case of an acquisition in connection with the initial
issuance of any certificates, at least 50% of each class of
certificates in which Plans have invested is acquired by
persons independent of the restricted group and at least 50%
of the aggregate interest in the trust is acquired by persons
independent of the restricted group;
o the Plan's investment in any class of certificates does not
exceed 25% of the outstanding certificates of the class at the
time of acquisition;
o immediately after the acquisition, no more than 25% of the
Plan assets with respect to which the investing fiduciary has
discretionary authority or renders investment advice are
invested in certificates evidencing interest in trusts
sponsored or containing assets sold or serviced by the same
entity; and
o the Plan is not sponsored by any member of the restricted
group.
On July 21, 1997, the DOL published in the Federal Register an
amendment to the Exemption, which extends exemptive relief to certain
mortgage-backed and asset-backed securities transactions using pre-funding
accounts for trusts issuing pass through certificates. The amendment generally
allows mortgage loans or other secured receivables supporting payments to
certificateholders, and having a value equal to no more than 25% of the total
principal amount of the certificates being offered by the trust, to be
transferred to the trust within a specified pre-funding 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:
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o the ratio of the amount allocated to the pre-funding account
to purchase mortgage loans which have not yet been identified
to the total principal amount of the certificates being
offered must not exceed 25%;
o all obligations transferred after the closing date must meet
the same terms and conditions for eligibility as the original
obligations used to create the trust, which terms and
conditions have been approved by a national credit rating
agency;
o the transfer of additional obligations to the trust during the
pre-funding period must not result in the certificates to be
covered by the Exemption receiving a lower credit rating from
a national credit 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 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 ensure that the characteristics of the additional
obligations are substantially similar to the original
obligations which were transferred to the trust:
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 national credit 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 that applied 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 certain
circumstances if the pre-funding account falls below the
minimum level specified in the pooling and servicing agreement
or trust agreement or if an event of default occurs;
o amounts transferred to the pre-funding account and/or
capitalized interest account used in connection with
pre-funding may be invested only in certain permitted
investments;
o the related prospectus or prospectus supplement must describe:
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o the pre-funding account and/or capitalized interest
account used in connection with the pre-funding
account;
o the duration of the pre-funding period;
o the percentage and/or dollar amount of the
pre-funding limit for the trust; and
o that the amounts remaining in the pre-funding account
at the end of the pre-funding period will be remitted
to certificateholders as repayments of principal; and
o the trustee of the trust (or any agent with which the trustee
contracts to provide trust services) must be a substantial
financial institution or trust company experienced in trust
activities and familiar with its duties, responsibilities, and
liabilities as a fiduciary under ERISA. The trustee as the
legal owner of the obligations in the trust must enforce all
the rights created in favor of certificateholders of such
trust, including Plans.
There have been sufficient obligations identified prior to the closing
date so that these obligations, if transferred to the trust after the closing
date, in exchange for amounts credited to the pre-funding account, would result
in a ratio that is within the pre-funding limit. In addition, these obligations
would meet the same terms and conditions for eligibility as the original
obligations used to create the trust and the other conditions required under the
amendment to the Exemption. Thus, the relief granted by the Exemption and its
subsequent amendment should continue to be available.
On November 13, 2000, the DOL published in the Federal Register a
second amendment to the Exemption, which generally is effective for transactions
occurring on or after August 23, 2000. The amendment provides, among other
things, that the rights and interests evidenced by the offered certificates may
be subordinate to the rights and interests evidenced by the other certificates
of the same trust. In addition, the offered certificates at the time of
acquisition by the Plan must be rated in one of the four highest generic rating
categories by the following national credit rating agencies: Standard & Poor's
Ratings Services, a division of The McGraw-Hill Companies, Inc., Moody's
Investors Service, Inc., Duff & Phelps Credit Rating Co. or Fitch IBCA, Inc. The
relief granted by the Exemption, as amended, therefore should be available for
all classes of the offered certificates.
The amendment to the Exemption also clarified that certificates covered
by certain credit support arrangements, such as the Cap Agreement, may only be
purchased by certain qualified plan investors. ACCORDINGLY, ANY PURCHASER OR
TRANSFEREE OF A CLASS AV-1, CLASS MV-1, CLASS MV-2 OR CLASS BV-1 CERTIFICATES
WILL BE DEEMED TO HAVE REPRESENTED BY ITS ACCEPTANCE OF SUCH CERTIFICATE THAT IT
IS EITHER (I) A "QUALIFIED PROFESSIONAL ASSET MANAGER" AS DEFINED UNDER PTE
84-14, (II) AN "IN-HOUSE ASSET MANAGER" AS DEFINED UNDER PTE 96-23, OR (III) A
PLAN FIDUCIARY WITH TOTAL ASSETS UNDER MANAGEMENT OF AT LEAST $100 MILLION AT
THE TIME OF THE ACQUISITION OF THE CERTIFICATES.
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Before purchasing offered certificates, a fiduciary of a Plan should
itself confirm:
o that the certificates constitute "certificates" for purposes
of the Exemption and
o that the specific and general conditions of the exemption and
the other requirements set forth in the Exemption would be
satisfied.
ERISA Plan fiduciaries or other persons considering the purchase of an
offered certificate on behalf of an insurance company general account also
should consult their legal advisors regarding the effect of JOHN HANCOCK MUT.
LIFE INS. CO. V HARRIS TRUST AND SAV. BANK, 510 U.S. 86 (1993), and the general
account regulations promulgated by the DOL. In JOHN HANCOCK, the Untied States
Supreme Court held that, under some circumstances, assets held in an insurance
company's general account may be deemed to be assets of ERISA Plans that were
issued policies supported by that general account.
The Small Business Job Protection Act of 1996 added a new section of
ERISA relating to the status of the assets of insurance company general accounts
under ERISA. This new section provides that assets underlying general account
policies issued before December 31, 1998 will be considered assets of an ERISA
Plan to the extent the criteria set forth in the DOL general account regulations
are satisfied.
The general account regulations provide that, when an ERISA Plan
acquires a policy issued by an insurance company that is supported by assets of
the insurance company's general account, the assets of the ERISA Plan will
include the policy but not the underlying assets of the general account to the
extent the requirements set forth in the general account regulations are
satisfied. The general account regulations do not apply to any general account
policies issued after December 31, 1998.
RATINGS
It is a condition of the issuance of the offered certificates that they
receive ratings as set forth on page S-4.
The ratings do not represent any assessment of the likelihood or rate
of principal prepayments or the likelihood that any Group I Certificates
Carryover Amount or Group II Certificates Carryover Amount will be paid.
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. The security rating assigned to the offered
certificates should be evaluated independently of similar security ratings
assigned to other kinds of securities.
The ratings assigned by Fitch and Moody's to mortgage pass through
certificates address the likelihood of the receipt by certificateholders of all
distributions to which certificateholders are entitled. Fitch's and Moody's
ratings address the structural and legal aspects associated with the
certificates, including the nature of the underlying mortgage loans. Fitch's and
Moody's ratings on mortgage pass through certificates do not represent any
assessment of the likelihood or rate of principal prepayments. As a result, the
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initial ratings assigned to the offered certificates do not address the
possibility that holders of the offered certificates might suffer a lower than
anticipated yield in the event of principal payments on the offered certificates
resulting from rapid prepayments of the mortgage loans or the application of the
Extra Principal Distribution Amount as described herein, or in the event that
the trust fund is terminated before the expected final distribution dates of the
offered certificates. The ratings on the offered certificates do not address the
ability of the trust to acquire subsequent mortgage loans, any potential
redemption with respect thereto or the effect on yield resulting therefrom.
Explanations of the significance of the ratings may be obtained from
Moody's, 99 Church Street, New York, New York, 10007, and Fitch, One State
Street Plaza, New York, New York, 10004. Those ratings will be the views only of
the rating agencies. There is no assurance that any ratings will continue for
any period of time or that the ratings will not be revised or withdrawn. Any
revision or withdrawal of the ratings may have an adverse effect on the market
price of the offered certificates.
LEGAL INVESTMENT CONSIDERATIONS
Upon the termination of the pre-funding period, the class AV-1 and
class MV-1 certificates will constitute "mortgage related securities" for
purposes of the Secondary Mortgage Market Enhancement Act of 1984 for so long as
they are rated in one of the two highest rating categories by one or more
nationally recognized statistical rating organizations. As such, they will be
legal investments for particular entities to the extent provided in SMMEA,
subject to state laws overriding SMMEA. In addition, institutions whose
investment activities are subject to review by federal or state regulatory
authorities may be or may become subject to restrictions, which may be
retroactively imposed by such regulatory authorities, on the investment by such
institutions in certain forms of mortgage related securities. Furthermore, some
states have enacted legislation overriding the legal investment provisions of
SMMEA.
Although the class A certificates with respect to group I, the class
MF-1 certificates and the class A-IO certificates are expected to be rated in
one of the two highest rating categories by Fitch and Moody's, those
certificates will not constitute mortgage related securities for purposes of
SMMEA because some of the mortgage loans in group I are secured by second liens.
Accordingly, many institutions with legal authority to invest in comparably
rated securities may not be legally authorized to invest in those certificates.
USE OF PROCEEDS
The depositor will sell the initial mortgage loans to the trust
concurrently with the delivery of the offered certificates. Net proceeds from
the sale of the offered certificates less the original pre-funded amount and the
amount deposited in the capitalized interest account will represent, together
with the private certificates, certain of which may be retained by the depositor
or its affiliates, the purchase price to be paid by the trust to the depositor
for the initial mortgage loans.
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LEGAL MATTERS
Legal matters relating to the validity of the issuance of the offered
certificates will be passed upon for the depositor and the seller by
McGuireWoods LLP. Legal matters relating to insolvency issues and federal income
tax matters concerning the certificates will also be passed upon for the
depositor by McGuireWoods LLP. Legal matters relating to the validity of the
certificates will be passed upon for the underwriters by Brown & Wood LLP,
Washington, D.C.
UNDERWRITING
Subject to the terms and conditions set forth in the underwriting
agreement for the sale of the offered certificates, the depositor has agreed to
cause the trust to sell and the underwriters named below have severally agreed
to purchase the principal amount of offered certificates set forth below.
CREDIT SUISSE BANC OF GREENWICH
FIRST BOSTON AMERICA CHASE CAPITAL
CLASS CORPORATION SECURITIES LLC SECURITIES INC. MARKETS, INC.
AF-1 $ 11,150,000 $ 11,150,000 $ 11,150,000 $ 11,150,000
AF-2 9,250,000 9,250,000 9,250,000 9,250,000
AF-3 4,150,000 4,150,000 4,150,000 4,150,000
AF-4 7,200,000 7,200,000 7,200,000 7,200,000
AF-5 3,587,500 3,587,500 3,587,500 3,587,500
AF-6 3,925,000 3,925,000 3,925,000 3,925,000
MF-1 2,700,000 2,700,000 2,700,000 2,700,000
MF-2 1,912,500 1,912,500 1,912,500 1,912,500
BF-1 1,125,000 1,125,000 1,125,000 1,125,000
AV-1 58,275,000 58,275,000 58,275,000 58,275,000
MV-1 5,600,000 5,600,000 5,600,000 5,600,000
MV-2 3,850,000 3,850,000 3,850,000 3,850,000
BV-1 2,275,000 2,275,000 2,275,000 2,275,000
The class A-IO certificates will be purchased from the depositor by
Credit Suisse First Boston Corporation.
The underwriters have advised the depositor that they propose to offer
the offered certificates for sale from time to time in one or more negotiated
transactions or otherwise
o at market prices prevailing at the time of sale,
o at prices related to those market prices or
o at negotiated prices.
Offers are subject to prior sale, withdrawal, cancellation or modification of
the offer without notice, to delivery and acceptance by the underwriters and to
certain other conditions. The underwriters may sell offered certificates to or
through dealers, and dealers may receive compensation in the form of
S-76
<PAGE>
underwriting discounts, concessions or commissions from the underwriters or
purchasers of the offered certificates for whom they may act as agent. Any
dealers that participate with the underwriters in the distribution of the
offered certificates may be deemed to be underwriters. Any discounts or
commissions received by dealers or underwriters and any profit on the resale of
the offered certificates by them may be deemed to be underwriting discounts or
commissions under the Securities Act of 1933.
The depositor expects to receive net proceeds (including accrued
interest) of approximately $468,712,325.69 before deducting expenses payable by
it in connection with the offered certificates, estimated to be $460,000. In
connection with the purchase and sale of the offered certificates, the
underwriters may be deemed to have received compensation from the depositor in
the form of underwriting discounts.
The depositor and the seller have agreed to indemnify the underwriters
against certain liabilities including liabilities under the Securities Act of
1933.
There is currently no secondary market for the offered certificates.
Each underwriter intends to make a secondary market in the offered certificates
offered by that underwriter but has no obligation to do so. There can be no
assurance that a secondary market for the offered certificates will develop or,
if it does develop, that it will continue.
Some of the mortgage loans may have been the subject of financing
provided by affiliates of the underwriters.
Under Rule 2710(c)(8) of the Corporate Financing Rules to the National
Association of Securities Dealers, Inc., no NASD members can participate in a
public offering of an issuer's securities where more than 10% of the net
offering proceeds, not including underwriting compensation, are intended to be
paid to NASD members participating in the distribution of the offering or
associated or affiliated persons of NASD members unless the price at which an
equity issue is to be distributed to the public is established pursuant to Rule
2720(c)(3) by a qualified independent underwriter. Entities associated or
affiliated with certain of the underwriters, or entities administered by those
entities, may receive in the aggregate 10% or more of the net proceeds of this
offering in repayment of a portion of certain indebtedness. Accordingly, this
offering is being conducted pursuant to Rule 2710(c)(8).
Rule 2720(c)(3)(C), however, allows an NASD member to participate in
the distribution of securities of an issuer where it or its affiliates or
associates will receive more than 10% of the net proceeds without a qualified
independent underwriter establishing the price of the securities being offered
if the offering is of a class of securities rated "Baa" or better by Moody's or
"BBB" or better by S&P or rated in a comparable category by another rating
service acceptable to the NASD. The securities being offered by this prospectus
supplement and the accompanying prospectus are expected to receive at least the
ratings mentioned above and, therefore, there will be no qualified independent
underwriter recommending the minimum price of the securities being offered.
S-77
<PAGE>
GLOSSARY
An "accrual period" means, with respect to any distribution date, for
the group II certificates, the period from the preceding distribution date (or
from the closing date in the case of the first distribution date) to and
including the day prior to the current distribution date. An "accrual period"
means, with respect to any distribution date, for the class A-IO certificates
and the group I certificates, the calendar month immediately preceding the month
of such distribution date.
"Actual Cumulative Excess Spread" for any distribution date and any
group is the sum of the Actual Current Monthly Excess Spread and the Pledged
Prepayment Penalties for all prior distribution dates.
"Actual Current Monthly Excess Spread" for any distribution date and
any group is the total interest funds collected or advanced by the servicer or
master servicer with respect to the related distribution date less the total of
all interest and trust expenses required to be paid on the certificates of the
related group for that distribution date.
"Applied Realized Loss Amount," with respect to any class of
subordinate certificates and as to any distribution date, the sum of Realized
Losses with respect to mortgage loans which have been applied in reduction of
the certificate principal balance of the class (less excess interest and any
other available amounts previously distributed in repayment thereof).
"Assumed Principal Balance," as of any date and for each group of
mortgage loans is the aggregate scheduled principal balances of the mortgage
loans in such group plus applicable amounts on deposit in the pre-funding
account, in each case as of the end of the related collection period.
The "certificate principal balance" of each class of group I or group
II offered certificates, as of any distribution date, is the aggregate principal
amount of the certificates of that class on the closing date as reduced by:
o all amounts distributed on previous distribution dates in
reduction of the certificate principal balance thereof, and
o in the case of a subordinate certificate, reductions in the
certificate principal balance thereof as a result of the
application of Realized Losses.
Any amounts distributed to a class of subordinate certificates in respect of any
Unpaid Realized Loss Amount will not further reduce the certificate principal
balance of that class.
"Class A Principal Distribution Amount" for a group is
o with respect to any distribution date prior to the related
Stepdown Date or as to which a Trigger Event exists for the
group, 100% of the Principal Distribution Amount for the group
and the distribution date and
o with respect to any distribution date on or after the Stepdown
Date and as to which a related Trigger Event is not in effect
for the group, the excess of
S-78
<PAGE>
o the related class A certificate principal balance immediately
prior to the distribution date OVER
o the lesser of
o 70.50% for group I (60.00% for group II) of the
Assumed Principal Balance for such group on the
preceding due date and
o the Assumed Principal Balance on such group on the
preceding due date less 0.50% of the Assumed
Principal Balance for such group as of the cut off
date (but in no event less than zero).
"Class AF-6 Distribution Amount, " for any distribution date, is the
lesser of (i) the product of
o a fraction, the numerator of which is the class AF-6
certificate principal balance and the denominator of which is
the class A certificate principal balance for group I, in each
case immediately prior to the distribution date,
o the Class A Principal Distribution Amount with respect to
group I for the distribution date and
o the applicable percentage for the distribution date set forth
in the following table:
DISTRIBUTION DATE PERCENTAGE
----------------- ----------
January 2001 - December 2003 0%
January 2004 - December 2005 45%
January 2006 - December 2006 80%
January 2007 - December 2007 100%
January 2008 and thereafter 300%
and (ii) the Class A Principal Distribution Amount for group I.
"Class B-1 Principal Distribution Amount" for a group, with respect to
any distribution date on or after the related Stepdown Date and as long as a
Trigger Event for the group is not in effect for the group, is the excess of
o the sum for the group of
o the related class A certificate principal balance
(after giving effect to distributions on that date),
o the related class M-1 certificate principal balance
(after giving effect to distributions on that date),
o the related class M-2 certificate principal balance
(after giving effect to distributions on that date),
and
o the related class B-1 certificate principal balance
immediately prior to the distribution date OVER ----
o the lesser of
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<PAGE>
o 96.00% for group I (93.50% for group II) of the
Assumed Principal Balance for such group on the
preceding due date and
o the Assumed Principal Balance for such group on the
preceding due date less 0.50% of the Assumed
Principal Balance for such group as of the cut off
date (but in no event less than zero).
"Class M-1 Principal Distribution Amount" for a group, with respect to
any distribution date on or after the related Stepdown Date and as long as a
Trigger Event for the group is not in effect for the group, is the excess of
o the sum for the group of
o the related class A certificate principal balance
(after giving effect to distributions on that date)
and
o the related class M-1 certificate principal balance
immediately prior to the distribution date OVER ----
o the lesser of
o 82.50% for group I (76.00% for group II ) of the
Assumed Principal Balance for such group on the
preceding due date and
o the Assumed Principal Balance for such group on the
preceding due date less 0.50% of the Assumed
Principal Balance for the group as of the cut off
date (but in no event less than zero).
"Class M-2 Principal Distribution Amount," for a group, with respect to
any distribution date on or after the related Stepdown Date and as long as a
Trigger Event for the group is not in effect for the group, is the excess of
o the sum for the group of
o the related class A certificate principal balance
(after giving effect to distributions on that date),
o the related class M-1 certificate principal balance
(after giving effect to distributions on that date),
and
o the related class M-2 certificate principal balance
immediately prior to the distribution date OVER ----
o the lesser of
o 91.00% for group I (87.00% for group II) of the
Assumed Principal Balance for such group on the
preceding due date and
o the Assumed Principal Balance for such group on the
preceding due date less 0.50% of the Assumed
Principal Balance for such group as of the cut off
date (but in no event less than zero).
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<PAGE>
"Clean-Up Call Date" is any distribution date when the Assumed
Principal Balance is less than 10% of the Assumed Principal Balance on the
closing date.
"CPR" is a constant prepayment standard or model commonly used to
measure prepayments on mortgage loans. The model used for purposes of the table
set forth on page S-50 for the mortgage loans represents an assumed constant
rate of prepayment each month relative to the then outstanding principal balance
of the mortgage loans for the life of such mortgage loans. CPR does not purport
to be either a historical description of the prepayment experience of the
mortgage loans or a prediction of the anticipated rate of prepayment of any
mortgage loans, including the mortgage loans to be included in the trust.
"Cumulative Excess Spread Shortfall" for any distribution date and any
group is an amount equal to:
o in the case of group I, the excess of the Targeted Cumulative
Excess Spread as set forth in the following table over the sum
of (x) the Actual Cumulative Excess Spread for the prior
distribution date and (y) the Actual Current Monthly Excess
Spread for the related distribution date.
<TABLE>
<CAPTION>
DATE AMOUNT DATE AMOUNT DATE AMOUNT
---- ------ ---- ------ ---- ------
<S> <C> <C> <C> <C> <C> <C>
1/25/2001 $ -- 9/25/2002 $ 4,761,717 5/25/2004 $ 8,444,904
2/25/2001 246,727 10/25/2002 4,930,542 6/25/2004 8,624,024
3/25/2001 497,938 11/25/2002 5,087,312 7/25/2004 8,796,821
4/25/2001 760,150 12/25/2002 5,232,345 8/25/2004 8,963,483
5/25/2001 1,024,112 1/25/2003 5,391,918 9/25/2004 9,124,150
6/25/2001 1,288,345 2/25/2003 5,539,675 10/25/2004 9,278,940
7/25/2001 1,565,382 3/25/2003 5,675,882 11/25/2004 9,427,967
8/25/2001 1,839,679 4/25/2003 5,833,421 12/25/2004 9,571,340
9/25/2001 2,109,640 5/25/2003 5,980,109 1/25/2005 9,709,847
10/25/2001 2,383,520 6/25/2003 6,116,576 2/25/2005 9,843,817
11/25/2001 2,645,555 7/25/2003 6,255,548 3/25/2005 9,973,127
12/25/2001 2,893,668 8/25/2003 6,514,314 4/25/2005 10,097,947
1/25/2002 3,143,437 9/25/2003 6,764,492 5/25/2005 10,218,626
2/25/2002 3,379,389 10/25/2003 7,004,968 6/25/2005 10,335,285
3/25/2002 3,599,652 11/25/2003 7,237,297 7/25/2005 10,448,042
4/25/2002 3,820,408 12/25/2003 7,457,070 8/25/2005 10,557,013
5/25/2002 4,027,254 1/25/2004 7,667,197 9/25/2005 10,662,307
6/25/2002 4,219,896 2/25/2004 7,870,601 10/25/2005 10,763,996
7/25/2002 4,413,179 3/25/2004 8,068,210 11/25/2005 10,862,148
8/25/2002 4,593,679 4/25/2004 8,259,631 12/25/2005 10,950,537
</TABLE>
o in the case of group II, the excess of the Targeted Cumulative
Excess Spread as set forth in the following table over the sum
of (x) the Actual Cumulative Excess Spread for the prior
distribution date and (y) the Actual Current Monthly Excess
Spread for the related distribution date.
S-81
<PAGE>
<TABLE>
<CAPTION>
DATE AMOUNT DATE AMOUNT DATE AMOUNT
---- ------ ---- ------ ---- ------
<S> <C> <C> <C> <C> <C> <C>
1/25/2001 $ -- 9/25/2002 $ 10,572,441 5/25/2004 $18,163,701
2/25/2001 548,992 10/25/2002 10,988,911 6/25/2004 18,497,123
3/25/2001 1,254,302 11/25/2002 11,394,294 7/25/2004 18,831,339
4/25/2001 1,804,929 12/25/2002 11,820,060 8/25/2004 19,146,625
5/25/2001 2,400,208 1/25/2003 12,189,970 9/25/2004 19,449,088
6/25/2001 2,931,375 2/25/2003 12,561,336 10/25/2004 19,751,467
7/25/2001 3,515,736 3/25/2003 12,996,218 11/25/2004 20,032,732
8/25/2001 4,035,251 4/25/2003 13,331,014 12/25/2004 20,313,111
9/25/2001 4,552,773 5/25/200 13,715,614 1/25/2005 20,571,057
10/25/2001 5,123,183 6/25/2003 14,061,609 2/25/2005 20,819,607
11/25/2001 5,639,209 7/25/2003 14,412,652 3/25/2005 21,088,036
12/25/2001 6,197,753 8/25/2003 14,821,814 4/25/2005 21,316,470
1/25/2002 6,705,500 9/25/2003 15,213,719 5/25/2005 21,544,601
2/25/2002 7,204,202 10/25/2003 15,609,510 6/25/2005 21,754,323
3/25/2002 7,823,732 11/25/2003 15,982,012 7/25/2005 21,963,647
4/25/2002 8,312,382 12/25/2003 16,358,177 8/25/2005 22,155,964
5/25/2002 8,825,032 1/25/2004 16,728,496 9/25/2005 22,340,040
6/25/2002 9,280,065 2/25/2004 17,087,091 10/25/2005 22,523,563
7/25/2002 9,754,092 3/25/2004 17,467,331 11/25/2005 22,689,650
8/25/2002 10,172,388 4/25/2004 17,800,856 12/25/2005 22,854,592
</TABLE>
"Current Monthly Excess Spread Shortfall" for any distribution date and
any group is an amount equal to:
o in the case of group I, the excess of the Targeted Current
Monthly Excess Spread as set forth in the following table over
the Actual Current Monthly Excess Spread:
<TABLE>
<CAPTION>
DATE AMOUNT DATE AMOUNT DATE AMOUNT
---- ------ ---- ------ ---- ------
<S> <C> <C> <C> <C> <C> <C>
1/25/2001 $ -- 9/25/2002 $ 168,038 5/25/2004 $ 185,273
2/25/2001 246,727 10/25/2002 168,825 6/25/2004 179,120
3/25/2001 251,211 11/25/2002 156,770 7/25/2004 172,797
4/25/2001 262,212 12/25/2002 145,033 8/25/2004 166,662
5/25/2001 263,962 1/25/2003 159,573 9/25/2004 160,667
6/25/2001 264,233 2/25/2003 147,757 10/25/2004 154,790
7/25/2001 277,037 3/25/2003 136,207 11/25/2004 149,027
8/25/2001 274,297 4/25/2003 157,539 12/25/2004 143,373
9/25/2001 269,961 5/25/2003 146,688 1/25/2005 138,507
10/25/2001 273,880 6/25/2003 136,467 2/25/2005 133,970
11/25/2001 262,035 7/25/2003 138,972 3/25/2005 129,310
12/25/2001 248,113 8/25/2003 258,766 4/25/2005 124,820
1/25/2002 249,769 9/25/2003 250,178 5/25/2005 120,679
2/25/2002 235,952 10/25/2003 240,476 6/25/2005 116,659
3/25/2002 220,263 11/25/2003 232,329 7/25/2005 112,757
4/25/2002 220,756 12/25/2003 219,773 8/25/2005 108,971
5/25/2002 206,846 1/25/2004 210,127 9/25/2005 105,294
6/25/2002 192,642 2/25/2004 203,404 10/25/2005 101,689
7/25/2002 193,283 3/25/2004 197,609 11/25/2005 98,152
8/25/2002 180,500 4/25/2004 191,421 12/25/2005 88,389
</TABLE>
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<PAGE>
o in the case of group II, the excess of Targeted Current
Monthly Excess Spread as set forth in the following table over
the Actual Current Monthly Excess Spread:
<TABLE>
<CAPTION>
DATE AMOUNT DATE AMOUNT DATE AMOUNT
---- ------ ---- ------ ---- ------
<S> <C> <C> <C> <C> <C> <C>
1/25/2001 $ -- 9/25/2002 $ 400,053 5/25/2004 $ 362,845
2/25/2001 548,992 10/25/2002 416,470 6/25/2004 333,422
3/25/2001 705,310 11/25/2002 405,383 7/25/2004 334,216
4/25/2001 550,627 12/25/2002 425,766 8/25/2004 315,286
5/25/2001 595,279 1/25/2003 369,910 9/25/2004 302,463
6/25/2001 531,167 2/25/2003 371,366 10/25/2004 302,379
7/25/2001 584,361 3/25/2003 434,882 11/25/2004 281,265
8/25/2001 519,515 4/25/2003 334,796 12/25/2004 280,379
9/25/2001 517,522 5/25/2003 384,600 1/25/2005 257,946
10/25/2001 570,410 6/25/2003 345,995 2/25/2005 248,550
11/25/2001 516,026 7/25/2003 351,043 3/25/2005 268,429
12/25/2001 558,544 8/25/2003 409,162 4/25/2005 228,434
1/25/2002 507,747 9/25/2003 391,905 5/25/2005 228,131
2/25/2002 498,702 10/25/2003 395,791 6/25/2005 209,722
3/25/2002 619,530 11/25/2003 372,502 7/25/2005 209,324
4/25/2002 488,650 12/25/2003 376,165 8/25/2005 192,317
5/25/2002 512,650 1/25/2004 370,319 9/25/2005 184,076
6/25/2002 455,033 2/25/2004 358,595 10/25/2005 183,523
7/25/2002 474,027 3/25/2004 380,240 11/25/2005 166,087
8/25/2002 418,296 4/25/2004 333,525 12/25/2005 164,942
</TABLE>
"Current Interest," with respect to each class of the certificates and
each distribution date, is the interest accrued on the certificate principal
balance of the class (or, in the case of the class A-IO certificates, the
related notional principal balance) immediately prior to the distribution date
during the applicable accrual period at the applicable pass through rate plus
any amount previously distributed with respect to interest for the class that is
recovered as a voidable preference by a trustee in bankruptcy.
A "due period" is the period from and including the second day of a
month to and including the first day of the following month.
"Extra Principal Distribution Amount," for a mortgage loan group and
with respect to any distribution date is the lesser of (i) excess interest funds
and Net Pledged Prepayment Penalties, if any, and (ii) the excess of (A) the
Required Overcollateralization Amount over (B) the Overcollateralization Amount
(assuming for this purpose that all Principal Funds are distributed as principal
to the certificates on such date).
"Group I Available Funds Cap" for any distribution date is the weighted
average of the interest rates for the mortgage loans in group I net of servicing
fees and master servicing fees and reduced by a percentage equal to the product
of (1) the pass through rate for the A-IO-I component and (2) a fraction, the
numerator of which is the notional principal balance of the A-IO-I component for
such distribution date, and the denominator of which is the aggregate principal
balance of the mortgage loans in loan group I before giving effect to any
distributions on such distribution date.
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<PAGE>
"Group II Available Funds Cap" as to the group II certificates and for
any distribution date the per annum rate equal to (w)(i) the total scheduled
interest on the mortgage loans in Group II for the related due period less (ii)
the servicing fees and master servicing fees and the amount distributable in
respect of the A-IO-II component for that due period divided by (x) the
certificate principal balance of the group II certificates divided by (y) the
actual number of days in the related accrual period and (z) multiplied by 360.
"Interest Carry Forward Amount," with respect to each class of the
certificates and each distribution date, is the sum of
o the excess of
o Current Interest for the class with respect to prior
distribution dates (excluding any Group I Certificates
Carryover Amount or Group II Certificates Carryover Amount, as
the case may be) OVER
o the amount actually distributed to the class with respect to
Current Interest on those prior distribution dates and
o interest on the excess at the applicable pass through rate.
"Interest funds" with respect to each master servicer remittance date,
to the extent actually deposited in the master servicer custodial account, are
equal to the sum, without duplication of
o all scheduled interest collected by the servicer during the
related due period less the related servicing fee and master
servicing fee;
o all advances relating to interest;
o all month end interest; and
o liquidation proceeds to the extent the liquidation proceeds
relate to interest, less all non-recoverable advances relating
to interest and certain expenses reimbursed during the related
due period.
"Net Pledged Prepayment Penalties" for each group and distribution date
means the related Pledged Prepayment Penalties remaining after payment of any
amounts carried over as a result of the application of a cap.
The "notional principal balance" for each component of the class A-IO
certificates, as of any distribution date, is equal to the lesser of (i) the sum
of the aggregate scheduled principal balances of the mortgage loans in the
related group at the beginning of the related due period and (ii) an amount
determined with reference to the following schedule:
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<PAGE>
A-IO-I A-IO-II
Distribution Date Component Component
----------------- --------- ---------
January 2001 - March 2001 $ 52,700,000 $ 24,000,000
April 2001 - June 2001 51,300,000 21,000,000
July 2001 - September 2001 48,800,000 19,000,000
October 2001 - December 2001 46,000,000 18,000,000
January 2002 - March 2002 43,200,000 17,000,000
April 2002 - June 2002 40,500,000 15,000,000
July 2002 - September 2002 38,000,000 15,000,000
October 2002 - December 2002 35,700,000 15,000,000
January 2003 - March 2003 31,000,000 15,000,000
April 2003 - June 2003 25,200,000 15,000,000
July 2003 23,000,000 15,000,000
August 2003 and thereafter 0 0
"Overcollateralization Amount" for each group and distribution date is
the excess of the Assumed Principal Balance of the group on that distribution
date over the aggregate certificate principal balance of the certificates in the
group after giving effect to principal distributions on that distribution date.
"Pledged Prepayment Penalties" for any distribution date and any group
is an amount equal to the greater of:
o 50% of the prepayment penalties owed and not waived by the
servicer pursuant to the terms of the trust agreement for that
group and the related due period;
o the Current Monthly Excess Spread Shortfall; and
o the Cumulative Excess Spread Shortfall.
"Prepayment Penalty Period" has the meaning set forth in this
prospectus supplement under the heading "The Mortgage Loan Pool--Characteristics
of the Mortgage Loans."
"Principal Distribution Amount," with respect to each distribution date
and group, is the excess of
o the sum of
o the Principal Funds for that distribution date and
that group and
o any Extra Principal Distribution Amount for that
distribution date and that group OVER
o the Released Principal Amount for that distribution date and
the group.
"Principal Funds" with respect to each master servicer remittance date,
to the extent actually deposited in the master servicer custodial account, are
equal to the sum, without duplication of:
S-85
<PAGE>
o the scheduled principal collected by the servicer during the
related due period or advanced on or before the master
servicer remittance date;
o prepayments of principal collected by the servicer in the
applicable prepayment period;
o the scheduled principal balance of each mortgage loan that was
repurchased by the depositor;
o any substitution shortfall, which is the amount, if any, by
which the aggregate unpaid principal balance of any substitute
mortgage loans is less than the aggregate unpaid principal
balance of any deleted mortgage loans, delivered by the
depositor in connection with a substitution of mortgage loans;
and
o all liquidation proceeds collected by the servicer during the
related due period, to the extent the liquidation proceeds
related to principal, less all non-recoverable advances
relating to principal reimbursed during the related due
period.
"Realized Loss" is the excess of the scheduled principal balance of a
defaulted mortgage loan over the liquidation proceeds with respect to that loan
that are allocated to principal.
"Released Principal Amount" for a group will equal zero as to any
distribution date on which a Subordinated Trigger Event exists for a group. As
to any distribution date on which a Subordinated Trigger Event does not exist
for a group, the "Released Principal Amount" for the group will equal the amount
by which the Overcollateralization Amount for the group (assuming for this
purpose that all Principal Funds for that date are distributed as principal to
the certificates) on that distribution date that exceeds the Required
Overcollateralization Amount for that group and that distribution date.
The "Required Overcollateralization Amount" for each group and
distribution date is
o prior to the Stepdown Date, 2.00% for group I (3.25% for group
II) of the Assumed Principal Balance for such group as of the
cut off date and
o on and after the Stepdown Date, if a Trigger Event is not in
effect, the greater of
o the lesser of
o 2.00% for group I (3.25% for group II) of
the Assumed Principal Balance for such group
as of the cut off date and
o 4.00% for group I (6.50% for group II) of
the Assumed Principal Balance for such group
on the preceding due date and
o 0.50% of the Assumed Principal Balance for such group
as of the cut off date and
o if a Trigger Event is in effect for the group, the
Overcollateralization Amount as of the preceding distribution
date.
S-86
<PAGE>
"Stepdown Date," with respect to each group, is the earlier to occur of
o the later to occur of
o the distribution date in January 2004 and
o the first distribution date on which the class A
certificate principal balance of the group (less the
Principal Funds for the group on that date) is less
than or equal to 70.50% for group I (60.00% for group
II) of the Assumed Principal Balance for the group on
such due date and
o the distribution date after the certificate principal balance
of the related class A certificates has been reduced to zero.
A "Subordinated Trigger Event," with respect to each group and each
distribution date after the Stepdown Date, exists if
o Realized Losses since the related cut off date with respect to
the mortgage loans in that group as a percentage of the
Assumed Principal Balance for the group as of the related
cut-off date exceed the percentage set out below with respect
to the distribution date and
o the scheduled principal balance of the mortgage loans in that
group that, as of the distribution date, are 60 or more days
delinquent as a percentage of the Assumed Principal Balance
for that group exceeds the delinquency percentage set out
below with respect to the distribution date:
<TABLE>
<CAPTION>
DISTRIBUTION DATE (INCLUSIVE) REALIZED LOSS PERCENTAGE DELINQUENCY PERCENTAGE
----------------------------- ------------------------ ----------------------
GROUP I GROUP II GROUP I GROUP II
------- -------- ------- --------
<S> <C> <C> <C> <C>
January 2004 and thereafter 4.0% 4.75% 10% 14%
</TABLE>
A "Trigger Event," with respect to each group and each distribution
date after the Stepdown Date, exists if the product, expressed as a percentage,
of
o 2 times for group I (2 times for group II) and
o the quotient of
o the aggregate scheduled principal balance of all 60
or more day delinquent mortgage loans (including
bankruptcy, foreclosure and REO loans) for the group
and
o the Assumed Principal Balance of that group as of the
preceding master servicer remittance date
equals or exceeds 29.50% for group I (40.00% for group II).
S-87
<PAGE>
"Unpaid Realized Loss Amount," with respect to any class of subordinate
certificates and as to any distribution date, is the excess of
o Applied Realized Loss Amounts with respect to the class OVER
o the sum of all distributions in reduction of the Applied
Realized Loss Amounts to the class on all previous
distribution dates.
"Weighted Average Net Rate" is the weighted average of the mortgage
interest rate of the mortgage loans in a group less the sum of the group I or
group II servicing fee rate and the group I or group II master servicing fee
rate, in each case, as applicable.
S-88
<PAGE>
Annex I
Scheduled Notional Amounts
for Group II Cap Agreement
Effective Date: December 20, 2000
Distribution Date New Schedule
25-Jan-2001 280,000,000
25-Feb-2001 278,658,302
25-Mar-2001 276,785,960
25-Apr-2001 274,558,313
25-May-2001 271,978,257
25-Jun-2001 269,049,985
25-Jul-2001 265,779,188
25-Aug-2001 262,172,866
25-Sep-2001 258,239,239
25-Oct-2001 253,988,203
25-Nov-2001 249,430,829
25-Dec-2001 244,579,392
25-Jan-2002 239,446,798
25-Feb-2002 234,041,330
25-Mar-2002 228,393,788
25-Apr-2002 222,514,061
25-May-2002 216,416,697
25-Jun-2002 210,126,395
25-Jul-2002 203,659,969
25-Aug-2002 197,037,811
25-Sep-2002 190,298,076
25-Oct-2002 183,686,247
25-Nov-2002 177,217,082
25-Dec-2002 170,895,392
25-Jan-2003 164,799,191
25-Feb-2003 76,260,073
25-Mar-2003 73,535,972
25-Apr-2003 70,908,858
25-May-2003 68,375,287
25-Jun-2003 65,931,937
25-Jul-2003 63,575,603
25-Aug-2003 61,303,193
25-Sep-2003 59,111,727
25-Oct-2003 56,998,327
25-Nov-2003 54,960,221
25-Dec-2003 52,998,697
25-Jan-2004 51,106,950
N.B.: The payment will be remitted to the trust 3 business days in advance of
the payment date.
S-89
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
PROSPECTUS
[GRAPHIC OMITTED] SAXON ASSET SECURITIES COMPANY
SAXON (DEPOSITOR)
MORTGAGE LOAN ASSET BACKED CERTIFICATES
(ISSUABLE IN SERIES BY SEPARATE TRUSTS)
----------------------
EACH SERIES OF CERTIFICATES:
o will consist of one or more classes of mortgage pass through
certificates representing interests in the assets of a trust;
o will receive principal and interest only from payments collected on the
assets of the related trust; and
o will not be insured or guaranteed by any government agency or
instrumentality and will not be obligations of Saxon Asset Securities
Company or any related companies.
THE ASSETS OF EACH TRUST:
o will be mortgage loans or mortgage backed securities sold to the trust
by Saxon Asset Securities Company; and
o will be serviced by Saxon Asset Securities Company or a related
company.
MORTGAGE LOANS INCLUDED IN ANY TRUST WILL BE SECURED BY FIRST OR SECOND LIENS
ON:
o one- to four-family residential properties,
o condominium units,
o manufactured housing, and
o units in planned unit development.
You should carefully consider the risk factors beginning on page 3 of this
prospectus.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
The date of this prospectus is May 19, 2000.
<PAGE>
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED
IN THIS PROSPECTUS AND THE PROSPECTUS SUPPLEMENT
Information is provided to you about the certificates in two separate
documents that progressively provide more detail: (1) this prospectus, which
provides general information, some of which may not apply to a particular series
of certificates, including your series, and (2) the accompanying prospectus
supplement, which will describe the specific terms of your series of
certificates, including:
o the principal balance and interest rate of each class,
o the timing and priority of interest and principal payments,
o statistical and other information about the mortgage assets,
o information about credit enhancement, if any, for each class,
o the ratings for each class, and
o the method for selling the certificates.
THE PROSPECTUS SUPPLEMENT DESCRIBES THE TERMS OF THE CERTIFICATES IN
GREATER DETAIL THAN THIS PROSPECTUS, AND MAY PROVIDE INFORMATION THAT DIFFERS
FROM THIS PROSPECTUS. IF THE TERMS OF A PARTICULAR SERIES OF CERTIFICATES VARY
BETWEEN THIS PROSPECTUS AND THE PROSPECTUS SUPPLEMENT, YOU SHOULD RELY ON THE
INFORMATION IN THE PROSPECTUS SUPPLEMENT.
You should rely only on the information provided in this prospectus and
the accompanying prospectus supplement, including the information incorporated
by reference. No one has been authorized to provide you with different
information. The certificates are not being offered in any state where the offer
is not permitted. Saxon Assets Securities Company does not claim the accuracy of
the information in this prospectus or the accompanying prospectus supplement as
of any date other than the dates stated on their respective covers.
Cross-references are included in this prospectus and in the
accompanying prospectus supplement to captions in these materials where you can
find further related discussions.
2
<PAGE>
RISK FACTORS
Prospective investors should consider the following factors,
as well as the factors identified under "Risk Factors" in the related
prospectus supplement, in connection with a purchase of the
certificates of any series.
THE TRUSTS WILL HAVE NO THE CERTIFICATES WILL REPRESENT AN
SIGNIFICANT ASSETS OTHER THAN OWNERSHIP INTEREST IN THE RELATED TRUST AND
THE ASSETS ASSIGNED TO THEM BY WILL NOT REPRESENT AN INTEREST IN OR
THE DEPOSITOR AND OBLIGATION OF ANY OTHER ENTITY AND WILL NOT
CERTIFICATEHOLDERS MAY LOOK BE INSURED BY ANY GOVERNMENT AGENCY OR
ONLY TO THOSE LIMITED ASSETS INSTRUMENTALITY. Each trust is expected to
FOR REPAYMENT OF THEIR have no significant assets other than the
CERTIFICATES assets assigned to it by Saxon Asset
Securities Company, the depositor.
You must rely primarily upon payments on
the assets assigned to the related trust,
any security for those certificates and any
sources of credit enhancement identified in
the related prospectus supplement for
distributions on the certificates.
None of any governmental agency or
instrumentality, the depositor, any
servicer, any master servicer, any trustee
or any of their affiliates will guarantee
or insure any assets assigned to a trust,
except as set forth in the related
prospectus supplement.
CREDIT ENHANCEMENT, IF Any credit enhancement for any series of
PROVIDED, WILL BE LIMITED IN certificates may be limited in amount and
BOTH AMOUNT AND SCOPE OF may be subject to periodic reduction in
COVERAGE, AND MAY NOT BE accordance with a schedule or formula. In
SUFFICIENT TO COVER ALL LOSSES addition, credit enhancement may provide
OR RISKS ON YOUR INVESTMENT only very limited coverage as to some types
of losses and may provide no coverage as to
other types of losses. The trustee may be
permitted to reduce, terminate or
substitute all or a portion of the credit
enhancement for any series of certificates
to the extent specified in the related
prospectus supplement.
PROPERTY VALUES MAY DECLINE, If the residential real estate market in
LEADING TO HIGHER LOSSES ON general or a regional or local area where
THE MORTGAGE LOANS, WHICH the mortgage assets for a trust are
COULD REDUCE YOUR ABILITY concentrated should experience an overall
TO BE REPAID decline in property values or a significant
downturn in economic conditions, rates of
delinquencies, foreclosures and losses
could be higher than those now generally
experienced in the mortgage lending
industry.
To the extent losses are not covered by
credit enhancement, you will have to look
primarily to the value of the mortgaged
premises for recovery of the outstanding
principal and unpaid interest of the
defaulted mortgage loans.
3
<PAGE>
THE BANKRUPTCY OF THE SELLER The seller and the depositor intend that
MAY RESULT IN A DELAY IN OR the transfers of assets to the depositor
REDUCTION OF DISTRIBUTIONS and, in turn, to the related trust
constitute sales rather than pledges to
secure indebtedness for insolvency
purposes. If the seller becomes a debtor
under the federal Bankruptcy Code, however,
a creditor, trustee-in-bankruptcy or
receiver of that seller might argue that
those transfers were pledges rather than
sales. That position, if argued or accepted
by a court, could result in a delay in or
reduction of distributions on the
certificates of the related series.
STATE AND FEDERAL CREDIT In addition to anti-deficiency and related
PROTECTION LAWS MAY LIMIT legislation, numerous other federal and
COLLECTION OF PRINCIPAL state statutory provisions, including the
AND INTEREST ON THE federal bankruptcy laws, the federal
MORTGAGE LOANS Soldiers' and Sailors' Civil Relief Act of
1940 and state laws affording relief to
debtors, may interfere with or affect the
ability of a secured mortgage lender to
realize upon its security.
Other federal and state laws provide
priority to certain tax and other liens
over the lien of a mortgage or deed of
trust.
MODIFICATION OF MORTGAGE With respect to a mortgage loan on which a
LOANS MAY DELAY OR REDUCE material default has occurred or a payment
CERTIFICATE PAYMENTS default is imminent, the servicer may enter
into a forbearance or modification
agreement with the borrower. The terms of
any forbearance or modification agreement
may affect the amount and timing of
payments on the mortgage loan and,
consequently, the amount and timing of
payments on one or more classes of the
related series of certificates. For
example, a modification agreement that
results in a lower mortgage interest rate
would lower the pass through rate of any
related class of certificates that accrues
interest at a rate based on the weighted
average net rate of the mortgage loans.
PREPAYMENTS ON THE MORTGAGE The prepayment experience on the mortgage
LOANS COULD CAUSE YOU TO BE assets underlying a particular series of
PAID EARLIER THAN YOU EXPECT, certificates will affect:
WHICH MAY ADVERSELY AFFECT
YOUR YIELD TO MATURITY o the average life of each class of
those certificates; and
o for certificates purchased at a price
other than par, the effective yield
on the certificates.
The timing and amount of prepayments on
mortgage loans are influenced by a variety
of economic, geographic, legal, social and
other factors, including changes in
interest rate levels. In general, if
mortgage interest rates fall, the rate of
prepayment would be expected to increase.
Conversely, if mortgage interest rates
rise, the rate of prepayment would be
expected to decrease. Prepayments may also
result from:
4
<PAGE>
o foreclosure, condemnation and other
dispositions of the mortgaged
premises, including amounts paid by
insurers under applicable insurance
policies;
o the repurchase of any mortgage loan
as to which there has been a material
breach of warranty or defect in
documentation or from the deposit of
certain amounts in respect of the
delivery of a substitute mortgage
loan;
o the repurchase of mortgage loans
modified in lieu of refinancing;
o the repurchase of any liquidated
mortgage loan or delinquent mortgage
loan, if applicable; or
o the repurchase or redemption of all
the certificates of a series or all
the mortgage loans or mortgage
certificates in certain
circumstances.
The yields realized by the holders of
certain certificates of a series with a
disproportionate allocations of principal
and interest will be extremely sensitive to
levels of prepayments on the mortgage
assets of the related trust. No assurance
can be given as to the prepayment
experience of the mortgage loans underlying
any series of certificates.
You must make your own decision as to the
appropriate prepayment assumption.
YOU MAY NOT BE ABLE TO SELL There can be no assurance that a secondary
YOUR SECURITIES, AND MAY market will develop for the certificates of
HAVE TO HOLD YOUR SECURITIES any series or, if a market does develop,
TO MATURITY EVEN THOUGH YOU that it will provide you with liquidity of
MAY WANT TO SELL IT investment or that it will continue for the
life of your certificates.
Particular classes of certificates may not
constitute mortgage related securities
under SMMEA, and some investors may be
subject to legal restrictions that preclude
their purchase of any such non-SMMEA
certificates. In addition, if so specified
in the related prospectus supplement,
transferability of some classes of
certificates to particular types of
entities may be restricted.
Any restrictions on the purchase or
transferability of the certificates of a
series may have a negative effect on the
development of a secondary market for the
certificates.
ISSUANCE OF CERTIFICATES IN If so specified in the related prospectus
BOOK-ENTRY FORM MAY REDUCE supplement, a trust may issue certificates
THE LIQUIDITY OF THE of a series in book-entry form. Issuance of
CERTIFICATES the certificates in book-entry form may
reduce the liquidity of the certificates in
the secondary market because investors may
be unwilling to purchase certificates for
which they cannot obtain physical
certificates. In addition, because
transfers of book-entry certificates will,
5
<PAGE>
in most cases, be able to be effected only
through persons or entities that
participate in the book-entry system, your
ability to pledge a book-entry certificate
to persons or entities that do not
participate in the book-entry system, or
otherwise to take actions with respect to a
book-entry certificate, may be impaired
because physical certificates representing
the certificates will generally not be
available. You may experience some delay in
receipt of distributions of interest on and
principal of the book-entry certificates
because the trustee will forward
distributions through book-entry system
participants which thereafter will be
required to credit those distributions to
your accounts as a beneficial owner of the
certificates, whether directly or
indirectly through financial
intermediaries.
THE RATINGS ASSIGNED TO YOUR Any rating of certificates is not a
SECURITIES BY THE RATING recommendation to buy, sell or hold
AGENCIES MAY BE LOWERED OR certificates and is subject to revision or
WITHDRAWN AT ANY TIME, WHICH withdrawal at any time by the rating agency
MAY AFFECT THE VALUE OF YOUR issuing such rating. The rating of
CERTIFICATES AND YOUR ABILITY certificates credit-enhanced through
TO SELL THEM external credit enhancement, examples of
which include a letter of credit, financial
guaranty insurance policy or mortgage pool
insurance policy, will depend primarily on
the creditworthiness of the provider of
such external credit enhancement. Any
lowering of the rating assigned to the
claims-paying ability of the enhancement
provider below the rating initially given
to the certificates of the related series
would likely result in a lowering of the
rating assigned to the certificates. The
depositor will not be obligated to obtain
additional credit enhancement if necessary
to maintain the rating initially assigned
to the certificates of any series.
ANY ORIGINAL ISSUE DISCOUNT Compound interest certificates and some
MUST BE INCLUDED IN INCOME classes of certificates that are entitled
FOR TAX PURPOSES only to interest distributions will be, and
particular classes of certificates may be,
issued with original issue discount for
federal income tax purposes. The holder of
a certificate issued with original issue
discount must 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 income. Accrued but unpaid
interest on the certificates generally will
be treated as original issue discount for
this purpose.
MORTGAGE LOANS WITH BALLOON A portion of the mortgage assets included
PAYMENT FEATURES MAY HAVE A in a trust may be balloon loans that
GREATER DEFAULT RISK provide for the payment of the unamortized
principal balance of the mortgage loans in
a single payment at maturity. Balloon loans
provide for equal monthly payments,
consisting of principal and interest,
generally based on a 30-year amortization
schedule, and a single payment of the
remaining balance of the balloon loan,
6
<PAGE>
generally five, seven, ten or 15 years
after origination. Amortization of a
balloon loan based on a scheduled period
that is longer than its term results in a
remaining principal balance at maturity
that is substantially larger than the
regular scheduled payments. The depositor
does not have any information regarding the
default history or prepayment history of
payments on balloon loan. Because borrowers
of balloon loans must make substantial
single payments at maturity, the default
risk associated with balloon loans may be
greater than that associated with
fully-amortizing mortgage loans. The
ability of a borrower to repay a balloon
loan at maturity frequently will depend
upon the borrower's ability to refinance
the loan. Neither the depositor nor the
trustee is obligated to obtain refinancing.
Any loss on a balloon loan resulting from a
borrower's inability to obtain refinancing
will be borne by certificateholders if not
covered by credit enhancement.
MORTGAGE LOANS SECURED BY A portion of the mortgage assets included
JUNIOR LIENS MAY EXPERIENCE in a trust may be loans secured by second
HIGHER RATES OF DELINQUENCIES or more junior liens on residential
AND LOSSES properties. Because the rights of a holder
of a second or more junior lien are
subordinate to the rights of senior
lienholders, the position of the trust and
the holders of the related certificates
could be more adversely affected by a
reduction in the value of the mortgaged
premises than would the position of the
senior lienholders. If a borrower defaults,
liquidation or other proceeds may be
insufficient to satisfy a second or more
junior lien after satisfaction of the
senior lien and the payment of any
liquidation expenses.
THE RATE OF DELINQUENCY ON A portion of the mortgage assets included
MORTGAGE LOANS SECURED BY in a trust may be secured by liens on
NON-OWNER OCCUPIED MORTGAGE mortgaged premises which are not owner-
PREMISES COULD BE HIGHER occupied. The rate of delinquencies,
foreclosures and losses on the mortgage
loans on those mortgaged premises could be
higher than on mortgage loans secured by
liens on mortgaged premises which are the
primary residences of the owners.
7
<PAGE>
THE SELLER'S UNDERWRITING All or a portion of the mortgage assets may
STANDARDS ARE LESS STRINGENT consist of mortgage loans underwritten in
THAN THOSE USED BY FEDERAL accordance with the underwriting standards
AGENCIES, WHICH MAY for non-conforming credits.
INCREASE THE RISK OF
DEFAULT ON THE MORTGAGE A mortgage loan made to a non-conforming
LOANS credit means a mortgage loan that is
ineligible for purchase by Fannie Mae or
Freddie Mac due to borrower credit
characteristics, property characteristics,
loan documentation guidelines or other
characteristics that do not meet Fannie Mae
or Freddie Mac underwriting guidelines,
including a loan made to:
o a borrower whose creditworthiness
and repayment ability do not
satisfy Fannie Mae or Freddie Mac
underwriting guidelines; or
o a borrower with a record of major
derogatory credit items, including
default on a prior mortgage loan,
credit write-offs, outstanding
judgments or prior bankruptcies.
As a consequence, delinquencies and
foreclosures can be expected to be greater
with respect to those mortgage loans than
with respect to mortgage loans originated
in accordance with Fannie Mae or Freddie
Mac underwriting guidelines. In addition,
changes in the values of the mortgaged
premises may have a greater effect on the
loss experience of those mortgage loans
than on mortgage loans originated in
accordance with Fannie Mae or Freddie Mac
underwriting guidelines.
You must make your own decision as to the
effect of non-conforming credits upon the
delinquency, foreclosure, and prepayment
experience of the mortgage loans.
MORTGAGE LOANS MAY BE A substantial portion of the mortgage loans
DELINQUENT, RESULTING IN may be delinquent upon the issuance of the
GREATER DEFAULTS, related certificates. Inclusion of
PREPAYMENTS AND LOSSES delinquent mortgage loans may cause the
rate of defaults and prepayments to
increase and, in turn, may cause losses to
exceed the available credit enhancement and
affect the yield on the related
certificates.
ANY VIOLATION OF CONSUMER A number of federal and state laws and
PROTECTION LAWS MAY GIVE regulations related to residential mortgage
THE BORROWER THE RIGHT TO refinance transactions contain stringent
RESCIND OR CANCEL THE limits on interest rates and origination
LOAN TRANSACTION fees, and impose detailed disclosure
requirements. In some instances, any
violations of these laws and regulations by
the originator of a loan could cause loans
to be unenforceable, or give the borrower
the right to rescind or cancel the loan
transaction. Any loan affected by
violations of law would have a
significantly increased risk of default or
prepayment.
8
<PAGE>
DESCRIPTION OF THE CERTIFICATES
GENERAL
The certificates described in this prospectus and in the related
prospectus supplement will be issued from time to time in series under one or
more trust agreements or pooling and servicing agreements. The provisions of
each agreement will vary depending upon the nature of the certificates to be
issued and the nature of the related trust. The following summaries describe the
material provisions common to each series of certificates. The summaries do not
purport to be complete and are subject to the prospectus supplement and the
agreement with respect to a particular series. The material terms of the
agreement with respect to a series of certificates will be further described in
the related prospectus supplement and a copy of the agreement will be filed with
the Securities and Exchange Commission on Form 8-K.
The certificates of a series will be entitled to payment only from the
assets of the related trust. The certificates do not represent an interest in or
obligation of the depositor, the seller, any servicer, any master servicer, any
trustee or any of their affiliates, except as set forth herein and in the
related prospectus supplement. Neither the certificates nor the underlying
mortgage assets will be guaranteed or insured by any governmental agency or
instrumentality or by the depositor, the seller, any servicer, any master
servicer, any trustee or any of their affiliates, except as set forth in the
related prospectus supplement. To the extent that delinquent payments on or
losses in respect of defaulted mortgage loans are not advanced by the applicable
servicer or any other entity or paid from any applicable credit enhancement,
those delinquencies may result in delays in the distribution of payments to the
holders of one or more classes of certificates and those losses may be allocated
to the holders of one or more classes of certificates.
The certificates of each series will be issued as fully registered
certificates in certificated or book-entry form in the authorized denominations
for each class specified in the related prospectus supplement. The certificates
of each series in certificated form may be transferred, subject to the
limitations on transfer, if any, specified in the related agreement, or
exchanged at the corporate trust office of the trustee without the payment of
any service charge, other than any tax or other governmental charge payable in
connection therewith. If so specified in the prospectus supplement for a series,
distributions of principal and interest on each certificate in certificated form
will be made on each distribution date by or on behalf of the trustee by check
mailed to each holder of a certificate at the address of the holder appearing on
the books and records of the trust or by wire transfer of immediately available
funds upon timely request to the trustee in writing by any holder of a
certificate having an initial principal amount of at least $1,000,000 or any
other amount specified in the related prospectus supplement; provided, however,
that the final distribution in retirement of a certificate of a series in
certificated form will be made only upon presentation and surrender of the
certificate at the corporate trust office of the trustee. Distributions of
principal and of interest on each class of certificates in book-entry form will
be made as set forth below.
9
<PAGE>
CLASSES OF CERTIFICATES
Each series of certificates will be issued in one or more classes as
specified in the related prospectus supplement. The certificates of any class of
any series:
o may be entitled to receive:
o only principal, only interest or any combination of
principal and interest,
o prepayments of principal throughout the life of the
certificates or only during specified periods,
o amounts only after the occurrence of specified
events, or in accordance with a specified schedule or
formula or on the basis of distributions on specified
portions of the mortgage assets,
o may be subordinated in right to receive distributions and may
be subject to allocation of losses in favor of one or more
other classes of certificates of the series, and
o which are interest bearing certificates may be entitled to
receive:
o interest at a pass through rate, which may be fixed,
variable or adjustable and may differ from the rate
at which other classes of certificates of the series
are entitled to receive interest and
o the distributions only after the occurrence of
specified events and may accrue interest until such
events occur, in each case as specified in the
related prospectus supplement.
REGISTRATION OF THE OFFERED SECURITIES
BOOK-ENTRY REGISTRATION
The prospectus supplement for a series may specify that the
certificates of that series initially will be represented by one or more
book-entry certificates, which are expected to be registered in the name Cede &
Co., the nominee of The Depository Trust Company. Unless and until the
certificates are issued in fully registered, certificated form, no beneficial
owner of a book-entry certificate will be entitled to receive a physical
certificate. All references in this prospectus to actions by certificateholders
refer to actions taken by DTC or its nominee, as the case may be, upon
instructions from the participants in the DTC system, and all references in this
prospectus to payments, notices, reports and statements to certificateholders
refer to participants, notices, reports and statements to DTC or its nominee, as
the case may be, as the registered holder of the certificates, for distribution
to certificateholders in accordance with DTC's procedures. The beneficial owners
of the certificates will not be recognized by the trustee as certificateholders,
and the beneficial owners of the certificates will be permitted to exercise the
rights of certificateholders only indirectly through DTC and its participating
organizations. The beneficial owners of the certificates may hold certificates
in Europe through Clearstream or Euroclear, which in turn will hold through DTC,
if they participate in DTC, or indirectly through organizations participating in
DTC. See "- Clearstream and Euroclear" in this prospectus for a further
discussion of Clearstream and the Euroclear system.
10
<PAGE>
THE DEPOSITORY TRUST COMPANY
DTC is a limited-purpose trust company organized under the New York
Banking Law, a "banking organization" within the meaning of the New York Banking
Law, a member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code and a "clearing agency"
registered under the provisions of Section 17A of the Securities Exchange Act of
1934, as amended. DTC holds securities for its participating organizations and
facilitates the clearance and settlement among those organizations of securities
transactions, such as transfers and pledges, in deposited securities through
electronic book-entry changes in their accounts. The electronic book-entry
system eliminates the need for physical movement of securities. The
organizations that participate in DTC include securities brokers and dealers,
who may include the underwriters of the certificates, banks, trust companies,
clearing corporations and other organizations. Indirect access to the DTC system
is also available to others such as securities brokers and dealers, banks and
trust companies that clear through or maintain a custodial relationship with an
organization participating in DTC, either directly or indirectly. Transfers
between organizations participating in DTC will occur in accordance with DTC
rules. The rules applicable to DTC and its participating organizations are on
file with the Securities and Exchange Commission.
Clearstream and Euroclear will hold omnibus positions on behalf of
their respective participating organizations through customers' securities
accounts in the name of Clearstream and Euroclear on the books of their
respective depositaries. The depositaries will in turn hold those positions in
customers' securities accounts in the depositaries' names on the books of DTC.
Transfers between organizations participating in Clearstream and organizations
participating in the Euroclear system will occur in accordance with their
respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC in the United States, on the one hand, and directly or indirectly
through organizations participating in Clearstream or the Euroclear system, on
the other, will be effected in DTC in accordance with DTC rules on behalf of the
relevant European international clearing system by its depositary; however,
these cross-market transactions will require delivery of instructions to the
relevant European international clearing system by the counterparty in that
system in accordance with its rules and procedures and within its established
deadlines. The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to its
depositary to take action to effect final settlement on its behalf by delivering
or receiving securities in DTC and making or receiving payment in accordance
with normal procedures for same-day funds settlement applicable to DTC.
Organizations participating in Clearstream or the Euroclear system may not
deliver instructions directly to the Clearstream or Euroclear depositaries.
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Because of time zone differences, credits or securities in Clearstream
or Euroclear as a result of a transaction with an organization participating in
DTC will be made during the subsequent securities settlement processing, dated
the business day following the DTC settlement date, and these credits or any
transactions in these securities settled during this processing will be reported
to the relevant organization participating in Clearstream or the Euroclear
system on that business day. Cash received in Clearstream or the Euroclear
system as a result of sales of securities by or through an organization
participating in Clearstream or the Euroclear system to an organization
participating in DTC will be received with value on the DTC settlement date but
will be available in the relevant Clearstream or Euroclear cash account only as
of the business day following settlement in DTC.
Purchases of certificates under the DTC system must be made by or
through an organization participating in DTC, which organization will receive a
credit for the certificates on DTC's records. The ownership interests of the
beneficial owners of the certificates are in turn to be recorded on the records
of that organization or, in the case of a purchase made indirectly through an
organization participating in DTC, on the records of the indirect participant.
The beneficial owners of the certificates will not receive written confirmation
from DTC of their purchase, but they are expected to receive written
confirmations providing details of the transaction, as well as periodic
statements of their holdings, from the organization through which they entered
into the transaction. Transfers of ownership interests in the certificates are
to be accomplished by entries made on the books of organizations participating
in DTC acting on behalf of the beneficial owners of the certificates.
To facilitate subsequent transfers, all certificates deposited with DTC
by its participating organizations are registered in the name of Cede. The
deposit of certificates with DTC and their registration in the name of Cede
effects no change in beneficial ownership. DTC has no knowledge of the identity
of the beneficial owners of the certificates. DTC's records reflect only the
identity of the organizations participating in DTC to whose accounts the
certificates are credited, which may or may not be the beneficial owners of the
certificates. Those organizations will remain responsible for keeping account of
their holdings on behalf of their customers.
Because DTC can only act on behalf of its participating organizations,
who in turn act on behalf of organizations participating indirectly in DTC and
certain banks, the ability of the beneficial owners of the certificates to
pledge those securities to persons or entities that do not participate in the
DTC system, or otherwise take action in respect of the certificates, may be
limited due to lack of a physical certificate for the certificates.
Conveyance of notices and other communications by DTC to its
participating organizations, by those organizations to indirect participants in
DTC, and by direct or indirect participants in DTC to the beneficial owners of
the certificates will be governed by arrangements among them, subject to any
statutory or regulatory requirements as may be in effect from time to time.
Neither DTC nor Cede will consent or vote with respect to the certificates.
Under its usual procedures, DTC mails an omnibus proxy to the issuer as soon as
possible after the record date, which assigns Cede's consenting or voting rights
to those organizations participating in DTC to whose accounts the certificates
are credited on the record date as identified in a listing attached to the
omnibus proxy. Principal and interest payments on the certificates will be made
to DTC. DTC's practice is to credit the accounts of its participating
organizations on the distribution date in accordance with their respective
holdings shown on DTC's records unless DTC has reason to believe that it will
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not receive payment on the distribution date. Payments by organizations
participating in DTC to the beneficial owners of the certificates will be
governed by standing instructions and customary practices, as is the case with
securities held for the accounts of customers in bearer form or registered in
street name, and will be the responsibility of those organizations and not of
DTC, the trustee or Saxon Asset Securities Company, subject to any statutory or
regulatory requirements as may be in effect from time to time. Payment of
principal and interest to DTC is the responsibility of the trustee, as
applicable, disbursement of those payments to organizations participating in DTC
is the responsibility of DTC, and disbursement of those payments to the
beneficial owners of the certificates is the responsibility of those
organizations or indirect participants in DTC. Accordingly, the beneficial
owners of the certificates may experience some delay in their receipt of
principal and interest payments.
THE INFORMATION IN THIS SECTION CONCERNING DTC AND DTC'S BOOK-ENTRY
SYSTEM HAS BEEN OBTAINED FROM SOURCES THAT THE DEPOSITOR BELIEVES TO BE
RELIABLE, BUT THE DEPOSITOR ASSUMES NO RESPONSIBILITY FOR ITS ACCURACY.
CLEARSTREAM AND EUROCLEAR
Clearstream Banking, societe anonyme, is incorporated under the laws of
Luxembourg as a professional depository. Clearstream holds securities for its
participating organizations and facilitates the clearance and settlement of
securities transactions between those organizations through electronic
book-entry changes in their accounts. The electronic book-entry system
eliminates the need for physical movement of certificates. Transactions may be
settled by Clearstream in any of 36 currencies, including United States dollars.
Clearstream provides to its participating organizations services for
safekeeping, administration, clearance and settlement of internationally traded
securities and securities lending and borrowing. Clearstream interfaces with
domestic markets in several countries. As a registered bank in Luxembourg,
Clearstream is subject to regulation by the Commission de Surveillance du
Secteur Financier. Organizations participating in Clearstream are world-wide
financial institutions, including underwriters, securities brokers and dealers,
banks, trust companies, clearing corporations and other organizations and may
include the underwriters of the certificates. Indirect access to Clearstream is
also available to others, including banks, brokers, dealers and trust companies,
that clear through or maintain a custodial relationship with an organization
participating in Clearstream, either directly or indirectly. Clearstream has
established an electronic bridge with Morgan Guaranty Trust Company of New York,
as operator of the Euroclear system, in Brussels, Belgium to facilitate
settlement of trades between Clearstream and Euroclear.
The Euroclear system was created in 1968 to hold securities for
organizations participating in the Euroclear system and to clear and settle
transactions between those organizations through simultaneous electronic
book-entry delivery against payment. The electronic book-entry system eliminates
the need for physical movement of certificates and any risk from lack of
simultaneous transfers of securities and cash. Transactions may be settled
through the Euroclear system in any of 27 currencies, including United States
dollars. The Euroclear system includes various other services, including
securities lending and borrowing, and interfaces with domestic markets in
several countries under arrangements generally similar to the arrangements for
cross-market transfers with DTC.
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The Euroclear system is operated by the Brussels, Belgium office of
Morgan Guaranty Trust Company of New York under a contract with Euroclear
Clearance System, S.C., a Belgian cooperative corporation. All operations are
conducted by that office, and all Euroclear securities clearance accounts and
Euroclear cash accounts are maintained with that office, not Euroclear Clearance
System, S.C. Euroclear Clearance System, S.C. establishes policy for the
Euroclear system on behalf of organizations participating in the Euroclear
system. Those organizations include banks, including central banks, securities
brokers and dealers and other professional financial intermediaries and may
include the underwriters of the certificates. Indirect access to the Euroclear
system is also available to other firms that clear through or maintain a
custodial relationship with organizations participating in the Euroclear system,
either directly or indirectly.
Morgan Guaranty is a New York banking corporation and a member bank of
the Federal Reserve System. Morgan Guaranty is regulated and examined by the
Board of Governors of the Federal Reserve System and the New York State Banking
Department. The Brussels, Belgium office of Morgan Guaranty is regulated and
examined by the Belgian Banking Commission.
The Terms and Conditions Governing Use of Euroclear, the related
Operating Procedures of the Euroclear system and applicable Belgian law govern
the securities clearance accounts and cash accounts maintained with the operator
of the Euroclear system, transfers of securities and cash within the Euroclear
system, withdrawal of securities and cash from the Euroclear system and receipts
of payments with respect to securities in the Euroclear system. All securities
in the Euroclear system are held on a fungible basis without attribution of
specific certificates to specific securities clearance accounts. The operator of
the Euroclear system acts only on behalf of organizations participating in the
Euroclear system and has no record of or relationship with persons holding
through those organizations.
Distributions with respect to certificates held through Clearstream or
Euroclear will be credited to the cash accounts of organizations participating
in Clearstream or Euroclear in accordance with the relevant system's rules and
procedures, to the extent received by its depositary. These distributions will
be subject to tax reporting in accordance with relevant United States tax laws
and regulations. Clearstream or the operator of the Euroclear system, as the
case may be, will take any other action permitted to be taken by a
certificateholder under the applicable agreement on behalf of an organization
participating in Clearstream or the Euroclear system only in accordance with its
relevant rules and procedures and subject to its depositary's ability to effect
those actions on its behalf through DTC.
Although DTC, Clearstream and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of the certificates among
participants in DTC, Clearstream and the Euroclear system, they are under no
obligation to perform or continue to perform these procedures, and these
procedures may be discontinued at any time.
THE INFORMATION IN THIS SECTION CONCERNING CLEARSTREAM AND EUROCLEAR
HAS BEEN OBTAINED FROM SOURCES THAT THE DEPOSITOR BELIEVES TO BE RELIABLE, BUT
THE DEPOSITOR ASSUMES NO RESPONSIBILITY FOR ITS ACCURACY.
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GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
The globally-offered securities to be issued from time to time will
initially be available only in book-entry form. Investors in the
globally-offered securities may hold those securities through any of DTC,
Clearstream or Euroclear. The globally-offered 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 globally-offered
securities through Clearstream and Euroclear will be conducted in accordance
with their normal rules and operating procedures and in accordance with
conventional eurobond practice.
Secondary market trading between investors holding globally-offered
securities through DTC will be conducted in accordance with the rules and
procedures applicable to U.S. corporate debt obligations.
Secondary cross-market trading between Clearstream or Euroclear and
organizations participating in DTC that hold offered securities will be effected
on a delivery-against-payment basis through the respective depositaries of
Clearstream and Euroclear, in such capacity, and as DTC participants.
INITIAL SETTLEMENT
All globally-offered securities will be held in the book-entry form by
DTC in the name of Cede as nominee of DTC. Investors' interests in the
globally-offered securities will be represented through financial institutions
acting on their behalf as direct and indirect participants in DTC. As a result,
Clearstream and Euroclear will hold positions on behalf of their participants
through their respective depositaries, which in turn will hold positions in
accounts as DTC participants.
Investors electing to hold globally-offered securities through DTC will
follow the settlement practices applicable to U.S. corporate debt obligations.
Investors securities custody accounts will be credited with their holdings
against payment in same-day funds on the settlement date.
Investors electing to hold globally-offered securities through
Clearstream or Euroclear accounts will follow the settlement procedures
applicable to conventional eurobonds, except that there will be no temporary
global security and no distribution compliance period. All globally-offered
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.
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Trading Between DTC Participants. Secondary market trading between
organizations participating in DTC will be settled using the procedures
applicable to U.S. corporate debt obligations in same-day funds.
Trading Between Clearstream and/or Euroclear Participants. Secondary
market trading between organizations participating in Clearstream or the
Euroclear system will be settled using the procedures applicable to conventional
eurobonds in same-day funds.
Trading Between DTC Seller and Clearstream or Euroclear Purchaser. When
globally-offered securities are to be transferred from the account of an
organization participating in DTC to the account of an organization
participating in Clearstream or the Euroclear system, the purchaser will send
instructions to Clearstream or Euroclear through a Clearstream participant or a
Euroclear system participant at least one business day prior to settlement.
Clearstream or Euroclear will instruct the respective depositary to receive the
globally-offered securities against payment. Payment will include interest
accrued on the globally-offered securities from and including the last coupon
payment date to and excluding the settlement date. Payment will then be made by
the respective depositary to the account of the DTC participant against delivery
of the globally-offered securities. After settlement has been completed, the
globally-offered securities will be credited to the respective clearing system
and by the clearing system, in accordance with its usual procedures, to the
account of the Clearstream participant or the Euroclear system participant. The
globally-offered securities credit will appear the next day, European Time, and
the cash debit will be back-valued to, and the interest on the globally-offered
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, the Clearstream or Euroclear cash debit will be valued
instead as of the actual settlement date.
Organizations participating in Clearstream or the Euroclear system 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 or
Euroclear. Under this approach, they may take on credit exposure to Clearstream
or Euroclear until the globally-offered securities are credited to their
accounts one day later.
As an alternative, if Clearstream or Euroclear has extended a line of
credit to them, organizations participating in Clearstream or the Euroclear
system can elect not to pre-position funds that allow that credit line to be
drawn upon to finance settlement. Under this procedure, Clearstream participants
or Euroclear system participants purchasing globally-offered securities would
incur overdraft charges for one day, assuming they cleared the overdraft when
the securities were credited to their accounts. However, interest on the
globally-offered securities would accrue from the value date. Therefore, in many
cases the investment income on the globally-offered securities earned during the
one-day period may substantially reduce or offset the amount of these overdraft
charges, although this result will depend on the particular cost of funds of the
organization participating in Clearstream or the Euroclear system.
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Since the settlement is taking place during New York business hours,
organizations participating in DTC can employ their usual procedures for sending
globally-offered securities to the respective depositary for the benefit of
organizations participating in Clearstream or the Euroclear system. The sale
proceeds will be available to the DTC seller on the settlement date. Thus, to
the DTC participant, a cross-market transaction will settle no differently than
a trade between two DTC participants.
Trading Between Clearstream or Euroclear Seller and DTC Purchaser. Due
to time zone differences in their favor, organizations participating in
Clearstream or the Euroclear system may employ their customary procedures for
transactions in which globally-offered securities are to be transferred by the
respective clearing system, through the respective depositary, to an
organization participating in DTC. The seller will send instructions to
Clearstream or Euroclear through a Clearstream participant or Euroclear system
participant at least one business day prior to settlement. In these cases,
Clearstream or Euroclear will instruct the respective depositary, as
appropriate, to deliver the globally-offered securities to the account of the
DTC participant against payment. Payment will include interest accrued on the
globally-offered securities from and including the last coupon payment date to
and excluding the settlement date. The payment will then be reflected in the
account of the Clearstream participant or the Euroclear system participant the
following day, and receipt of the cash proceeds in the account of the
Clearstream participant or Euroclear system participant would be back-valued to
the value date, which would be the preceding day, when settlement occurred in
New York. Should the Clearstream participant or Euroclear system participant
have a line of credit with its respective clearing system and elect to be in
debit in anticipation of receipt of the sale proceeds in its account, the
back-valuation will extinguish any overdraft charges incurred over that one-day
period. If settlement is not completed on the intended value date, receipt of
the cash proceeds in the account of the Clearstream participant or Euroclear
system participant would instead be valued as of the actual settlement date.
Finally, day traders that use Clearstream or Euroclear and that
purchase globally-offered securities from organizations participating in DTC for
delivery to organizations participating in Clearstream or the Euroclear system
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:
o borrowing through Clearstream or Euroclear for one day, until
the purchase side of the day trade is reflected in their
Clearstream or Euroclear accounts, in accordance with the
clearing system's customary procedures;
o borrowing the globally-offered securities in the U.S. from a
DTC participant no later than one day prior to settlement,
which would give the globally-offered securities sufficient
time to be reflected in their Clearstream or Euroclear
accounts in order to settle the sale side of the trade; or
o staggering the value dates for the buy and sell sides of the
trade so that the value date for the purchase form the DTC
participant is at least one day prior to the value date for
the sale to the Clearstream participant or the Euroclear
system participant.
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MATERIAL U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of globally-offered securities holding securities
through Clearstream or Euroclear, or through DTC if the holder has an address
outside the U.S., will be subject to the 30% U.S. withholding tax that usually
applies to payments of interest, including original issue discount, on
registered debt issued by U.S. Persons unless:
o 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
o the beneficial owner takes one of the following steps to
obtain an exemption or reduced tax rate:
Exemption For Non-U.S. Persons. Non-U.S. Persons that are beneficial
owners of the globally-offered securities can obtain a complete exemption from
the withholding tax by filing Form W-8, Certificate of Foreign Status. If the
information shown on Form W-8 changes, a new Form W-8 must be filed within 30
days of that change.
Exemption For Non-U.S. Persons with Effectively Connected Income.
Non-U.S. Persons, including non-U.S. corporations or banks with a U.S. branch,
that are beneficial owners of the globally-offered securities and for which the
related interest income is effectively connected with the conduct of a trade or
business in the United States can obtain a complete exemption from the
withholding tax by filing Form 4224, Exemption from Withholding of Tax on Income
Effectively Connected with the Conduct of a Trade or Business in the United
States. For payments made after December 31, 2000, Form 4224 will not apply, and
non-U.S. persons will be required to file a Form W-8 ECI to obtain an exemption
for interest payments that are effectively connected with the conduct of a trade
or business in the U.S.
Exemption or Reduced Rate for Non-U.S. Persons Resident in Treaty
Countries. Non-U.S. Persons that are beneficial owners of the globally-offered
securities and reside in a country that has a tax treaty with the United States
can obtain an exemption or reduced tax rate, depending on the treaty terms, by
filing Form 1001, Ownership, Exemption or Reduced Rate Certificate. If the
treaty provides only for a reduced rate, withholding tax will be imposed at that
rate unless the filer alternatively files Form W-8. Form 1001 may be filed by
the beneficial owner or his agent. For payments made after December 31, 2000,
Form 1001 will not apply, and non-U.S. persons will be required to file a Form
W-8 BEN to claim the benefit of an applicable tax treaty.
Exemption for U.S. Persons. U.S. Persons that are beneficial owners of
the globally-offered securities can obtain a complete exemption from the
withholding tax by filing Form W-9, Payer's Request for Taxpayer Identification
Number and Certification.
U.S. Federal Income Tax Reporting Procedure. The beneficial owner of a
globally-offered security or, in the case of a Form 1001 or a Form 4224 filer,
his agent, files by submitting the appropriate form to the person through whom
he holds, which person would be the clearing agency in the case of persons
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holding directly on the books of the clearing agency. Form W-8 and Form 1001 are
effective for three calendar years and Form 4224 is effective for one calendar
year. For payments made after December 31, 2000, Form 4224 and Form 1001 will be
replaced by Form W-8 ECI and Form W-8 BEN, respectively, each of which will be
effective from the date the form is signed through the end of the third
succeeding calendar year.
THIS SUMMARY DOES NOT DEAL WITH ALL ASPECTS OF U.S. FEDERAL INCOME TAX
WITHHOLDING THAT MAY BE RELEVANT TO FOREIGN HOLDERS OF THE GLOBALLY-OFFERED
SECURITIES. THE DEPOSITOR SUGGESTS THAT YOU CONSULT YOUR OWN TAX ADVISORS WITH
RESPECT TO THE TAX CONSEQUENCES OF HOLDING OR DISPOSING OF THE GLOBALLY-OFFERED
SECURITIES.
DEFINITIVE SECURITIES
Book-entry certificates will be issued in fully registered,
certificated form to the beneficial owners of the certificates or their
respective nominees, rather than to DTC or its nominee, only if:
o DTC or the depositor advise in writing that DTC is no longer
willing or able to discharge properly its responsibilities as
a nominee and depository with respect to the book-entry
certificates and the depositor or the trustee is unable to
locate a qualified successor;
o the depositor elects, at its sole option, to terminate the
book-entry system through DTC; or
o DTC, at the direction of the depositary participants to whose
accounts are credited a majority of the outstanding book-entry
certificates, advises the trustee in writing that the
continuation of a book-entry system through DTC, or a
successor to DTC, is no longer in the best interests of the
beneficial owners of the certificates.
Upon the occurrence of any of the events described in the preceding
paragraph, the trustee will be required to notify the applicable beneficial
owners of the certificates, through organizations participating in DTC, of the
availability of fully registered certificates. Upon surrender by DTC of the
certificates representing the certificates and the receipt of instructions for
re-registration, the trustee will issue fully registered certificates to the
beneficial owners of the certificates.
ALLOCATION OF DISTRIBUTIONS
The prospectus supplement for each series of certificates will specify:
o whether distributions on the certificates will be made
monthly, quarterly, semi-annually or at other intervals,
o the distribution date for each distribution, and
o the amount of each distribution allocable to principal and
interest.
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All distributions with respect to each certificate of a series will be
made to the person in whose name the certificate is registered as of the close
of business on the record date specified in the related prospectus supplement.
The amount available to be distributed on each distribution date with
respect to each series of certificates will be determined as set forth in the
related agreement and will be described in the related prospectus supplement
and, in general, will be equal to the amount of principal and interest actually
collected, advanced or received during the related due period or prepayment
period, net of applicable servicing fees, master servicing fees, special
servicing fees, administrative and guarantee fees, insurance premiums, amounts
required to reimburse any unreimbursed advances and any other amounts specified
in the related prospectus supplement. The amount distributed will be allocated
among the classes of certificates in the proportion and order of application set
forth in the related agreement and described in the related prospectus
supplement. If so specified in the related prospectus supplement, amounts
received in respect of the properties securing the mortgage loans representing
excess interest may be applied in reduction of the principal balance of one or
more specified classes.
A due period is, with respect to any distribution date, the period
commencing on the second day of the calendar month preceding the calendar month
in which the distribution date occurs and continuing through the first day of
the calendar month in which the distribution date occurs, or any other period
specified in the related prospectus supplement.
A prepayment period is, with respect to any distribution date, the time
period or periods specified in the servicing agreement for each servicer to
identify prepayments or other unscheduled payments of principal or interest
received with respect to mortgage assets that will be used to pay
certificateholders of such series on the distribution date.
The prospectus supplement for each series of certificates will specify
the pass through rate, or the method for determining the pass through rate, for
each applicable class of certificates. One or more classes of certificates may
be represented by a notional principal amount. The notional principal amount is
used solely for purposes of determining interest distributions and some other
rights and obligations of the holders of certificates and does not represent a
beneficial interest in principal payments on the property securing the mortgage
loans in the related trust. One or more classes of certificates, known as
compound interest certificates, may provide for interest that accrues but is not
currently payable. Any interest that has accrued but is not paid with respect to
a compound interest certificate on any distribution date will be added to the
principal balance of the compound interest certificate on such distribution
date.
The prospectus supplement for each series of certificates will specify
the method by which the amount of principal to be distributed on each
distribution date will be calculated and the manner in which such amount will be
allocated among the classes of certificates of the series entitled to
distributions of principal. The aggregate original principal balance of the
certificates of each series will equal the aggregate distributions allocable to
principal that the certificates will be entitled to receive. One or more classes
of certificates may be entitled to payments of principal in specified amounts on
specified distribution dates, to the extent of the amount available on those
distribution dates, or may be entitled to payments of principal from the amount
by which the available amount exceeds specified amounts. One or more classes of
certificates may be subordinated in right to receive distributions and may be
subject to allocation of losses in favor of one or more other classes of
certificates of the same series as specified in the related prospectus
supplement.
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ALLOCATION OF LOSSES AND SHORTFALLS
The prospectus supplement for each series of certificates will specify
the method by which realized losses or interest shortfalls will be allocated. A
loss may be realized with respect to a mortgage loan as a result of:
o the final liquidation of the mortgage loan through foreclosure
sale, disposition of the related property securing the
mortgage loan if acquired by deed-in-lieu of foreclosure, or
otherwise,
o the reduction of the unpaid principal balance of the mortgage
loan or the modification of the payment terms of the mortgage
loan in connection with a proceeding under the federal
Bankruptcy Code or otherwise,
o physical damage to the related property securing the mortgage
loan of a type not covered by standard hazard insurance
policies, or
o fraud, dishonesty or misrepresentation in the origination of
the mortgage loan.
An interest shortfall may occur with respect to a mortgage loan as a
result of a failure by the servicer, master servicer or trustee to advance funds
to cover delinquent payments of principal or interest on such mortgage loan, the
application of the Soldiers' and Sailors' Civil Relief Act of 1940 or the
prepayment in full of the mortgage loan and the failure of the servicer or, in
some instances, the master servicer to pay interest to month-end.
If so specified in the related prospectus supplement, the senior
certificates of a series will not bear any realized losses on the related
mortgage loans until the subordinated certificates of the series have borne
realized losses up to a specified amount or loss limit or until the principal
amount of the subordinated certificates has been reduced to zero, either through
the allocation of realized losses, the priority of distributions or both. If so
specified in the related prospectus supplement, interest shortfalls may result
in a reallocation to the senior certificates of a series of amounts otherwise
distributable to the subordinated certificates of the series.
MORTGAGE ASSETS
The scheduled principal balance of the mortgage assets and the amount
of any other assets included in the trust for each series of certificates
(including amounts held in any pre-funding account for the series) will
generally equal or exceed the aggregate original principal balance of the
certificates of the series.
Scheduled principal balance means, with respect to any mortgage loan as
of any date of determination, the scheduled principal balance of the mortgage
loan as of the date specified in the related prospectus supplement increased by
the amount of negative amortization, if any, with respect thereto and reduced
by:
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o the principal portion of all scheduled monthly payments due on
or before the date of determination, whether or not received,
o all amounts allocable to unscheduled principal payments
received on or before the last day of the preceding prepayment
period, and
o without duplication, the amount of any realized loss that has
occurred with respect to the mortgage loan on or before the
date of determination.
OPTIONAL TERMINATION
To the extent and under the circumstances specified in the prospectus
supplement for a series, the certificates of the series may be terminated at the
option of the depositor or any other party as specified in the related
prospectus supplement for a purchase price specified in the prospectus
supplement. Upon termination of the certificates, at the option of the
terminating party, the related trust may be terminated, thereby causing the sale
of the remaining trust property, or the certificates may be held or resold by
the redeeming party. If so specified in the prospectus supplement for a series,
the right to redeem the certificates of a series will be conditioned upon the
passage of a certain date specified in the prospectus supplement or the
scheduled principal balance of the mortgage loans in the trust or the
outstanding principal balance of a specified class of certificates at the time
of purchase aggregating less than a percentage, specified in such prospectus
supplement. Notice will be given to certificateholders as provided in the
related agreement.
MATURITY, PREPAYMENT AND YIELD CONSIDERATIONS
The prepayment experience of the mortgage loans will affect (1) the
average life of each class of certificates issued by the related trust and (2)
for certificates purchased at a price other than par, the effective yield on the
certificates.
Prepayments on mortgage loans are commonly measured relative to a
prepayment standard or model, such as the single monthly prepayment model, the
constant prepayment rate model or the prepayment speed assumption model. The
prospectus supplement for a series may contain a table setting forth percentages
of the original principal amount of each class of certificates of the series to
be outstanding after each of the dates shown in the table based on the
prepayment assumption model. It is unlikely that the prepayment of the property
securing the mortgage loans of any trust will conform to any of the percentages
of the prepayment assumption model described in any table set forth in the
related prospectus supplement.
A number of social, economic, tax, geographic, demographic, legal and
other factors may influence prepayments, including:
o the age of the mortgage loans,
o the geographic distribution of the mortgaged premises,
o the payment terms of the mortgage loans,
o the characteristics of the borrowers,
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o homeowner mobility,
o economic conditions generally and in the geographic area in
which the mortgaged premises are located,
o enforceability of due-on-sale clauses,
o servicing decisions,
o prevailing mortgage market interest rates in relation to the
interest rates on the mortgage loans,
o the availability of mortgage funds,
o the use of second or home equity loans by borrowers,
o the availability of refinancing opportunities,
o the use of the mortgaged premises as second or vacation homes,
o the net equity of the borrowers in the mortgaged premises, and
o if the mortgage loans are secured by investment properties,
tax-related considerations and the availability of other
investments.
The prepayment rate may also be subject to seasonal variations.
The prepayment rate on pools of conventional housing loans has
fluctuated significantly in recent years. In general, if prevailing interest
rates were to fall significantly below the interest rates on a pool of mortgage
loans, the mortgage loans in that pool would be expected to prepay at higher
rates than if prevailing interest rates were to remain at or above the interest
rates on those mortgage loans. Conversely, if interest rates were to rise above
the interest rates on a pool of the mortgage loans, the mortgage loans in that
pool would be expected to prepay at lower rates than if prevailing interest
rates were to remain at or below interest rates on the mortgage loans. In
general, junior mortgage loans have smaller average principal balances than
senior or first mortgage loans and are not viewed by borrowers as permanent
financing. Accordingly, junior mortgage loans may experience a higher rate of
prepayment than senior or first mortgage loans. In addition, any future
limitations on the right of borrowers to deduct interest payments on mortgage
loans for federal income tax purposes may affect the rate of prepayment of
mortgage loans.
Distributions on the certificates of a series on any distribution date
generally will include interest accrued through a date specified in the related
prospectus supplement that may precede the distribution date. Because interest
generally will not be distributed to the certificateholders of the series until
the distribution date, the effective yield to the certificateholders will be
lower than the yield otherwise produced by the applicable pass through rate and
purchase price for the certificates.
The yield to maturity of any certificate will be affected by the rate
of interest and, in the case of certificates purchased at a price other than
par, timing of payments of principal on the mortgage loans. If the purchaser of
a certificate offered at a discount calculates the anticipated yield to maturity
of the certificate based on an assumed rate of payment of principal that is
faster than that actually received on the mortgage loans, or on the mortgage
loans underlying mortgage backed securities, the actual yield to maturity will
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be lower than that so calculated. Conversely, if the purchaser of a certificate
offered at a premium calculates the anticipated yield to maturity of the
certificate based on an assumed rate of payment of principal that is slower than
that actually received on the mortgage loans, or on the mortgage loans
underlying mortgage backed securities, the actual yield to maturity will be
lower than that so calculated.
If so specified in a related prospectus supplement, amounts received in
respect of the property securing the mortgage loans representing excess interest
may be applied in reduction of the principal balance of one or more specified
classes. The amount of excess interest required so to be applied may affect the
weighted average life of the related series of certificates.
The timing of changes in the rate of prepayments on the mortgage loans
may significantly affect an investor's actual yield to maturity, even if the
average rate of principal payments experienced over time is consistent with such
investor's expectation. In general, the earlier a prepayment of principal on the
mortgage loans, or on the mortgage loans underlying mortgage backed securities,
the greater will be the effect on the investor's yield to maturity. As a result,
the effect on an investor's yield of principal payments occurring at a rate
higher, or lower, than the rate anticipated by the investor during the period
immediately following the issuance of the certificates would not be fully offset
by a subsequent like reduction, or increase, in the rate of principal payments.
Because the rate of principal payments, including prepayments on the mortgage
loans or on the mortgage loans underlying mortgage backed securities, will
significantly affect the weighted average life and other characteristics of any
class of certificates, prospective investors are urged to consider their own
estimates as to the anticipated rate of future prepayments and the suitability
of the certificates to their investment objectives.
Under some circumstances, the master servicer, certain insurers, the
holders of REMIC residual certificates or other entities specified in the
related prospectus supplement may have the option to effect earlier retirement
of the related series of certificates.
Factors other than those identified in this prospectus and in the
related prospectus supplement could significantly affect principal prepayments
at any time and over the lives of the certificates. The relative contribution of
the various factors affecting prepayment may also vary from time to time. There
can be no assurance as to the rate of payment of principal at any time or over
the lives of the certificates.
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THE TRUSTS
ASSIGNMENT OF MORTGAGE ASSETS
Under the terms of the applicable agreement, the depositor will cause
the mortgage assets and other assets to be included in the related trust to be
assigned and transferred to the trustee together with all principal and interest
paid on the mortgage assets from the date or dates specified in the related
prospectus supplement. The trustee will deliver to the order of the depositor,
in exchange for the mortgage assets so transferred, certificates of the related
series in authorized denominations registered in the names requested by the
depositor representing the beneficial ownership interest in the related trust.
Each mortgage loan or mortgage backed security included in a trust will be
identified in a schedule appearing as an exhibit to the related agreement. The
schedule will include information as to the Scheduled principal balance of each
mortgage loan or mortgage backed security as of the specified date and its
interest rate, its original principal balance and other specified information.
Each mortgage loan or mortgage backed security transferred to the
trustee will be assigned of record either to the trustee, the servicer of the
loan, or to a document custodian acting on behalf of the trustee, and payments
on each mortgage loan after the specified date or dates will be made directly to
the trustee. In some instances, loans will be assigned directly from the seller
or from the originator that transferred the loan to the seller, directly to the
custodian, in accordance with the seller's loan purchase guidelines. As to each
mortgage loan, the depositor will deliver or cause to be delivered to the
trustee the related mortgage note endorsed to the order of the trustee, evidence
of recording of the related mortgage or deed of trust, an assignment of the
mortgage or deed of trust in recordable form naming the related servicer, the
trustee or a custodian acting on its behalf as assignee and, the other original
documents evidencing or relating to the mortgage loan. In lieu of recording the
assignments of mortgage loans in a particular jurisdiction, the depositor may
deliver or cause to be delivered to the trustee an opinion of counsel to the
effect that recording is not required to protect the right, title and interest
of the trustee in the mortgage loans. The original mortgage documents are to be
held by the trustee or a custodian acting on its behalf except to the extent
released to the servicer or the master servicer from time to time in connection
with servicing the mortgage loans.
The depositor will make customary representations and warranties in
each agreement with respect to each related mortgage asset. In addition, the
seller or other sellers of mortgage assets may make customary representations
and warranties with respect to the mortgage assets in the sales agreement
pursuant to which the mortgage assets are assigned and transferred to the
depositor. The right of the depositor to enforce these representations and
warranties will be assigned to the trustee under the related agreement. If any
representation or warranty is breached, and the breach adversely affects the
interest of the certificateholders, the depositor or the seller will be
required, subject to the terms imposed under the related agreement or sales
agreement:
o to cure the breach,
o to substitute other mortgage assets for the affected mortgage
assets, or
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o to repurchase the affected mortgage assets at a price
generally equal to the unpaid principal balance of the
mortgage assets, together with accrued and unpaid interest on
the mortgage assets at the rate in the related mortgage note.
Neither the depositor nor the master servicer will be obligated to
substitute mortgage assets or to repurchase mortgage assets, and no assurance
can be given that the seller will perform its obligations with respect to
mortgage assets.
The following is a brief description of the mortgage assets expected to
be included in the trusts. If specific information respecting the mortgage
assets is not known at the time the related series of certificates is initially
offered, more general information of the nature described below will be provided
in the 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
within fifteen days after the initial issuance of the certificates. A copy of
the agreement with respect to each series of certificates 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.
THE MORTGAGE LOANS--GENERAL
The mortgage loans will be evidenced by promissory notes and will be
secured by first, second or more junior liens on the related real property or
leasehold interest, together with improvements thereon, or with respect to
cooperative loans, the shares issued by the related cooperative.
The payment terms of the mortgage loans to be included in the trust for
any series will be described in the related prospectus supplement and may
include any of the following features or combinations of these features or any
other features described in the prospectus supplement:
o Interest may be payable at a fixed rate or may be payable at a
rate that is adjustable from time to time on specified
adjustment dates by adding a specified fixed percentage to a
specified index, which sum may be rounded, that otherwise
varies from time to time, that is fixed for a period of time
or under certain circumstances and is followed by a rate that
is adjustable from time to time as described above or that
otherwise varies from time to time or that is convertible from
an adjustable rate to a fixed rate. Changes to an adjustable
rate may be subject to periodic limitations, maximum rate, a
minimum rate or a combination of these limitations. Accrued
interest may be deferred and added to the principal of a
mortgage loan for specified periods and under various
circumstances as may be set forth in the related prospectus
supplement. Mortgage loans may permit the payment of interest
at a rate lower than the interest rate on the related mortgage
note for a period of time or for the life of the mortgage
loan, and the amount of any difference may be contributed from
funds supplied by the seller of the related property or
interest securing the mortgage loan or another source or may
be treated as accrued interest and added to the principal
balance of the mortgage loan.
o Principal may be payable on a level basis to amortize fully
the mortgage loan over its term, may be calculated on the
basis of an assumed amortization schedule that is
significantly longer than the original term of the mortgage
loan or on an interest rate that is different from the rate in
the related mortgage note or may not be amortized during all
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or a portion of the original term. Payment of all or a
substantial portion of the principal may be due at maturity.
Principal may include interest that has been deferred and
added to the principal balance of the mortgage loan.
o Payments may be fixed for the life of the mortgage loan, may
increase over a specified period of time or may change from
period to period. Mortgage loans may include limits on
periodic increases or decreases in the amount of monthly
payments and may include maximum or minimum amounts of monthly
payments.
o Prepayments of principal may be subject to a prepayment fee,
which may be fixed for the life of the mortgage loan or may
adjust or decline over time. Other mortgage loans may permit
prepayments without payment of a prepayment fee. The mortgage
loans may include due-on-sale clauses which permit the
mortgagee to demand payment of the entire mortgage loan in
connection with the sale or certain other transfers of the
property or interest securing the related mortgage loan. Other
mortgage loans may be assumable by persons meeting the then
applicable underwriting standards of the originator.
The property or interest securing the related mortgage loan, and, with
respect to cooperative loans, the buildings owned by cooperatives, may be
located in any state, territory or possession of the United States, including
the District of Columbia or Puerto Rico. The property or interest securing the
related mortgage loan generally will be covered by standard hazard insurance
policies insuring against losses due to fire and various other causes. The
mortgage loans may be covered by primary mortgage insurance policies insuring
against all or a part of any loss sustained by reason of nonpayments by
borrowers to the extent specified in the related prospectus supplement.
The prospectus supplement for each series of certificates will contain
information with respect to the mortgage loans expected to be included in the
related trust. This information may include:
o the expected aggregate outstanding principal balance and the
expected average outstanding principal balance of the mortgage
loans as of the date set forth in the prospectus supplement,
o the largest expected principal balance and the smallest
expected principal balance of any of the mortgage loans,
o the types of assets securing the mortgage loans,
o the original terms to maturity of the mortgage loans,
o the expected weighted average term to maturity of the mortgage
loans as of the date set forth in the prospectus supplement
and the expected range of the terms to maturity,
o the expected aggregate outstanding principal balance of
mortgage loans having loan-to-value ratios at origination
exceeding 80%,
o the expected mortgage interest rates and the range of mortgage
interest rates,
o in the case of ARM loans, the expected weighted average of the
adjustable rates,
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o the expected aggregate outstanding scheduled principal
balance, if any, of buy-down loans as of the date set forth in
the prospectus supplement,
o the expected aggregate outstanding principal balance, if any,
of GPM loans as of the date set forth in the prospectus
supplement,
o the amount of any mortgage pool insurance policy, special
hazard insurance policy or bankruptcy bond to be maintained
with respect to the related trust,
o to the extent different from the amounts described in this
prospectus, the amount of any standard hazard insurance policy
required to be maintained with respect to each mortgage loan,
o the amount, if any, and terms of any other credit enhancement
to be provided with respect to all or a material portion of
the mortgage loans, and
o the expected geographic location of the property or interest
securing the mortgage loans, or, in the case of a cooperative
loan, the building owned by the related cooperative.
If specific information respecting the mortgage loans is not known to
the depositor at the time the related certificates are initially offered, more
general information of the nature described above will be provided in the
prospectus supplement.
ARM loans are mortgage loans providing for periodic adjustments to the
related mortgage interest rate to equal the sum, which may be rounded, of a
gross margin and an index.
Buy-down loans are mortgage loans as to which funds have been provided,
and deposited into an escrow account, to reduce the monthly payments of the
borrowers during the early years of such mortgage loans.
GPM loans are mortgage loans providing for monthly payments during the
early years of the mortgage loans which are or may be less than the amount of
interest due on the mortgage loans and as to which unpaid interest is added to
the principal balance of the mortgage loans, resulting in negative amortization,
and paid, together with interest, in later years.
No assurance can be given that values of the properties or interests
securing the mortgage loans have remained or will remain at their levels on the
dates of origination of the related mortgage loans. If the real estate market
should experience an overall decline in property values so that the outstanding
principal balances of the mortgage loans, plus any additional financing by other
lenders on the same properties or interests securing the mortgage loans, in the
related trust become equal to or greater than the value of the properties or
interests securing the mortgage loans, the actual rates of delinquencies,
foreclosures and losses could be higher than those now generally experienced in
the mortgage lending industry.
If specified in the prospectus supplement for a series, the mortgage
assets in the related trust may include mortgage loans that are delinquent upon
the issuance of the related certificates. The inclusion of delinquent mortgage
loans in the trust for a series may cause the rate of defaults and prepayments
on the mortgage loans to increase and, in turn, may cause losses to exceed the
available credit enhancement for the series and affect the yield on the
certificates of the series.
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SINGLE FAMILY LOANS
Single family loans will consist of mortgage loans secured by liens on
one- to four-family residential and mixed use properties. The properties which
secure single family loans will consist of detached or semi-detached one- to
four-family dwelling units, townhouses, row houses, individual condominium units
in condominium buildings, individual units in planned unit developments, and
certain mixed use and other dwelling units. The properties may include vacation
and second homes or investment properties. A portion of a dwelling unit may
contain a commercial enterprise.
COOPERATIVE LOANS
Cooperative loans generally will be secured by certificate interests in
or similar liens on stock, shares or membership certificates issued by
cooperatives and in the related proprietary leases or occupancy agreements
granting exclusive rights to occupy specific dwelling units in the buildings
owned by the cooperatives. A cooperative is owned by tenant-stockholders who,
through ownership of stock, shares or membership certificates in the
corporation, receive proprietary leases or occupancy agreements which confer
exclusive rights to occupy specific apartments or units. In general, a
tenant-stockholder of a cooperative must make a monthly payment to the
cooperative representing the tenant-stockholder's pro rata share of the
cooperative's payments for its mortgage loans, real property taxes, maintenance
expenses and other capital or ordinary expenses. Those payments are in addition
to any payments of principal and interest the tenant-stockholder must make on
any loans to the tenant-stockholder secured by its shares in the cooperative.
The cooperative is directly responsible for management and, in most cases,
payment of real estate taxes and hazard and liability insurance. A cooperative's
ability to meet debt service obligations on a mortgage loan on the building
owned by the cooperative, as well as all other operating expenses, will depend
in large part on the receipt of maintenance payments from the
tenant-stockholders, as well as any rental income from units or commercial areas
the cooperative might control. Unanticipated expenditures may in some cases have
to be paid by special assessments on the tenant-stockholders.
MULTI-FAMILY LOANS
Multi-family loans will consist of mortgage loans secured by liens on
rental apartment buildings, mixed-use properties or projects containing five or
more residential units including high-rise, mid-rise and garden apartments and
projects owned by cooperatives.
JUNIOR MORTGAGE LOANS
If specified in the prospectus supplement for a series, the mortgage
loans assigned and transferred to the related trust may include mortgage loans
secured by second or more junior liens on residential properties.
HOME IMPROVEMENT LOANS
Home improvement loans will consist of secured loans, the proceeds of
which generally will be used to improve or protect the basic livability or
utility of the property. To the extent set forth in the related prospectus
supplement, home improvement loans will be fully amortizing and will bear
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interest at a fixed or variable rate. To the extent a material portion of the
mortgage assets included in a trust consists of home improvement loans, the
related prospectus supplement will describe the material provisions of the
mortgage loans and the programs under which they were originated.
HOME EQUITY LINES OF CREDIT
Home equity lines of credit will consist of lines of credit or
specified balances of those lines of credit secured by mortgages on one- to
four-family residential properties, including condominium units and cooperative
dwellings, or mixed-use properties. The home equity lines of credit may be
subordinated to other mortgages on the properties.
As more fully described in the related prospectus supplement, interest
on each home equity line of credit, excluding introductory rates offered from
time to time during promotional periods, may be computed and payable monthly on
the average daily outstanding principal balance of the loan. Principal amounts
on the home equity lines of credit may be drawn down, up to a maximum amount as
set forth in the related prospectus supplement, or repaid under each home equity
line of credit from time to time. If specified in the related prospectus
supplement, new draws by borrowers under home equity lines of credit
automatically will become part of the trust for a series. As a result, the
aggregate balances of the home equity lines of credit will fluctuate from day to
day as new draws by borrowers are added to the trust and principal payments are
applied to those balances, and the amounts usually will differ each day, as more
specifically described in the prospectus supplement. Under the circumstances
more fully described in the related prospectus supplement, a borrower under a
home equity line of credit 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 may begin paying at least the minimum
monthly payment or a specified percentage of the average outstanding balance of
the loan.
The properties or interests securing mortgage loans relating to home
equity lines of credit will include one- to four-family residential properties,
including condominium units and cooperative dwellings, and mixed-use properties.
Mixed-use properties will consist of one- to four-family residential dwelling
units and space used for retail, professional or other commercial uses. The
properties or interests securing mortgage loans may consist of detached
individual dwellings, individual condominiums, townhouses, duplexes, row houses,
individual units in planned unit developments and other attached dwelling units.
Each one- to four-family dwelling unit will be located on land owned in fee
simple by the borrower or, if so specified in the related prospectus supplement,
on land leased by the borrower for a term of at least ten years greater than the
term of the related home equity lines of credit. Attached dwellings may include
owner-occupied structures where each borrower owns the land upon which the unit
is built, with the remaining adjacent land owned in common, or dwelling units
subject to a proprietary lease or occupancy agreement in a cooperatively-owned
apartment building.
The aggregate principal balance of home equity lines of credit secured
by properties or interests securing mortgage loans that are owner-occupied will
be disclosed in the related prospectus supplement. If so specified in the
related prospectus supplement, the sole basis for a representation that a given
percentage of the home equity lines of credit are secured by one- to four-family
dwelling units that are owner-occupied will be either:
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o the making of a representation by the borrower at origination
of the home equity line of credit either that the underlying
properties or interests securing the mortgage loan will be
used by the borrower for a period of at least six months every
year or that the borrower intends to use the properties or
interests securing the mortgage loans as a primary residence
or
o a finding that the address of the underlying properties or
interests securing the mortgage loan is the borrower's mailing
address as reflected in the master servicer's records.
If so specified in the related prospectus supplement, the mortgaged
premises may include non-owner occupied investment properties and vacation and
second homes.
REPURCHASE OF CONVERTED MORTGAGE LOANS
Unless otherwise specified in the prospectus supplement for a series,
the trust for the series may include mortgage loans with respect to which the
related mortgage interest rate is convertible from an adjustable rate to a fixed
rate at the option of the borrower upon the fulfillment of certain conditions.
If so specified in the prospectus supplement, the applicable servicer, or other
party specified in the prospectus supplement, may be obligated to repurchase
from the trust any mortgage loan with respect to which the related mortgage
interest rate has been converted from an adjustable rate to a fixed rate at a
purchase price equal to the unpaid principal balance of the converted mortgage
loan plus 30 days of interest thereon at the applicable mortgage interest rate.
If the applicable servicer, other than a successor servicer, is not obligated to
purchase converted mortgage loans, the master servicer may be obligated to
purchase the converted mortgage loans to the extent provided in the prospectus
supplement. The purchase price specified in the prospectus supplement will be
treated as a prepayment of the related mortgage loan.
REPURCHASE OF DELINQUENT MORTGAGE LOANS
If so specified in the prospectus supplement for a series, the
depositor may, but will not be obligated to, repurchase from the trust any
mortgage loan as to which the borrower is delinquent in payments by 90 days or
more at a purchase price equal to the greater of the unpaid principal balance of
the delinquent mortgage loan plus interest thereon at the applicable mortgage
interest rate from the date on which interest was last paid to the last day of
the month in which the purchase price occurs or the fair market value of the
delinquent mortgage loan at the time of its purchase. The purchase price
specified in the prospectus supplement will be treated as a prepayment of the
related mortgage loan.
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SUBSTITUTION OF MORTGAGE LOANS
If so specified in the prospectus supplement for a series, the
depositor may deliver to the trustee other mortgage loans in substitution for
any one or more mortgage loans initially included in the trust for the series.
In general, any substitute mortgage loan must, on the date of the substitution:
o have an unpaid principal balance not greater than the unpaid
principal balance of any deleted mortgage loan,
o with respect to a fixed rate mortgage loan, have a mortgage
interest rate not less than, and not more than one percentage
point in excess of, the mortgage interest rate of the deleted
mortgage loan,
o with respect to an ARM loan, provide for a lowest possible net
rate and a highest possible net rate that is not lower than
the respective net rate for the deleted mortgage loan, and
have a gross margin that is not less than the gross margin of
the deleted mortgage loan,
o have a net rate that is not less than the net rate of the
deleted mortgage loan,
o have a remaining term to maturity ending not later than one
year prior to the latest possible maturity date specified in
the applicable agreement, and
o comply with each applicable representation, warranty and
covenant pertaining to an individual mortgage loan set forth
in the applicable agreement, was underwritten on the basis of
credit underwriting standards at least as strict as the credit
underwriting standards used with respect to the deleted
mortgage loan and, if a seller is effecting the substitution,
comply with each applicable representation, warranty or
covenant pertaining to an individual mortgage loan set forth
in the related sales agreement or subsequent sales agreement.
In general, no ARM loan may be substituted unless the deleted mortgage
loan is also an ARM loan and is not convertible to a fixed mortgage interest
rate unless the deleted mortgage loan is so convertible.
If more than one mortgage loan is substituted for one or more deleted
mortgage loans, the amounts, rates, margins, terms and ratios described above
shall be determined on a weighted average basis.
MORTGAGE-BACKED SECURITIES
The mortgage-backed securities may include private, that is not
guaranteed or insured by the United States or any agency or instrumentality
thereof, mortgage participation or pass through certificates or other
mortgage-backed securities or, representing either debt or equity, and
certificates insured or guaranteed by Fannie Mae, Freddie Mac or GNMA. Private
mortgage-backed securities will not include participations in previously issued
mortgage-backed securities unless such securities have been previously
registered under the Securities Act of 1933, as amended, or held for the
required holding period under Rule 144(k) thereunder or were acquired in a bona
fide secondary market transaction from someone other than an affiliate of the
depositor. Private mortgage-backed securities will have been issued in
accordance with a private mortgage-backed securities agreement.
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The related prospectus supplement for a series of certificates that
evidence interests in mortgage-backed securities will specify:
o the approximate aggregate principal amount and type of any
mortgage-backed securities to be included in the trust,
o to the extent known to the depositor, certain characteristics
of the mortgage loans underlying the mortgage-backed
securities including:
o the payment features of the mortgage loans,
o the approximate aggregate principal balance, if
known, of underlying mortgage loans insured or
guaranteed by a governmental entity,
o the servicing fee or range of servicing fees with
respect to the underlying mortgage loans, and
o the minimum and maximum stated maturities of the
underlying mortgage loans at origination,
o the maximum original term-to-stated maturity of the
mortgage-backed securities,
o the weighted average term-to-stated maturity of the
mortgage-backed securities,
o the pass through or certificate rate of the mortgage-backed
securities,
o the weighted average pass through or certificate rate of the
mortgage-backed securities,
o the issuer, servicer and trustee of the mortgage- backed
securities,
o characteristics of credit support, if any, including reserve
funds, insurance policies, surety bonds, letters of credit or
guaranties, relating to the mortgage loans underlying the
mortgage-backed securities or to the mortgage-backed
securities themselves,
o the terms on which the underlying mortgage loans may, or are
required to, be repurchased prior to their stated maturity or
the stated maturity of the mortgage-backed securities, and
o the terms on which other mortgage loans may be substituted for
those originally underlying the mortgage-backed securities.
PRE-FUNDING ACCOUNT
If so specified in the related prospectus supplement, a trust may enter
into a pre-funding agreement with the depositor under which the depositor will
transfer additional mortgage assets to the trust following the closing date. Any
pre-funding agreement will require that any mortgage loans so transferred
conform to the requirements specified in the pre-funding agreement. If a
pre-funding agreement is used, the related trustee will be required to deposit
in a segregated account upon receipt a portion of the proceeds received by the
trustee in connection with the sale of certificates of the related series. The
additional mortgage assets will thereafter be transferred to the related trust
in exchange for money released to the depositor from the related pre-funding
account. Each pre-funding agreement will specify a period during which any
transfer must occur. If all moneys originally deposited in the pre-funding
account are not used by the end of such specified period, then any remaining
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moneys will be applied as a mandatory prepayment of one or more class of
certificates as specified in the related prospectus supplement. The specified
period for the acquisition by a trust of additional mortgage loans will not
exceed three months from the date the trust is established and the maximum
deposit of mortgage loans to the pre-funding account will not exceed thirty-five
percent of the aggregate proceeds received from the sale of all class of
certificates of the related series.
ASSET PROCEEDS ACCOUNT
All payments and collections received or advanced on the mortgage
assets assigned or transferred to the trust for the certificates of a series
will be remitted to one or more asset proceeds accounts established and
maintained in trust on behalf of the holders of the certificates. In general,
reinvestment income, if any, on amounts in the asset proceeds account will not
accrue for the benefit of the holders of the certificates of the series.
If so specified in the prospectus supplement for a series, payments on
the mortgage loans included in the related trust will be remitted to the
servicer custodial account or the master servicer custodial account and then to
the asset proceeds account for the series, net of amounts required to pay
servicing fees and any amounts that are to be included in any reserve fund
account or other fund or account for the series. All payments received on
mortgage-backed securities included in the trust for a series will be remitted
to the asset proceeds account. All or a portion of the amounts in the asset
proceeds account, together with reinvestment income if payable to the
certificateholders, will be available, to the extent specified in the related
prospectus supplement, for the payment of trustee fees, and any other fees or
expenses to be paid directly by the trustee and to make distributions with
respect to certificates of the series in accordance with the respective
allocations set forth in the related prospectus supplement.
CREDIT ENHANCEMENT
GENERAL
If so specified in the prospectus supplement for a series, the related
trust may include, or the related certificates may be entitled to the benefits
of, specified ancillary or incidental assets intended to provide credit
enhancement for the ultimate or timely distribution of proceeds from the
mortgage assets to the holders of the certificates, including reserve accounts,
insurance policies, guaranties, surety bonds, letters of credit, guaranteed
investment contracts, swap agreements and option agreements. In addition, if so
specified in the prospectus supplement for a series, one or more classes of
certificates of the series may be entitled to the benefits of other credit
enhancement arrangements, including subordination, overcollateralization or
cross support. The protection against losses or delays afforded by any such
assets or credit enhancement arrangements may be limited.
Credit enhancement will not provide protection against all risks of
loss and will not guarantee repayment of the entire principal balance of the
certificates and interest thereon. If losses exceed the amount covered by credit
enhancement or are not covered by credit enhancement, holders of one or more
lasses of certificates will bear their allocable share of any resulting losses.
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If a form of credit enhancement applies to several classes of certificates, and
if distributions with respect to principal equal to the aggregate principal
balances of particular classes of certificates are distributed prior to the
distributions to other classes of certificates, the classes of certificates
which receive distributions at a later time are more likely to bear any losses
which exceed the amount covered by credit enhancement. In some cases, credit
enhancement may be canceled or reduced if the cancellation or reduction would
not adversely affect the rating of the related certificates.
SUBORDINATION
If so specified in the related prospectus supplement, a series may
include one or more classes of certificates that are subordinated in right to
receive distributions or subject to the allocation of losses in favor of one or
more other classes of certificates of the series. If so specified in the
prospectus supplement, distributions in respect of scheduled principal,
principal prepayments, interest or any combination thereof that otherwise would
have been payable to one or more classes of subordinated certificates of a
series may instead be payable to one or more classes of senior certificates of
the series under the circumstances and to the extent specified in the prospectus
supplement. If so specified in the prospectus supplement, delays in receipt of
scheduled payments on the mortgage assets and losses with respect to those
mortgage assets will be borne first by classes of subordinated certificates and
thereafter by one or more classes of senior certificates, under the
circumstances and subject to the limitations specified in such prospectus
supplement. The aggregate distributions in respect of delinquent payments on the
mortgage assets over the lives of the certificates or at any time, the aggregate
losses which must be borne by the subordinated certificates by virtue of
subordination and the amount of the distributions otherwise payable to the
subordinated certificates that will be payable to the senior certificates on any
distribution date may be limited as specified in the prospectus supplement. If
aggregate distributions in respect of delinquent payments on the mortgage assets
or aggregate losses were to exceed the total amounts payable and available for
distribution to holders of subordinated certificates or, if applicable, were to
exceed a specified maximum amount, holders of senior certificates could
experience losses on the certificates.
If so specified in the related prospectus supplement, all or any
portion of distributions otherwise payable to the holders of subordinated
certificates on any distribution date may instead be deposited into one or more
reserve accounts established by the trustee for specified periods or until the
balance in any the reserve account has reached a specified amount and, following
payments from the reserve account to the holders of senior certificates or
otherwise, thereafter to the extent necessary to restore the balance of the
reserve account to required levels. If so specified in the prospectus
supplement, amounts on deposit in any designated reserve account may be released
to the depositor or the seller or the holders of any class of certificates at
the times and under the circumstances specified in the prospectus supplement.
If so specified in the related prospectus supplement, one or more
classes of certificates may bear the risk of losses not covered by credit
enhancement prior to other classes of certificates. Subordination might be
effected by reducing the principal balance of the subordinated certificates on
account of the losses, thereby decreasing the proportionate share of
distributions allocable to the certificates, or by another means specified in
the prospectus supplement.
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If so specified in the related prospectus supplement, various classes
of senior certificates and subordinated certificates may themselves be
subordinate in their right to receive distributions to other classes of senior
certificates and subordinated certificates, respectively, through a
cross-support mechanism or otherwise. If so set forth in the prospectus
supplement, the same class of certificates may constitute senior certificates
with respect to specified types of payments or losses and subordinated
certificates with respect to other types of payments or losses.
Distributions may be allocated among classes of senior certificates and
classes of subordinated certificates
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 prospectus
supplement.
As between classes of subordinated certificates, payments to holders of senior
certificates on account of delinquencies or losses and payments to any reserve
account will be allocated as specified in the prospectus supplement.
CERTIFICATE GUARANTY INSURANCE POLICIES
If so specified in the related prospectus supplement, one or more
certificate guaranty insurance policies will be obtained and maintained for one
or more classes or series of certificates. The issuer of any specified
certificate guaranty insurance policy will be named in the related prospectus
supplement. In general, certificate guaranty insurance policies unconditionally
and irrevocably guarantee that the full amount of the distributions of principal
and interest to which the holders of the related certificates are entitled under
the related agreement, as well as any other amounts specified in the related
prospectus supplement, will be received by an agent of the trustee for
distribution by the trustee to those holders.
The specific terms of any certificate guaranty insurance policy will be
set forth in the related prospectus supplement. Certificate guaranty insurance
policies may have limitations including, but not limited to, limitations on the
obligation of the certificate insurer to guarantee any servicer's obligation to
repurchase or substitute for any mortgage loans, to guarantee any specified rate
of prepayments or to provide funds to redeem certificates on any specified date.
The certificate insurer may be subrogated to the rights of the holders of the
related certificates to receive distributions to which they are entitled, as
well as other amounts specified in the related prospectus supplement, to the
extent of any payments made by the certificate Insurer under the related
certificate guaranty insurance policy.
OVERCOLLATERALIZATION
If so specified in the related prospectus supplement, the aggregate
principal balance of the mortgage assets included in a trust may exceed the
original principal balance of the related certificates. In addition, if so
provided in the related prospectus supplement, specified classes of certificates
may be entitled to receive distributions of excess cash as an additional payment
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of principal, thereby creating a limited acceleration of the payment of the
principal of the certificates relative to the amortization of the related
mortgage assets. This acceleration feature may continue for the life of the
applicable classes of certificates or may be limited. In the case of limited
acceleration, once the required level of overcollateralization is reached, and
subject to certain provisions specified in the related prospectus supplement,
the acceleration feature will cease unless necessary to maintain the required
overcollateralization level.
CROSS SUPPORT
If so specified in the related prospectus supplement, the ownership
interests of separate trusts or separate groups of assets may be evidenced by
separate classes of the related series of certificates. In that case, credit
enhancement may be provided by a cross-support feature which requires that
distributions be made with respect to specified certificates evidencing
interests in one or more trusts or asset groups prior to distributions to other
certificates evidencing interests in other trusts or asset groups. If so
specified in the related prospectus supplement, the coverage provided by one or
more forms of credit enhancement may apply concurrently to two or more separate
trusts or asset groups, without priority among the trusts or asset groups, until
the credit enhancement is exhausted. If applicable, the prospectus supplement
will identify the trusts or asset groups to which the credit enhancement relates
and the manner of determining the amount of the coverage provided by the credit
enhancement and of the application of the coverage to the identified trusts or
asset groups.
MORTGAGE POOL INSURANCE POLICIES
If so specified in the related prospectus supplement, one or more
mortgage pool insurance policies insuring, subject to their provisions and
limitations, against defaults on the related mortgage loans will be obtained and
maintained for the related series in an amount specified in the prospectus
supplement. The issuer of a mortgage pool insurance policy will be named in the
related prospectus supplement. A mortgage pool insurance policy for a series
will not be a blanket policy against loss because claims under the policy may
only be made for particular defaulted mortgage loans and only upon satisfaction
of specified conditions precedent described in the related prospectus
supplement. A mortgage pool insurance policy generally will not cover losses due
to a failure to pay or denial of a claim under a primary mortgage insurance
policy.
A mortgage pool insurance policy will generally not insure, and many
primary mortgage insurance policies may not insure, against special hazard
losses or losses sustained by reason of a default arising from, among other
things,
o fraud or negligence in the origination or servicing of a
mortgage loan, including misrepresentation by the borrower or
persons involved in the origination of the loan,
o failure to construct mortgaged premises in accordance with
plans and specifications, or
o a claim in respect of a defaulted mortgage loan occurring when
the servicer of the mortgage loan, at the time of default or
after that time, was not approved by the pool insurer.
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A failure of coverage attributable to one of the foregoing events might
result in a breach of the representations and warranties of the seller or the
servicer and, in that event, subject to certain limitations, might give rise to
an obligation on the part of the seller or servicer to purchase the defaulted
mortgage loan if the breach cannot be cured.
The original amount of coverage under any mortgage pool insurance
policy assigned to the trust for a series will be reduced over the life of the
certificates of the series 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 mortgaged premises covered by the policy. The amount of claims
paid includes certain expenses incurred by the servicer or the master servicer
of the defaulted mortgage loan, as well as accrued interest on delinquent
mortgage loans to the date of payment of the claim. The net amounts realized by
the pool insurer will depend primarily on the market value of the mortgaged
premises securing the defaulted mortgage loan. The market value of the mortgaged
premises will be determined by a variety of economic, geographic, social,
environmental and other factors and may be affected by matters that were unknown
and could not reasonably have been anticipated at the time the original mortgage
loan was made. If aggregate net claims paid under a mortgage pool insurance
policy reach the original policy limit, any further losses may affect adversely
distributions to holders of the certificates of the series. The original amount
of coverage under a mortgage pool insurance policy assigned to the trust for a
series may also be reduced or canceled to the extent each rating agency that
provides, at the request of the depositor, a rating for the certificates of the
series confirms that the reduction or cancellation will not result in a lowering
or withdrawal of the rating.
If so specified in the related prospectus supplement, a mortgage pool
insurance policy may insure against losses on mortgage loans that secure other
mortgage-backed securities or collateralized mortgage obligations; provided,
however, that any subsequent extension of coverage, and the corresponding
assignment of the mortgage pool insurance policy, to the other securities or
obligations does not, at the time of the extension, result in the downgrade or
withdrawal of any credit rating assigned, at the request of the depositor, to
the outstanding certificates of the series.
SPECIAL HAZARD INSURANCE POLICIES
If so specified in the related prospectus supplement, one or more
special hazard insurance policies insuring, subject to their provisions and
limitations, against specified losses not covered by standard hazard insurance
policies will be obtained and maintained for the related series in an amount
specified in the prospectus supplement. The issuer of any special hazard
insurance policy will be named in the related prospectus supplement. A special
hazard insurance policy will, subject to the limitations described below,
protect the holders of the certificates of such series from
o loss by reason of damage to the mortgaged premises underlying
defaulted mortgage loans caused by specified hazards,
including vandalism and earthquakes and, except where the
borrower is required to obtain flood insurance, floods and
mudflows, not covered by the standard hazard insurance
policies with respect to the mortgage loans and
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o loss from partial damage to the mortgaged premises caused by
reason of the application of the coinsurance clause contained
in the standard hazard insurance policies.
A special hazard insurance policy for a series will not, however, cover
losses occasioned by war, nuclear reaction, nuclear or atomic weapons,
insurrection, normal wear and tear or certain other risks.
Subject to the foregoing limitations, the special hazard insurance
policy with respect to a series will provide that, when there has been damage to
the mortgaged premises securing a defaulted mortgage loan and the damage is not
covered by the standard hazard insurance policy maintained by the borrower or
the servicer or the master servicer with respect to the mortgage loan, the
special hazard insurer will pay the lesser of the cost of repair of the
mortgaged premises or upon transfer of the mortgaged premises to it, the unpaid
principal balance of the mortgage loan at the time of the acquisition of the
mortgaged premises, plus accrued interest to the date of claim settlement,
excluding late charges and penalty interest, and certain expenses incurred in
respect of the mortgaged premises. No claim may be validly presented under a
special hazard insurance policy unless
o hazard insurance on the mortgaged premises securing the
defaulted mortgage loan has been kept in force and other
reimbursable protection, preservation and foreclosure expenses
have been paid, all of which must be approved in advance as
necessary by the special hazard insurer, and
o the insured has acquired title to the mortgaged premises as a
result of default by the borrower.
If the sum of the unpaid principal amount plus accrued interest and
specified expenses is paid by the special hazard insurer, that amount of further
coverage under the special hazard insurance policy will be reduced by that
amount less any net proceeds from the sale of the mortgaged premises. Any amount
paid as the cost of repair of the mortgaged premises will reduce coverage by
that amount.
The terms of the agreement with respect to a series will require the
master servicer to maintain the special hazard insurance policies for the series
in full force and effect throughout the term of the agreement, subject to
specified conditions contained in the agreement, present claims under the
policies on behalf of the depositor, the trustee and the holders of the
certificates of the series for all losses not otherwise covered by the
applicable standard hazard insurance policies and take all reasonable steps
necessary to permit recoveries on the claims. To the extent specified in the
prospectus supplement for a series, a deposit may be made of cash, an
irrevocable letter of credit or any other instrument acceptable to each rating
agency that provides, at the request of the depositor, a rating for the
certificates of the series in the related trust to provide protection in lieu of
or in addition to that provided by a special hazard insurance policy.
If so specified in the related prospectus supplement, a special hazard
insurance policy may insure against losses on mortgage loans that secure other
mortgage-backed securities or collateralized mortgage obligations; provided,
however, that any subsequent extension of coverage, and the corresponding
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assignment of the special hazard insurance policy, to any other series or other
securities or obligations does not, at the time of the extension, result in the
downgrade or withdrawal of the credit rating assigned, at the request of the
depositor, to the outstanding certificates of the series.
BANKRUPTCY BONDS
If so specified in the related prospectus supplement, one or more
mortgagor bankruptcy bonds covering losses resulting from proceedings under the
federal Bankruptcy Code will be obtained and maintained for the related series
in an amount specified in such prospectus supplement. The issuer of any
bankruptcy bond will be named in the related prospectus supplement. Each
bankruptcy bond will cover certain losses resulting from a reduction by a
bankruptcy court of scheduled payments of principal and interest on a mortgage
loan or a reduction by the court of the principal amount of a mortgage loan and
will cover certain unpaid interest on the amount of the principal reduction from
the date of the filing of a bankruptcy petition. To the extent specified in the
prospectus supplement for a series, a deposit may be made of cash, an
irrevocable letter of credit or any other instrument acceptable to each rating
agency that provides, at the request of the depositor, a rating for the
certificates of the series in the related trust to provide protection in lieu of
or in addition to that provided by a bankruptcy bond.
RESERVE FUNDS
If so specified in the related prospectus supplement, cash, U.S.
Treasury securities, instruments evidencing ownership of principal or interest
payments thereon, letters of credit, surety bonds, demand notes, certificates of
deposit or a combination thereof in the aggregate amount specified in the
prospectus supplement will be deposited by the depositor in one or more reserve
fund accounts established and maintained with the trustee. In addition, if so
specified in the related prospectus supplement, a reserve fund account may be
funded with all or a portion of the interest payments on the related mortgage
assets not needed to make required distributions. Cash and the principal and
interest payments on other investments will be used to enhance the likelihood of
timely payment of principal of, and interest on, or, if so specified in the
prospectus supplement, to provide additional protection against losses in
respect of, the assets in the related trust, to pay the expenses of the trust or
for other purposes as may be specified in the prospectus supplement. If a letter
of credit is deposited with the trustee, it will be irrevocable. Any instrument
deposited in a reserve funds account will name the trustee as a beneficiary and
will be issued by an entity acceptable to each rating agency that provides, at
the request of the depositor, a rating for the certificates of the series.
Additional information with respect to the instruments deposited in the reserve
funds accounts may be set forth in the related prospectus supplement.
OTHER CREDIT ENHANCEMENT
If so provided in the prospectus supplement for a series, the related
trust may include, or the related certificates may be entitled to the benefits
of, other specified assets including reserve accounts, insurance policies,
guaranties, surety bonds, letters of credit, guaranteed investment contracts or
similar arrangements:
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o for the purpose of maintaining timely payments or providing
additional protection against losses on the assets included in
such trust,
o for the purpose of paying administrative expenses,
o for the purpose of establishing a minimum reinvestment rate on
the payments made in respect of such assets or principal
payment rates on such assets,
o for the purpose of guaranteeing timely distributions with
respect to the certificates, or
o for the other purposes as may be specified in such prospectus
supplement. These arrangements may be in addition to or in
substitution for any forms of credit enhancement described in
this prospectus.
Any of these arrangements must be acceptable to each rating agency that
provides, at the request of the depositor, a rating for the certificates of the
related series.
ORIGINATION OF MORTGAGE LOANS
GENERAL
In originating a mortgage loan, the originator will follow either:
o its own credit approval process, to the extent that such
process conforms to underwriting standards generally
acceptable to Fannie Mae or Freddie Mac, or
o credit, appraisal and underwriting standards and guidelines
approved by the depositor, which may not conform to Fannie Mae
or Freddie Mac guidelines.
The underwriting guidelines with respect to loan programs approved by
the depositor may be less stringent than those of Fannie Mae or Freddie Mac. For
example, they may permit the borrower to have a higher debt-to-income ratio and
a larger number of derogatory credit items than do the guidelines of Fannie Mae
or Freddie Mac. These underwriting guidelines are intended to provide for the
origination of single family mortgage loans for non-conforming credits. A
mortgage loan made to a non-conforming credit means a mortgage loan that is
ineligible for purchase by Fannie Mae or Freddie Mac due to borrower credit
characteristics that do not meet Fannie Mae or Freddie Mac underwriting
guidelines, including a loan made to a borrower whose creditworthiness and
repayment ability do not satisfy Fannie Mae or Freddie Mac underwriting
guidelines or a borrower who may have a record of major derogatory credit items
including default on a prior mortgage loan, credit write-offs, outstanding
judgments and prior bankruptcies. Accordingly, mortgage loans underwritten
according to these guidelines are likely to experience rates of delinquency and
foreclosure that are higher, and may be substantially higher, than mortgage
loans originated in accordance with Fannie Mae or Freddie Mac underwriting
guidelines.
In general, a prospective borrower is required to complete a detailed
application designed to provide pertinent credit information. The prospective
borrower generally is required to provide a current list of assets as well as an
authorization for a credit report which summarizes the borrower's credit history
with merchants and lenders as well as any suits, judgments or bankruptcies that
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are of public record. The borrower may also be required to authorize
verification of deposits at financial institutions where the borrower has demand
or savings accounts.
In determining the adequacy of the mortgaged premises as collateral, an
appraisal is made of each property considered for financing by a qualified
independent appraiser. The appraiser is required to inspect the property and
verify that it is in good repair and that construction, if new, has been
completed. The appraisal is based on the market value of comparable homes and,
if considered applicable by the appraiser, the estimated rental income of the
property and a replacement cost and analysis based on the current cost of
constructing a similar home. All appraisals generally are expected to conform to
Fannie Mae or Freddie Mac appraisal standards then in effect.
Once all applicable employment, credit and property information is
received, a determination generally is made as to whether the prospective
borrower has sufficient monthly income available 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 mortgaged premises including property taxes and insurance premiums, and
to meet other financial obligations and monthly living expenses. The
underwriting standards applied, particularly with respect to the level of income
and debt disclosure on the application and verification, may be adjusted in
appropriate cases where factors such as low loan-to-value ratios or other
favorable compensating factors exist.
A prospective borrower applying for a loan pursuant to the full
documentation program is required to provide, in addition to the above, a
statement of income, expenses and liabilities, existing or prior. An employment
verification is obtained from an independent source, typically the prospective
borrower's employer, which verification generally reports the length of
employment with that organization, the prospective borrower's current salary and
whether it is expected that the prospective borrower will continue being
employed in the future. If a prospective borrower is self-employed, the borrower
may be required to submit copies of signed tax returns. For other than
self-employed borrowers, income verification may be accomplished by W-2 forms or
pay stubs that indicate year to date earnings.
Under the limited documentation program or stated income program,
greater emphasis is placed on the value and adequacy of the mortgaged premises
as collateral rather than on credit underwriting, and certain credit
underwriting documentation concerning income and employment verification is
therefore waived. Accordingly, the maximum permitted loan-to-value ratios for
loans originated under the program are generally lower than those permitted for
other similar loans originated pursuant to the full documentation program.
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REPRESENTATIONS AND WARRANTIES
The depositor generally will acquire the mortgage loans from the
seller. The seller will make customary representations and warranties with
respect to the mortgage loans in the sales agreement by which the seller
transfers its interest in the mortgage loans to the depositor. The seller will
represent and warrant, among other things:
o that each mortgage loan has been originated in compliance with
all applicable laws, rules and regulations,
o that each primary mortgage insurance policy is issued by the
related mortgage insurer,
o that each note and security instrument has been executed and
delivered by the borrower and the security instrument has been
duly recorded where the mortgaged premises are located in
order to make effective the lien on the related mortgaged
premises, and
o that upon foreclosure on the mortgaged premises, the holders
of the mortgage loan will be able to deliver good and
merchantable title to the mortgaged premises.
In general, the seller will submit to the trustee with each mortgage loan a
mortgagee title insurance policy, title insurance binder, preliminary title
report, or other satisfactory evidence of title insurance, and, if a preliminary
title report is delivered initially, the seller is required to deliver a final
title insurance policy or satisfactory evidence of the existence of such a
policy; however, for second mortgage loans with a balance of less than $50,000,
the seller will generally not obtain a mortgage title insurance policy.
If the seller breaches a representation or warranty made with respect
to a mortgage loan or if any principal document executed by the borrower
relating to a mortgage loan is found to be defective in any material respect and
the breach or defect cannot be cured as specified in the agreement, the trustee
may require the seller to purchase the mortgage loan from the related trust upon
deposit with the trustee of funds equal to the then unpaid principal balance of
the mortgage loan plus accrued interest thereon at the related mortgage interest
rate through the end of the month in which the purchase occurs. In the event of
a breach by the seller of a representation or warranty with respect to a
mortgage loan or the delivery by the seller to the trustee of a materially
defective document with respect to a mortgage loan, the seller may under
specified circumstances, in lieu of repurchasing the mortgage loan, substitute a
mortgage loan having characteristics substantially similar to those of the
defective mortgage loan. The seller's obligation to purchase a mortgage loan
will not be guaranteed by the depositor or any other party.
SERVICING OF MORTGAGE LOANS
Each servicer generally will be approved or will utilize a sub-servicer
that is approved by Fannie Mae or Freddie Mac as a servicer of mortgage loans
and must be approved by the master servicer. The depositor expects that most or
all of the mortgage loans will be serviced by Meritech Mortgage Services, Inc.,
an affiliate of the seller. In determining whether to approve a servicer, the
depositor will review the credit of the servicer and, if necessary for the
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approval of the servicer, the sub-servicer, including capitalization ratios,
liquidity, profitability and other similar items that indicate ability to
perform financial obligations. In addition, the depositor will review the
servicer's and, if necessary, the sub-servicer's servicing record and will
evaluate the ability of the servicer and, if necessary, the sub-servicer to
conform with required servicing procedures. Generally, the depositor will not
approve a servicer unless either the servicer or the sub-servicer, if any:
o has serviced conventional mortgage loans for a minimum of two
years,
o maintains a loan servicing portfolio of at least $300,000,000,
and
o has tangible net worth, determined in accordance with
generally accepted accounting principles, of at least
$3,000,000.
The depositor will continue to monitor on a regular basis the credit and
servicing performance of the servicer and, to the extent the servicer does not
meet the foregoing requirements, any sub-servicer.
The duties to be performed by the servicers with respect to the
mortgage loans included in the trust for each series will include the
calculation, collection and remittance of principal and interest payments on the
mortgage loans, the administration of mortgage escrow accounts, as applicable,
the collection of insurance claims, the administration of foreclosure procedures
and, if necessary, the advance of funds to the extent certain payments are not
made by the borrowers and are recoverable from late payments made by the
borrowers, under the applicable insurance policies with respect to the series or
from proceeds of the liquidation of the mortgage loans. Each servicer also will
provide accounting and reporting services as necessary to enable the master
servicer to provide required information to the depositor and the trustee with
respect to the mortgage loans. Each servicer is entitled to a periodic servicing
fee equal to a specified percentage of the outstanding principal balance of each
mortgage loan serviced by the servicer and certain other fees, including, but
not limited to, late payments, conversion or modification fees and assumption
fees. Servicing obligations of a servicer may be delegated to an approved
sub-servicer; provided, however, that the servicer remains fully responsible and
liable for all its obligations under the servicing agreement. The rights of the
depositor under each servicing agreement with respect to a series will be
assigned to the trust for the series.
PAYMENTS ON MORTGAGE LOANS
Each servicing agreement with respect to a series will require the
related servicer to establish and maintain one or more separate, insured, to the
available limits, custodial accounts into which the servicer will be required to
deposit on a daily basis payments of principal and interest received with
respect to mortgage loans serviced by the servicer included in the trust for the
series. To the extent deposits in each custodial account are required to be
insured by the FDIC, if at any time the sums in any custodial account exceed the
limits of insurance on the account, the servicer will be required within one
business day to withdraw the excess funds from the account and remit the amounts
to a custodial account maintained by the trustee or master servicer or to the
trustee or the master servicer for deposit in the asset proceeds account for the
series. The amount on deposit in any account will be invested in or
collateralized as described herein.
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Each servicing agreement with respect to a series will require the
related servicer, not later than the day of the month specified in the servicing
agreement, to remit to the master servicer custodial account amounts
representing scheduled installments of principal and interest on the mortgage
loans included in the trust for the series received or advanced by the servicer
that were due during the related due period and principal prepayments, insurance
proceeds, guarantee proceeds and liquidation proceeds, including amounts paid in
connection with the withdrawal from the related trust of defective mortgage
loans or the purchase from the related trust of converted mortgage loans,
received during the prepayment period specified in the servicing agreement, with
interest to the date of prepayment or liquidation, subject to specified
limitations. However, each servicer may deduct from the remittance all
applicable servicing fees, insurance premiums, amounts required to reimburse any
unreimbursed advances and any other amounts specified in the related servicing
agreement. On or before each distribution date, the master servicer will
withdraw from the master servicer custodial account and remit to the asset
proceeds account those amounts available for distribution on the distribution
date. In addition, there will be deposited in the asset proceeds account for the
series any advances of principal and interest made by the master servicer or the
trustee pursuant to the agreement to the extent the amounts were not advanced by
the servicer.
Prior to each distribution date for a series, the master servicer will
furnish to the trustee a statement setting forth certain information with
respect to the mortgage loans included in the trust for the series.
ADVANCES
If so specified in the prospectus supplement for a series, each
servicing agreement with respect to the series will provide that the related
servicer will be obligated to advance funds to cover, to the extent that the
amounts are deemed to be recoverable from any subsequent payments on the
mortgage loans:
o delinquent payments of principal or interest on the mortgage
loans,
o delinquent payments of taxes, insurance premiums or other
escrowed items and
o foreclosure costs, including reasonable attorney's fees.
The failure of a servicer to make any required advance under the
related servicing agreement constitutes a default under the servicing agreement
for which the servicer may be terminated. Upon a default by the servicer, the
master servicer or the trustee may be required, if so provided in the agreement,
to make advances to the extent necessary to make required distributions on
certain certificates, provided that such party deems such amounts to be
recoverable.
As specified in the related prospectus supplement for a series, the
advance obligation of the master servicer may be further limited to an amount
specified in the agreement that has been approved by each rating agency that
provides, at the request of the depositor, a rating for the certificates of the
series. Any required advances by a servicer, the master servicer or the trustee,
as the case may be, must be deposited into the applicable custodial account or
master servicer custodial account or into the asset proceeds account and will be
due not later than the distribution date to which the delinquent payment
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relates. Amounts so advanced by a servicer, the master servicer or the trustee,
as the case may be, will be reimbursable out of future payments on the mortgage
loans, insurance proceeds or liquidation proceeds of the mortgage loans for
which the amounts were advanced. If an advance made by a servicer, the master
servicer or the trustee, as the case may be, later proves to be unrecoverable,
the servicer, the master servicer or the trustee, as the case may be, will be
entitled to reimbursement from funds in the asset proceeds account prior to the
distribution of payments to the certificateholders.
Any advances made by a servicer, the master servicer or the trustee
with respect to mortgage loans included in the trust for any series are intended
to enable the trustee to make timely payment of the scheduled distributions on
the certificates of the series. Neither the servicer or the master servicer will
insure or guarantee the certificates of any series or the mortgage loans
included in the trust for any series, and their obligations to advance for
delinquent payments will be limited to the extent that the advances will be
recoverable out of future payments on the mortgage loans, insurance proceeds or
liquidation proceeds of the mortgage loans for which the amounts were advanced.
COLLECTION AND OTHER SERVICING PROCEDURES
Each servicing agreement with respect to a series will require the
related servicer to make reasonable efforts to collect all payments required
under the mortgage loans included in the related trust and, consistent with the
servicing agreement and the applicable insurance policies with respect to each
mortgage loan, to follow the collection procedures it normally would follow with
respect to mortgage loans serviced for Fannie Mae.
The mortgage note or security instrument used in originating a mortgage
loan may contain a due-on-sale clause. The servicer will be required to use
reasonable efforts to enforce due-on-sale clauses with respect to any mortgage
note or security instrument containing such a clause, provided that the coverage
of any applicable insurance policy will not be adversely affected thereby. In
any case in which properties or interests securing mortgage loans have been or
are about to be conveyed by the borrower and the due-on-sale clause has not been
enforced or the related mortgage note is by its terms assumable, the servicer
will be authorized to take or enter into an assumption agreement from or with
the person to whom the mortgaged premises have been or are about to be conveyed,
if that person meets certain loan underwriting criteria, including the criteria
necessary to maintain the coverage provided by the applicable primary mortgage
insurance policies or if otherwise required by law. If the servicer enters into
an assumption agreement in connection with the conveyance of any of the
mortgaged premises, the servicer will release the original borrower from
liability upon the mortgage loan and substitute the new borrower as obligor
thereon. In no event may an assumption agreement permit a decrease in the
mortgage interest rate or an increase in the term of a mortgage loan. Fees
collected for entering into an assumption agreement will be retained by the
servicer as additional servicing compensation.
PRIMARY MORTGAGE INSURANCE POLICIES
Each conventional mortgage loan that has an original loan-to-value
ratio of greater than 80% will, to the extent specified in the related
prospectus supplement, be covered by a primary mortgage insurance policy
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remaining in force until the principal balance of the mortgage loan is reduced
to 80% of the original fair market value of the related mortgaged premises or,
with the consent of the master servicer and the mortgage insurer, after the
related policy has been in effect for more than two years if the loan-to-value
ratio with respect to the mortgage loan has declined to 80% or less based upon
the current fair market value of the mortgaged premises. Other mortgage loans
may also be covered by primary mortgage insurance policies to the extent
specified in the related prospectus supplement.
If so specified in the prospectus supplement for a series, the amount
of a claim for benefits under a primary mortgage insurance policy covering a
mortgage loan included in the related trust will consist of the insured portion
of the unpaid principal balance of the covered mortgage loan plus accrued and
unpaid interest on such unpaid principal balance and reimbursement of specified
expenses, less
o all rents or other payments collected or received by the
insured, other than the proceeds of hazard insurance, that are
derived from or are in any way related to the related
mortgaged premises,
o hazard insurance proceeds in excess of the amount required to
restore the mortgaged premises and which have not been applied
to the payment of the mortgage loan,
o amounts expended but not approved by the mortgage insurer,
o claim payments previously made by the mortgage insurer, and
o unpaid premiums.
If so specified in the prospectus supplement for a series, the mortgage
insurer will be required to pay to the insured either the mortgage insurance
loss or, at its option under certain of the primary mortgage insurance policies,
the sum of the delinquent scheduled payments plus any advances made by the
insured, both to the date of the claim payment, and, after that date, scheduled
payments in the amount that would have become due under the mortgage loan if it
had not been discharged plus any advances made by the insured until the earlier
of the date the mortgage loan would have been discharged in full if the default
had not occurred and the date of an approved sale. Any rents or other payments
collected or received by the insured which are derived from or are in any way
related to the mortgaged premises securing the mortgage loan will be deducted
from any claim payment.
STANDARD HAZARD INSURANCE POLICIES
Each servicing agreement with respect to a series will require the
related servicer to cause to be maintained a standard hazard insurance policy
covering each mortgaged premises securing each mortgage loan covered by the
servicing agreement. Each standard hazard insurance policy is required to cover
an amount at least equal to the lesser of the outstanding principal balance of
the related mortgage loan or 100% of the replacement value of the improvements
on the related mortgaged premises. All amounts collected by the servicer or the
master servicer under any standard hazard insurance policy, less amounts to be
applied to the restoration or repair of the mortgaged premises and other amounts
necessary to reimburse the servicer or the master servicer for previously
incurred advances or approved expenses, which may be retained by the servicer or
the master servicer, will be deposited to the applicable custodial account
maintained with respect to the mortgage loan or the asset proceeds account.
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The standard hazard insurance policies will provide for coverage at
least equal to the applicable state standard form of fire insurance policy with
extended coverage. In general, the standard form of fire and extended coverage
policy will cover physical damage to, or destruction of, the improvements on the
mortgaged premises caused by fire, lightning, explosion, smoke, windstorm, hail,
riot, strike and civil commotion, subject to the conditions and exclusions
specified in each policy. Because the standard hazard insurance policies will be
underwritten by different insurers and will cover mortgaged premises located in
different states, the policies will not contain identical terms and conditions.
The basic terms of the policies, however, generally will be determined by state
law and generally will be similar. Standard hazard insurance policies typically
will not cover physical damage resulting from war, revolution, governmental
actions, floods and other water-related causes, earth movement, including
earthquakes, landslides and mudflows, nuclear reaction, wet or dry rot, vermin,
rodents, insects or domestic animals, theft or, in certain cases, vandalism. The
foregoing list is merely indicative of some kinds of uninsured risks and is not
intended to be all-inclusive. If mortgaged premises are located in a flood area
identified by HUD pursuant to the National Flood Insurance Act of 1968, as
amended, the applicable servicing agreement will require that the servicer or
the master servicer, as the case may be, cause to be maintained flood insurance
with respect to the mortgaged premises. The depositor may acquire one or more
special hazard insurance policies covering some of the uninsured risks described
above.
The standard hazard insurance policies covering mortgaged premises
securing mortgage loans typically will contain a coinsurance clause which, in
effect, will require the insured at all times to carry insurance of a specified
percentage, generally 80% to 90%, of the full replacement value of the
dwellings, structures and other improvements on the mortgaged premises in order
to recover the full amount of any partial loss. If the insured's coverage falls
below this specified percentage, the coinsurance clause will provide that the
insurer's liability in the event of partial loss will not exceed the greater of:
o the actual cash value, or the replacement cost less physical
depreciation, of the dwellings, structures and other
improvements damaged or destroyed, or
o that proportion of the loss, without deduction for
depreciation, as the amount of insurance carried bears to the
specified percentage of the full replacement cost of such
dwellings, structures and other improvements.
A servicer may satisfy its obligation to provide a standard hazard
insurance policy with respect to the mortgage loans it services by obtaining and
maintaining a blanket policy insuring against fire, flood and hazards of
extended coverage on all of the mortgage loans, to the extent that the policy
names the servicer as loss payee and the policy provides coverage in an amount
equal to the aggregate unpaid principal balance on the mortgage loans without
co-insurance. If the blanket policy contains a deductible clause and there is a
loss not covered by the blanket policy that would have been covered by a
standard hazard insurance policy covering the related mortgage loan, then the
servicer will remit to the master servicer from the servicer's own funds the
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difference between the amount paid under the blanket policy and the amount that
would have been paid under a standard hazard insurance policy covering the
mortgage loan.
Any losses incurred with respect to mortgage loans included in the
trust for a series due to uninsured risks, including earthquakes, landslides,
mudflows and floods, or insufficient insurance proceeds may reduce the value of
the assets included in the trust for the series to the extent the losses are not
covered by a special hazard insurance policy for the series and could affect
distributions to holders of the certificates of the series.
MAINTENANCE OF INSURANCE POLICIES; CLAIMS UNDER THOSE POLICIES AND OTHER
REALIZATION UPON DEFAULTED MORTGAGE LOANS
The master servicer or trustee may be required to maintain with respect
to a series one or more mortgage pool insurance policies, special hazard
insurance policies or bankruptcy bonds in full force and effect throughout the
term of the related trust, subject to payment of the applicable premiums. The
terms and requirements of the policy or bond applicable to any servicer or
master servicer will be described in the related prospectus supplement. If any
mortgage pool insurance policy, special hazard insurance policy or bankruptcy
bond is canceled or terminated for any reason, other than the exhaustion of
total policy coverage, the master servicer or trustee will be obligated to
obtain from another insurer a comparable replacement policy with a total
coverage which is equal to the then existing coverage, or a lesser amount if
each rating agency that provides, at the request of the depositor, a rating for
the certificates of the series confirms that such lesser amount will not impair
the rating on such certificates, of the mortgage pool insurance policy, special
hazard insurance policy or bankruptcy bond. If, however, the cost of any
replacement policy or bond is greater than the cost of the policy or bond which
has been terminated, then the amount of the coverage will be reduced to a level
so that the applicable premium will not exceed the cost of the premium for the
terminated policy or bond or the replacement policy or other credit enhancement
may be secured at such increased cost, so long as the increase in cost will not
adversely affect amounts available to make payments of principal or interest on
the certificates.
If any mortgaged premises securing a defaulted mortgage loan included
in the trust for a series is damaged and the proceeds, if any, from the related
standard hazard insurance policy or any special hazard insurance policy are
insufficient to restore the damaged mortgaged premises to the condition
necessary to permit recovery under the related mortgage pool insurance policy,
the servicer will not be required to expend its own funds to restore the damaged
mortgaged premises unless it determines that the expenses will be recoverable to
it through insurance proceeds or liquidation proceeds. Each servicing agreement
and the agreement with respect to a series will require the servicer or the
master servicer, as the case may be, to present claims to the insurer under any
insurance policy applicable to the mortgage loans included in the related trust
and to take all reasonable steps necessary to permit recovery under such
insurance policies with respect to defaulted mortgage loans or losses on the
mortgaged premises securing the mortgage loans.
If recovery under any applicable insurance policy is not available, the
servicer or the master servicer nevertheless will be obligated to follow
standard practices and procedures to realize upon the defaulted mortgage loan.
The servicer or the master servicer will sell the mortgaged premises pursuant to
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foreclosure, or a trustee's sale or, in the event a deficiency judgment is
available against the borrower or another person, proceed to seek recovery of
the deficiency against the appropriate person. To the extent that the proceeds
of any liquidation proceeding are less than the unpaid principal balance of the
defaulted mortgage loan, there will be a reduction in the value of the assets of
the trust for the related series that holders of the certificates of the series
may not receive distributions of principal and interest on the certificates in
full.
MODIFICATION OF MORTGAGE LOANS
With respect to a mortgage loan on which a material default has
occurred or a payment default is imminent, the related servicer may enter into a
forbearance or modification agreement with the borrower. The terms of any
forbearance or modification agreement may affect the amount and timing of
principal and interest payments on the mortgage loan and, consequently, may
affect the amount and timing of payments on one or more classes of the related
series of certificates. For example, a modification agreement that results in a
lower mortgage interest rate would lower the pass through rate of any related
class of certificates that accrues interest at a rate based on the weighted
average net rate of the mortgage loans.
As a condition to any modification or forbearance related to any
mortgage loan, the servicer and, if required, the master servicer, are required
to determine, in their reasonable business judgment, that the modification,
forbearance or substitution will maximize the recovery on the mortgage loan on a
present value basis. In determining whether to grant a forbearance or a
modification, the servicer and, if required, the master servicer will take into
account the willingness of the borrower to perform on the mortgage loan, the
general condition of the mortgaged premises and the likely proceeds from the
foreclosure and liquidation of the mortgaged premises.
The servicers will not exercise any discretion with respect to changes
in any of the terms of any mortgage loan, including, but not limited to, the
mortgage interest rate and whether the term of the mortgage loan is extended for
a further period and the specific provisions applicable to the extension, or the
disposition of delinquent or defaulted mortgage loans or mortgage loans that are
secured by mortgaged premises acquired by foreclosure or by deed-in-lieu of
foreclosure without the consent of the master servicer.
EVIDENCE AS TO SERVICING COMPLIANCE
Within 120 days after the end of each of its fiscal years, each
servicer must provide the master servicer or the trustee with a copy of its
audited financial statements for the year and a statement from the firm of
independent public accountants that prepared the financial statements to the
effect that, in preparing the statements, it reviewed the results of the
servicer's servicing operations in accordance with the Uniform Single-Audit
Procedures for mortgage banks developed by the Mortgage Bankers Association. In
addition, the servicer will be required to deliver an officer's certificate to
the effect that it has fulfilled its obligations under the servicing agreement
during the preceding fiscal year or identifying any ways in which it has failed
to fulfill its obligations during the fiscal year and the steps that have been
taken to correct the failure.
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The master servicer or the trustee will review, on an annual basis, the
performance of each servicer under the related servicing agreement and the
status of any fidelity bond and errors and omissions policy required to be
maintained by the servicer under the servicing agreement.
EVENTS OF DEFAULT AND REMEDIES
If so specified in the prospectus supplement for a series, events of
default under the servicing agreement in respect of the series will consist of:
o any failure by the servicer to remit to the master servicer
custodial account any payment required to be made by a
servicer under the terms of the servicing agreement that is
not remedied within at least one business day,
o any failure on the part of a servicer to observe or perform in
any material respect any of its other covenants or agreements
contained in the servicing agreement that continues unremedied
for a specified period after the giving of written notice of
such failure to the servicer by the master servicer,
o specified events of insolvency, readjustment of debt,
marshaling of assets and liabilities or similar proceedings
regarding the servicer, or
o specified actions by or on behalf of the servicer indicating
its insolvency or inability to pay its obligations.
The master servicer will have the right under each servicing agreement
to terminate the related servicer upon the occurrence of an event of default
under the servicing agreement. In the event of termination, the master servicer
will appoint a substitute servicer, which may be the master servicer or the
trustee, subject to written confirmation by each rating agency that provides, at
the request of the depositor, a rating for the certificates of the related
series that the appointment will not adversely affect the ratings then in effect
on the certificates. Any successor servicer, including the master servicer, will
be entitled to compensation arrangements similar to those provided to the
servicer.
MASTER SERVICER DUTIES
If so specified in the prospectus supplement for a series, the master
servicer will;
o administer and supervise the performance by each servicer of
its duties and responsibilities under the related servicing
agreement,
o maintain any insurance policies, other than property-specific
insurance policies, providing coverage for losses on the
mortgage loans for such series,
o calculate amounts payable to certificateholders on each
distribution date,
o prepare periodic reports to the trustee or the
certificateholders with respect to the foregoing matters,
o prepare federal and state tax and information returns, and
o prepare reports, if any, required under the Securities
Exchange Act of 1934, as amended.
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In addition, the master servicer will receive, review and evaluate all
reports, information and other data provided by each servicer to enforce the
provisions of the related servicing agreement, to monitor each servicer's
servicing activities, to reconcile the results of the monitoring with
information provided by the servicer and to make corrective adjustments to
records of the servicer and the master servicer, as appropriate. The master
servicer may engage various independent contractors to perform certain of its
responsibilities. However, the master servicer remains fully responsible and
liable for all its obligations under each agreement, other than those
specifically undertaken by a special servicer.
The master servicer will be entitled to a monthly master servicing fee
applicable to each mortgage loan expressed as a fixed percentage of the
remaining scheduled principal balance of the mortgage loan.
The master servicer may terminate a servicer who has failed to comply
with its covenants or breached one or more of its representations and warranties
contained in the related servicing agreement. Upon termination of a servicer by
the master servicer, the master servicer will assume the servicing obligations
of the terminated servicer or, at its option, may appoint a substitute servicer
acceptable to the trustee to assume the servicing obligations of the terminated
servicer. The master servicer's obligation to act as a servicer following the
termination of a servicer will not require the master servicer to:
o purchase mortgage loans from a trust due to a breach by the
servicer of a representation or warranty under the related
servicing agreement,
o purchase from the trust any converted mortgage loan, or
o advance payments of principal and interest on a delinquent
mortgage loan in excess of the master servicer's independent
advance obligation under the related agreement.
The master servicer for a series may resign from its obligations and
duties under the agreement with respect to the series, but no resignation will
become effective until the trustee or a successor master servicer has assumed
the master servicer's obligations and duties. If specified in the prospectus
supplement for a series, the depositor may appoint a stand-by master servicer,
which will assume the obligations of the master servicer upon a default by the
master servicer.
SPECIAL SERVICING AGREEMENT
The master servicer may appoint a special servicer to undertake certain
responsibilities of the servicer with respect to certain defaulted mortgage
loans securing a series. The special servicer may engage various independent
contractors to perform certain of its responsibilities. However, the special
servicer must remain fully responsible and liable for all its responsibilities
under the special servicing agreement. As may be further specified in the
related prospectus supplement, the special servicer, if any, may be entitled to
various fees, including, but not limited to:
o a monthly engagement fee applicable to each mortgage loan or
related REO properties as of the first day of the immediately
preceding Due Period,
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o a special servicing fee expressed as a fixed percentage of the
remaining scheduled principal balance of each specially
serviced mortgage loan or related REO properties, or
o a performance fee applicable to each liquidated mortgage loan
based upon the related liquidation proceeds.
THE AGREEMENT
The following summaries describe the material provisions common to each
series of certificates. The summaries do not purport to be complete and are
subject to the related prospectus supplement and the agreement with respect to
the series. The material provisions of a specific agreement will be further
described in the related prospectus supplement. When particular provisions or
terms used in the agreement are referred to, the actual provisions, including
definitions of terms, are incorporated by reference as part of the summaries.
THE TRUSTEE
The trustee under each agreement will be named in the related
prospectus supplement. The trustee must be a corporation or a national banking
association organized under the laws of the United States or any state thereof
and authorized under the laws of the jurisdiction in which it is organized to
have corporate trust powers. The trustee must also have combined capital and
surplus of at least $50,000,000 and be subject to regulation and examination by
state or federal regulatory authorities. Although the trustee may not be an
affiliate of the depositor or the master servicer, either the depositor or the
master servicer may maintain normal banking relations with the trustee if the
trustee is a depository institution.
The trustee may resign at any time, in which event the depositor will
be obligated to appoint a successor trustee. The depositor will also remove the
trustee if the trustee ceases to be eligible to continue under the agreement or
if the trustee becomes insolvent. The trustee may also be removed at any time by
the holders of outstanding certificates of the related series entitled to at
least 51%, or another percentage specified in the related prospectus supplement,
of the voting rights of the series. Certificate insurers may obtain the right to
exercise all voting rights of holders of certificates. Any resignation or
removal of the trustee and appointment of a successor trustee will not become
effective until acceptance of the appointment by the successor trustee.
ADMINISTRATION OF ACCOUNTS
Funds deposited in or remitted to the asset proceeds account, any
reserve fund or any other funds or accounts for a series are to be invested by
the trustee, as directed by the depositor, in certain eligible investments,
which may include:
o obligations of the United States or any agency thereof,
provided the obligations are backed by the full faith and
credit of the United States,
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o within specified limitations, securities bearing interest or
sold at a discount issued by any corporation, which securities
are rated in the rating category required to support the then
applicable rating assigned to the series,
o commercial paper which is then rated in the commercial paper
rating category required to support the then applicable rating
assigned to the series,
o demand and time deposits, certificates of deposit, bankers'
acceptances and federal funds sold by any depository
institution or trust company incorporated under the laws of
the United States or of any state thereof, provided that
either the senior debt obligations or commercial paper of the
depository institution or trust company, or the senior debt
obligations or commercial paper of the parent company of the
depository institution or trust company, are then rated in the
rating category required to support the then applicable rating
assigned to the series,
o demand and time deposits and certificates of deposit issued by
any bank or trust company or savings and loan association and
fully insured by the FDIC,
o guaranteed reinvestment agreements issued by any insurance
company, corporation or other entity acceptable to each rating
agency that provides, at the request of the depositor, a
rating for the certificates of the series at the time of
issuance of the series and
o specified repurchase agreements with respect to United States
government securities.
Permitted investments with respect to a series will include only
obligations or securities that mature on or before the date on which the asset
proceeds account, reserve fund and other funds or accounts for the series are
required or may be anticipated to be required to be applied for the benefit of
the holders of the certificates of the series. Any income, gain or loss from the
investments for a series will be credited or charged to the appropriate fund or
account for the series. In general, reinvestment income from permitted
investments will not accrue for the benefit of the certificateholders of the
series. If a reinvestment agreement is obtained with respect to a series, the
related agreement will require the trustee to invest funds deposited in the
asset proceeds account and any reserve fund or other fund or account for the
series according to the terms of the reinvestment agreement.
REPORTS TO CERTIFICATEHOLDERS
Concurrently with each distribution on the certificates of any series,
there will be mailed to the holders of the certificates a statement generally
setting forth, to the extent applicable to the series, among other things:
o the aggregate amount of the distribution allocable to
principal, separately identifying the amount allocable to each
class of certificates,
o the aggregate amount of the distribution allocable to
interest, separately identifying the amount allocable to each
class of certificates,
o the aggregate principal balance of each class of certificates
after giving effect to distributions on the related
distribution date,
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o if applicable, the amount otherwise distributable to any class
of certificates that was distributed to any other class of
certificates, and
o if any class of certificates has priority in the right to
receive principal prepayments, the amount of principal
prepayments in respect of the related mortgage assets; and
o information regarding the levels of delinquencies and losses
on the mortgage loans.
Customary information considered necessary for certificateholders to
prepare their tax returns will be furnished annually.
EVENTS OF DEFAULT AND REMEDIES
If so specified in the prospectus supplement for a series, events of
default under the related agreement will consist of:
o any default in the performance or breach of any covenant or
warranty of the master servicer under the agreement which
continues unremedied for a specified period after the giving
of written notice of the default or breach to the master
servicer by the trustee or by the holders of certificates
entitled to at least 25% of the aggregate voting rights,
o any failure by the master servicer to make required advances
with respect to delinquent mortgage loans in the related
trust,
o specified events of insolvency, readjustment of debt,
marshaling of assets and liabilities or similar proceedings
regarding the master servicer, if any, and
o specified actions by or on behalf of the master servicer
indicating its insolvency or inability to pay its obligations.
So long as an event of default by the master servicer under an
agreement remains unremedied, the trustee may, and, at the direction of the
holders of outstanding certificates of a series entitled to at least 51% of the
voting rights, the trustee will, terminate all the rights and obligations of the
master servicer under the related agreement, except that the holders of
certificates may not direct the trustee to terminate the master servicer for its
failure to make advances. Upon termination, the trustee will succeed to all the
responsibilities, duties and liabilities of the master servicer under the
agreement, except that if the trustee is prohibited by law from obligating
itself to make advances regarding delinquent mortgage loans, then the trustee
will not be so obligated, and will be entitled to similar compensation
arrangements. If the trustee is unwilling or unable to act as successor master
servicer, the trustee may appoint or, if the holders of certificates of a series
entitled to at least 51% of the voting rights of such series, or a certificate
insurer entitled to exercise the voting rights of the holders of certificates,
so request in writing, the trustee shall appoint, or petition a court of
competent jurisdiction for the appointment of, an established mortgage loan
servicing institution acceptable to the rating agencies and having a net worth
of at least $15,000,000 to act as successor to the master servicer under the
agreement. The trustee and the successor master servicer may agree upon the
servicing compensation to be paid, which in no event may be greater than the
compensation to the master servicer under the agreement.
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The trustee will be under no obligation to exercise any of the trusts
or powers vested in it by the agreement or to make any investigation of matters
arising under the agreement or to institute, conduct or defend any litigation
under or in relation to the agreement at the request, order or direction of any
of the holders of the certificates of the related series unless the
certificateholders have offered to the trustee reasonable security or indemnity
against the costs, expenses and liabilities which may be incurred therein or
thereby.
AMENDMENT
The agreement generally may be amended by the parties to the agreement
with the consent of the holders of outstanding certificates of the related
series entitled to at least 66% of the voting rights of the series.
Nevertheless, no amendment shall:
o reduce in any manner the amount of, or delay the timing of,
payments received on the mortgage assets that are required to
be distributed on any certificate without the consent of the
holder of such certificate,
o adversely affect in any material respect the interests of the
holders of any class of certificates in a manner other than as
described above without the consent of the holders of
certificates of the class evidencing 66% of the voting rights
of such class, or
o reduce the aforesaid percentage of certificateholders required
to consent to any amendment unless each holder of a
certificate consents.
A certificate insurer may obtain the right to exercise all voting rights of the
holders of certificates. The agreement may also be amended by the parties to the
agreement without the consent of certificateholders for the purpose of, among
other things:
o curing any ambiguity,
o correcting or supplementing any provisions of the agreement
which may be inconsistent with any other provision of the
agreement,
o modifying, eliminating or adding to any of the provisions of
the agreement to the extent necessary or appropriate to
maintain the qualification of the trust, or specified assets
of the trust, either as a REMIC or as a grantor trust under
the Internal Revenue Code at all times that any certificates
are outstanding, or
o making any other provision with respect to matters or
questions arising under the agreement or matters arising with
respect to the trust which are not covered by the agreement
and which shall not be inconsistent with the provisions of the
agreement,
provided in each case that the action shall not adversely affect in any material
respect the interests of any certificateholder. No amendment or supplement shall
be deemed to adversely affect in any material respect any certificateholder if
there is delivered to the trustee written notification from each rating agency
that provides, at the request of the depositor, a rating for the certificates of
the related series to the effect that the amendment or supplement will not cause
the rating agency to lower or withdraw the then current rating assigned to the
certificates.
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TERMINATION
Each agreement and the respective obligations and responsibilities
created by the agreement shall terminate upon the distribution to
certificateholders of all amounts required to be paid to them pursuant to such
related agreement following:
o to the extent specified in the related prospectus supplement,
the purchase of all the mortgage assets in the related trust
and all mortgaged premises acquired in respect of the trust,
or
o the later of the final payment or other liquidation of the
last mortgage asset remaining in the trust or the disposition
of all mortgaged premises acquired in respect of the trust.
In no event, however, will any trust continue beyond the expiration of 21 years
from the death of the survivor of persons specified in the related agreement.
Written notice of termination of the agreement will be given to each
certificateholder, and the final distribution will be made only upon surrender
and cancellation of the certificates of the related series at the corporate
trust office of the trustee or its agent.
MATERIAL LEGAL ASPECTS OF MORTGAGE LOANS
GENERAL
The following discussion contains summaries of the material legal
aspects of mortgage loans which are general in nature. Because the legal aspects
are governed by applicable state law, which laws may differ substantially, the
summaries do not purport to be complete nor to reflect the laws of any
particular state, nor to encompass the laws of all states in which the security
for the mortgage loans is situated.
THE MORTGAGE LOANS
SINGLE FAMILY LOANS, MULTI-FAMILY LOANS, CONVENTIONAL HOME IMPROVEMENT
LOANS, TITLE I LOANS AND HOME EQUITY LINES OF CREDIT. The single family loans,
multi-family loans, conventional home improvement loans, Title I Loans and home
equity lines of credit generally will be secured by mortgages, deeds of trust,
security deeds or deeds to secure debt, depending upon the prevailing practice
in the state in which the related mortgaged premises are located. A mortgage
creates a lien upon the real property encumbered by the mortgage, which lien is
generally not prior to liens for real estate taxes and assessments. Priority
between mortgages depends on their terms and generally on any 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 premises, and the
mortgagee, who is the lender. 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 has three parties: the trustor, who is the borrower and homeowner,
similar to the mortgagor; the beneficiary, who is the lender, similar to a
mortgagee; and the trustee, who is a third-party grantee. 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
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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 such time as the underlying debt is repaid. The mortgagee's
authority under a mortgage, the trustee's authority under a deed of trust and
the grantee's authority under a security deed or deed to secure debt are
governed by law and, with respect to some deeds of trust, the directions of the
beneficiary.
CONDOMINIUMS. Particular mortgage loans may be loans secured by
condominium units. The condominium building may include one or more multi-unit
buildings, or a group of buildings whether or not attached to each other,
located on property subject to condominium ownership. Condominium ownership is a
form of ownership of real property wherein each owner is entitled to the
exclusive ownership and possession of his or her individual condominium unit and
also owns a proportionate undivided interest in all parts of the condominium
building, other than the individual condominium units, and all areas or
facilities, if any, for the common use of the condominium units. The condominium
unit owners appoint or elect the condominium association to govern the affairs
of the condominium.
COOPERATIVE LOANS. Particular mortgage loans may be cooperative loans.
The cooperative owns all the real property that comprises the project, including
the land and the apartment building comprised of separate dwelling units and
common areas or leases the land generally by a long-term ground lease and owns
the apartment building. The cooperative is directly responsible for project
management and, in most cases, payment of real estate taxes and hazard and
liability insurance. If there is a blanket mortgage on the cooperative or
underlying land, as is generally the case, the cooperative, as project
mortgagor, is also responsible for meeting these mortgage obligations. A blanket
mortgage is ordinarily incurred by the cooperative in connection with the
construction or purchase of the cooperative's apartment building. The interest
of the occupants under proprietary leases or occupancy agreements to which the
cooperative is a party are generally subordinate to the interest of the holder
of the blanket mortgage in that building. If the cooperative is unable to meet
the payment obligations arising under its blanket mortgage, the mortgagee
holding the blanket mortgage could foreclose on that mortgage and terminate all
subordinate proprietary leases and occupancy agreements. In addition, the
blanket mortgage on a cooperative may provide financing in the form of a
mortgage that does not fully amortize with a significant portion of principal
being due in one lump sum at final maturity. The inability of the cooperative to
refinance this mortgage or make the final payment could lead to foreclosure by
the mortgagee providing the financing. A foreclosure in either event by the
holder of the blanket mortgage could eliminate or significantly diminish the
value of, in the case of a trust including cooperative loans, the collateral
securing the cooperative loans.
A cooperative is owned by tenant-stockholders who, through ownership of
stock, shares or membership certificates in the corporation, receive proprietary
leases or occupancy agreements which confer exclusive rights to occupy specific
apartments or units. In general, a tenant-stockholder of a cooperative must make
a monthly payment to the cooperative representing the tenant-stockholder's pro
rata share of the cooperative's payments for its mortgage loans, real property
taxes, maintenance expenses and other capital or ordinary expenses. An ownership
interest in a cooperative and accompanying rights is financed through a
cooperative share loan evidenced by a promissory note and secured by a security
interest in the occupancy agreement or proprietary lease and in the related
cooperative shares. The lender takes possession of the share certificate and a
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counterpart of the proprietary lease or occupancy agreement, and a financing
statement covering the proprietary lease or occupancy agreement and the
cooperative shares is filed in the appropriate state and local offices to
perfect the lender's interest in its collateral. Subject to the limitations
discussed below, upon default of the tenant-stockholder, the lender may sue for
judgment on the promissory note, dispose of the collateral at a public or
private sale or otherwise proceed against the collateral or tenant-stockholder
as an individual as provided in the security agreement covering the assignment
of the proprietary lease or occupancy agreement and the pledge of the
cooperative shares.
FORECLOSURE
SINGLE FAMILY LOANS, MULTI-FAMILY LOANS, CONVENTIONAL HOME IMPROVEMENT
LOANS, TITLE I LOANS AND HOME EQUITY LINES OF CREDIT. Foreclosure of a mortgage
is generally accomplished by judicial action. A foreclosure action generally is
initiated by the service of legal pleadings upon the borrower and any party
having a subordinate interest in the real estate including any holder of a
junior encumbrance on the real estate. Delays in completion of the foreclosure
occasionally may result from difficulties in locating necessary parties
defendant. When the mortgagee's right to foreclosure is contested, the legal
proceedings necessary to resolve the issue can be time-consuming. After the
completion of a judicial foreclosure proceeding, the court may issue a judgment
of foreclosure and appoint a receiver or other officer to conduct the sale of
the mortgaged premises. In some states, mortgages may also be foreclosed by
advertisement, under a power of sale provided in the mortgage. Foreclosure of a
mortgage by advertisement is essentially similar to foreclosure of a deed of
trust by non-judicial power of sale.
Foreclosure of a deed of trust is generally accomplished by a
non-judicial trustee's sale under a specific provision in the deed of trust that
authorizes the trustee to sell the mortgaged premises to a third party upon any
default by the borrower under the terms of the note or deed of trust. In some
states, the foreclosure also may be accomplished by judicial action in the
manner provided for foreclosure of mortgages. In some states, the trustee must
record a notice of default and send a copy to the borrower and to any person who
has recorded a request for a copy of a notice of default and notice of sale. In
addition, the trustee must provide notice in some states to any other party
having a subordinate interest in the real estate, including any holder of a
junior encumbrance on the real estate. If the deed of trust is not reinstated
within any applicable cure period, a notice of sale must be posted in a public
place and, in most states, published for a specified period of time in one or
more newspapers. In addition, some state laws require that a copy of the notice
of sale be posted on the property and sent to all parties having an interest of
record in the property. When the beneficiary's right to foreclosure is
contested, the legal proceedings necessary to resolve the issue can be
time-consuming.
In some 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. In general, state law controls the amount of foreclosure expenses
and costs, including attorneys' fees, which may be recovered by a lender. After
the reinstatement period has expired without the default having been cured, the
borrower or junior lienholder no longer has the right to reinstate the loan and
must pay the loan in full to prevent the scheduled foreclosure sale. If the
mortgage or deed of trust is not reinstated, a notice of sale must be posted in
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a public place and, in most states, published for a specific period of time in
one or more newspapers. In addition, some state laws require that a copy of the
notice of sale be posted on the property and sent to all parties having an
interest in the real property.
A sale conducted in accordance with the terms of the power of sale
contained in a mortgage or deed of trust is generally presumed to be conducted
regularly and fairly, and a conveyance of the real property by the referee
confers absolute legal title to the real property to the purchaser, free of all
junior mortgages and free of all other liens and claims subordinate to the
mortgage or deed of trust under which the sale is made, with the exception of
some governmental liens and any redemption rights that may be granted to
borrowers under applicable state law. The purchaser's title is, however, subject
to all senior liens, encumbrances and mortgages. Thus, if the mortgage or deed
of trust being foreclosed is a junior mortgage or deed of trust, the referee or
trustee will convey title to the property to the purchaser, subject to the
underlying first mortgage or deed of trust and any other prior liens or claims.
A foreclosure under a junior mortgage or deed of trust generally will have no
effect on any senior mortgage or deed of trust, except that it may trigger the
right of a senior mortgagee or beneficiary to accelerate its indebtedness under
a due-on-sale clause or due on further encumbrance clause contained in the
senior mortgage.
In case of foreclosure under either a mortgage or a deed of trust, the
sale by the receiver or other designated officer or by the trustee is a public
sale. Nevertheless, because of the difficulty a potential buyer at the sale
would have in determining the exact status of title and because the physical
condition of the mortgaged premises may have deteriorated during the foreclosure
proceedings, it is uncommon for a third party to purchase the mortgaged premises
at the foreclosure sale. Rather, it is common for the lender to purchase the
mortgaged premises from the receiver or trustee for an amount which may be as
great as the unpaid principal balance of the mortgage note, accrued and unpaid
interest thereon and the expenses of foreclosure. Subsequently, subject to the
right of the borrower in some states to remain in possession during the
redemption period, the lender will assume the burdens of ownership, including
obtaining hazard insurance and making such repairs at its own expense as are
necessary to render the mortgaged premises suitable for sale. The lender
commonly will obtain the services of a real estate broker and pay the broker a
commission in connection with the sale of the mortgaged premises. Depending upon
market conditions, the ultimate proceeds of the sale of the mortgaged premises
may not equal the lender's investment therein. Any loss may be reduced by the
receipt of insurance proceeds. Mortgaged premises that are acquired through
foreclosure must be sold by the trustee within two years of the date on which it
is acquired in order to satisfy certain federal income tax requirements
applicable to REMICs. Foreclosure of a deed of trust is generally accomplished
by a non-judicial sale under a specific provision in the deed of trust which
authorizes the trustee to sell the property at public auction upon any default
by the borrower under the terms of the note or deed of trust. In some states,
the trustee must record a notice of default and send a copy to the
borrower-trustor, to any person who has recorded a request for a copy of any
notice of default and notice of sale, to any successor in interest to the
borrower-trustor, to the beneficiary of any junior deed of trust and to certain
other persons. In some states, a notice of sale must be posted in a public place
and published during a specific period of time in one or more newspapers, posted
on the property and sent to parties having an interest of record in the property
before the non-judicial sale takes place.
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Courts have imposed general equitable principles upon foreclosure,
which are generally designed to mitigate the legal consequences to the borrower
of the borrower's defaults 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.
COOPERATIVE LOANS. The cooperative shares owned by the
tenant-stockholder and pledged to the lender are, in almost all cases, subject
to restrictions on transfer as set forth in the cooperative's charter documents,
as well as the proprietary lease or occupancy agreement, and may be canceled by
the cooperative for failure by the tenant-stockholder to pay rent or other
obligations or charges owed by such tenant-stockholder, including mechanics'
liens against the cooperative apartment building incurred by the
tenant-stockholder. The proprietary lease or occupancy agreement generally
permits the cooperative to terminate the lease or agreement in the event an
obligor fails to make payments or defaults in the performance of covenants
required thereunder. Typically, the lender and the cooperative enter into a
recognition agreement which establishes the rights and obligations of both
parties in the event of a default by the tenant-stockholder on its obligations
under the proprietary lease or occupancy agreement. A default by the
tenant-stockholder under the proprietary lease or occupancy agreement will
usually constitute a default under the security agreement between the lender and
the tenant-stockholder.
The recognition agreement generally provides that, in the event that
the tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the cooperative will take no action to terminate the lease or
agreement until the lender has been provided with an opportunity to cure the
default. The recognition agreement typically provides that if the proprietary
lease or occupancy agreement is terminated, the cooperative will recognize the
lender's lien against proceeds from the sale of the cooperative apartment,
subject, however, to the cooperative's right to sums due under such proprietary
lease or occupancy agreement. The total amount owed to the cooperative by the
tenant-stockholder, which the lender generally cannot restrict and does not
monitor, could reduce the value of the collateral below the outstanding
principal balance of the cooperative loan and accrued and unpaid interest
thereon.
Recognition agreements also provide that, in the event of a foreclosure
on a cooperative loan, the lender must obtain the approval or consent of the
cooperative as required by the proprietary lease before transferring the
cooperative shares or assigning the proprietary lease.
In some states, foreclosure on the cooperative shares is accomplished
by a sale in accordance with the provisions of Article 9 of the Uniform
Commercial Code and the security agreement relating to those shares. Article 9
of the Uniform Commercial Code requires that a sale be conducted in a
commercially reasonable manner. Whether a foreclosure sale has been conducted in
a commercially reasonable manner will depend on the facts in each case. In
determining commercial reasonableness, a court will look to the notice given the
debtor and the method, manner, time, place and terms of the foreclosure.
Generally, a sale conducted according to the usual practice of banks selling
similar collateral will be considered reasonably conducted.
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Article 9 of the Uniform Commercial Code provides that the proceeds of
the sale will be applied first to pay the costs and expenses of the sale and
then to satisfy the indebtedness secured by the lender's security interest. The
recognition agreement, however, generally provides that the lender's rights to
reimbursement is subject to the right of the cooperative to receive sums due
under the proprietary lease or occupancy agreement. If there are proceeds
remaining, the lender must account to the tenant-stockholder for the surplus.
Conversely, if a portion of the indebtedness remains unpaid, the
tenant-stockholder is generally responsible for the deficiency.
JUNIOR MORTGAGE LOANS; RIGHTS OF SENIOR MORTGAGEES
Some of the mortgage loans included in a trust may be secured by
mortgages or deeds of trust that are junior to other mortgages or deeds of
trust. The rights of the trustee, and therefore the certificateholders, as
mortgagee under a junior mortgage or beneficiary under a junior deed of trust
are subordinate to those of the mortgagee under the senior mortgage or
beneficiary under the senior deed of trust, including the prior rights of the
senior mortgagee to receive hazard insurance and condemnation proceeds and to
cause the property securing the mortgage loan to be sold upon default of the
mortgagor or trustor, thereby extinguishing the junior mortgagee's or junior
beneficiary's lien unless the junior mortgagee or junior beneficiary asserts its
subordinate interest in the property in foreclosure litigation and, possibly,
satisfies the defaulted senior mortgage or deed of trust. As discussed more
fully below, a junior mortgagee or junior beneficiary may satisfy a defaulted
senior loan in full and, in some states, may cure the default and bring the
senior loan current, in either event adding the amounts expended to the balance
due on the junior loan. In most states, no notice of default is required to be
given to a junior mortgagee or junior beneficiary, and junior mortgagees or
junior beneficiaries are seldom given notice of defaults on senior mortgages. In
order for a foreclosure action in some states to be effective against a junior
mortgagee or junior beneficiary, the junior mortgagee or junior beneficiary must
be named in any foreclosure action, thus giving notice to junior lienors.
The standard form of the mortgage or deed of trust used by most
institutional lenders confers on the mortgagee or beneficiary the right under
some circumstances both to receive all proceeds collected under any standard
hazard insurance policy and all awards made in connection with any condemnation
proceedings, and to apply the proceeds and awards to any indebtedness secured by
the mortgage or deed of trust in any order as the mortgagee or beneficiary may
determine. Thus, in the event improvements on the property are damaged or
destroyed by fire or other casualty, or in the event the property is taken by
condemnation, the mortgagee or beneficiary under any underlying senior mortgage
may have the right to collect any insurance proceeds payable under a standard
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 or deeds of trust. Proceeds in excess of the amount of senior mortgage
indebtedness, in most cases, will be applied to the indebtedness of a junior
mortgage or trust deed.
A common form of mortgage or deed of trust used by institutional
lenders typically contains a future advance clause which provides, in essence,
that additional amounts advanced to or on behalf of the mortgagor or trustor by
the mortgagee or beneficiary are to be secured by the mortgage or deed of trust.
While a future advance clause is valid under the laws of most states, the
priority of any advance made under the clause depends, in some states, on
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whether the advance was an obligatory or optional advance. If the mortgagee or
beneficiary is obligated to advance the additional amounts, the advance is
entitled to receive the same priority as amounts initially loaned under the
mortgage or deed of trust, notwithstanding that there may be intervening junior
mortgages or deeds of trust and other liens at the time of the advance. Where
the mortgagee or beneficiary is not obligated to advance the additional amounts,
and, in some jurisdictions, has actual knowledge of the intervening junior
mortgages or deeds of trust and other liens, the advance will be subordinate to
the intervening junior mortgages or deeds of trust and other liens. Priority of
advances under the clause rests, in many other states, on state statutes giving
priority to all advances made under the loan agreement at a credit limit amount
stated in the recorded mortgage.
Other provisions sometimes included in the form of the mortgage or deed
of trust used by institutional lenders obligate the mortgagor or trustor 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 or beneficiary under the
mortgage or deed of trust. Upon a failure of the mortgagor or trustor to perform
any of these obligations, the mortgagee or beneficiary is given the right under
some mortgages or deeds of trust to perform the obligation itself, at its
election, with the mortgagor or trustor agreeing to reimburse the mortgagee or
beneficiary for any sums expended by the mortgagee or beneficiary on behalf of
the mortgagor or trustor. All sums so expended by the mortgagee or beneficiary
become part of the indebtedness secured by the mortgage or deed of trust.
RIGHT OF REDEMPTION
In some states, after foreclosure of a mortgage or sale pursuant to a
deed of trust, the borrower and certain foreclosed junior lienholders are given
a statutory period in which to redeem the mortgaged premises from the
foreclosure sale. Depending upon state law, the right of redemption may apply to
sale following judicial foreclosure or to sale pursuant to a non-judicial power
of sale. In some states, statutory redemption may occur only upon payment of the
foreclosure purchase price, accrued interest and taxes and certain of the costs
and expenses incurred in enforcing the obligation. In some states, the right to
redeem is a statutory right and in others it is a contractual right. The effect
of a right of redemption is to diminish the ability of the lender to sell the
foreclosed mortgaged premises while the right of redemption is outstanding. The
exercise of a right of redemption would defeat the title of any purchaser at a
foreclosure sale or of any purchaser from the lender subsequent to judicial
foreclosure or sale under a deed of trust. The practical effect of the
redemption right is to force the lender to maintain the property and pay the
expenses of ownership until the redemption period has run.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Some states have imposed statutory prohibitions which limit the
remedies of a beneficiary under a deed of trust or a mortgagee under a mortgage.
In some states, statutes limit the right of the beneficiary or mortgagee to
obtain a deficiency judgment against the borrower following foreclosure or sale
under a deed of trust. A deficiency judgment would be a personal judgment
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against the former borrower equal in most cases to the difference between the
amount due to the lender and the fair market value of the real property sold at
the foreclosure sale. As a result of these prohibitions, it is anticipated that
in many instances servicers will not seek deficiency judgments against
defaulting borrowers.
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 collateral and/or enforce
a deficiency judgment. For example, if a mortgagor is in a proceeding under the
federal Bankruptcy Code, a lender may not foreclose on the mortgaged premises
without the permission of the bankruptcy court. The rehabilitation plan proposed
by the debtor may provide, if the court determines that the value of the
mortgaged premises is less than the principal balance of the mortgage loan, for
the reduction of the secured indebtedness to the value of the mortgaged premises
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 of these proceedings under
the federal Bankruptcy Code, including, but not limited to, any automatic stay,
could result in delays in receiving payments on the mortgage loans underlying a
series of certificates and possible reductions in the aggregate amount of the
payments. Some states also have homestead exemption laws which would protect a
principal residence from a liquidation in bankruptcy.
Federal and local real estate tax laws provide priority to certain tax
liens over the lien of a mortgage or secured party. Numerous federal and state
consumer protection laws impose substantive requirements upon mortgage lenders
in connection with the origination, servicing and enforcement of single family
loans and cooperative loans. These laws include the federal Truth-in-Lending
Act, Real Estate Settlement Procedures Act, Equal Credit Opportunity Act, Fair
Credit Billing Act, Fair Credit Reporting Act and related statutes and
regulations. These federal and state laws impose specific statutory liabilities
upon lenders who fail to comply with the provisions of the law. In some cases,
this liability may affect assignees of mortgage loans.
Generally, Article 9 of the Uniform Commercial Code governs foreclosure
on cooperative shares and the related proprietary lease or occupancy agreement.
Some courts have interpreted section 9-504 of the Uniform Commercial Code to
prohibit a deficiency award unless the creditor establishes that the sale of the
collateral, which, in the case of a cooperative loan, would be the shares of the
cooperative and the related proprietary lease or occupancy agreement, was
conducted in a commercially reasonable manner.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940
Under the Soldiers' and Sailors' Civil Relief Act of 1940, members of
all branches of the military on active duty, including draftees and reservists
in military service,
o are entitled to have interest rates reduced and capped at 6%
per annum on obligations, including mortgage loans, incurred
prior to the commencement of military service for the duration
of military service,
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o may be entitled to a stay of proceedings on any kind of
foreclosure or repossession action in the case of defaults on
obligations incurred before the commencement of military
service, and
o may have the maturity of obligations incurred before the
commencement of military service extended, the payments
lowered and the payment schedule readjusted for a period of
time after the completion of military service.
The benefits described above are subject to challenge by creditors, however, and
if, in the opinion of the court, the ability of a person to comply with such
obligations is not materially impaired by military service, the court may apply
equitable principles accordingly. If a borrower's obligation to repay amounts
otherwise due on a mortgage loan included in the trust for a series is relieved
pursuant to the Soldiers' and Sailors' Civil Relief Act of 1940, neither the
servicer, the master servicer nor the trustee will be required to advance the
amounts, and any loss in respect of those amounts may reduce the amounts
available to be paid to the holders of the certificates of the series. If so
specified in the prospectus supplement for a series, any shortfalls in interest
collections on mortgage loans included in the trust for the series resulting
from application of the Soldiers' and Sailors' Civil Relief Act of 1940 will be
allocated to each class of certificates of the series that is entitled to
receive interest in respect of the mortgage loans in proportion to the interest
that each class of certificates would have otherwise been entitled to receive in
respect of the mortgage loans had the interest shortfall not occurred.
ENVIRONMENTAL CONSIDERATIONS
Environmental conditions may diminish the value of the mortgage assets
and give rise to liability of various parties, including liability under
federal, state and local environmental laws, regulations and ordinances
concerning hazardous waste, hazardous substances, petroleum, underground and
aboveground storage tanks, solid waste, lead and copper in drinking water,
asbestos, lead-based paint and other materials under the federal Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended. A
secured party which participates in management of a facility, participates in
the management of the owner of a facility, takes a deed in lieu of foreclosure
or purchases a mortgaged premises at a foreclosure sale may become liable in
some circumstances for the costs of a remedial action if hazardous substances
have been released or disposed of on the property. These cleanup costs may be
substantial. The U.S. Environmental Protection Agency has established a Policy
Towards Owners of Residential Property at Superfund Sites (July 3, 1991) which
provides that the EPA will not proceed against owners of residential property
contaminated with hazardous substances under certain circumstances. Similarly,
the EPA and the Department of Justice have adopted a policy not to proceed
against lenders which are acting primarily to protect a security interest at the
inception of a loan, during a workout, in foreclosure or after foreclosure or
the taking of a deed in lieu of foreclosure. Policy on CERCLA Enforcement
Against Lenders and Government Entities that Acquire Property Involuntarily
(September 22, 1995). These policies are not binding on the EPA, a state or
third parties who may have a cause of action under CERCLA, however, and are
subject to limitations and conditions.
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On September 30, 1996, the President signed into law the Asset
Conservation Lender Liability and Deposit Insurance Protection Act of 1996. The
Asset Conservation Act was intended to clarify the scope of the secured creditor
exemption under both CERCLA and other legislation. The Asset Conservation Act
more explicitly defined the kinds of participation in management that would
trigger liability under CERCLA an specified the activities that would not
constitute participation in management or otherwise result in a forfeiture of
the secured creditor exemption before foreclosure or during a workout period.
The Asset Conservation Act also clarified the extent of protection against
liability under CERCLA in the event of foreclosure and authorized certain
regulatory clarifications of the scope of the secured creditor exemption for
purposes of other legislation, similar to the statutory protections under
CERCLA. However, since the courts have not yet had the opportunity to interpret
the new statutory provisions, the scope of the additional protections offered by
the Asset Conservation Act is not fully defined. It also is important to note
that the Asset Conservation Act does not offer complete protection to lenders
and that the risk of liability remains.
Many state or local laws, regulations or ordinances may also require
owners or operators of property, which may include a lender in certain
circumstances, to incur cleanup costs if hazardous substances, hazardous wastes,
petroleum or solid waste are released or otherwise exist on the property. It is
possible that cleanup costs under CERCLA or other federal, state or local laws,
regulations or ordinances could become a liability of a trust and reduce the
amounts otherwise distributable to the certificateholders if a mortgaged
premises securing a mortgage loan becomes the property of the trust in certain
circumstances and if the cleanup costs were incurred. Moreover, some states or
localities by statute or ordinance impose a lien for any cleanup costs incurred
by the state or locality on the property that is the subject of such cleanup
costs. Some liens take priority over all other prior recorded liens, and others
take the same priority as taxes in the jurisdiction. In both instances, the lien
of the states or localities would take priority over the security interest of
the trustee in a mortgaged premises in the jurisdiction in question.
It is possible that no environmental assessment or a very limited
environmental assessment of the mortgaged premises was conducted and no
representations or warranties are made by the depositor or the seller to the
trustee or certificateholders as to the absence or effect of adverse
environmental conditions on any of the mortgaged premises. In addition, the
servicers have not made any representations or warranties or assumed any
liability with respect to the absence or effect of adverse environmental
conditions on any mortgaged premises or any casualty resulting from the presence
or effect of adverse environmental conditions, and any loss or liability
resulting from the presence or effect of the adverse environmental conditions
will reduce the amounts otherwise available to pay to the holders of the
certificates.
If so specified in the prospectus supplement for a series, the
servicers are not permitted to foreclose on any mortgaged premises without the
approval of the master servicer or the trustee. The master servicer or the
trustee is not permitted to approve foreclosure on any property which it knows
or has reason to know is contaminated with or affected by hazardous wastes or
hazardous substances. The master servicer or the trustee is required to inquire
of any servicer requesting approval of foreclosure whether the property proposed
to be foreclosed upon is so contaminated. If a servicer does not foreclose on
mortgaged premises, the amounts otherwise available to pay the holders of the
certificates may be reduced. A servicer will not be liable to the holders of the
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certificates if it fails to foreclose on mortgaged premises that it reasonably
believes may be so contaminated or affected, even if the mortgaged premises are,
in fact, not so contaminated or affected. In addition, a servicer will not be
liable to the holders of the certificates if, based on its reasonable belief
that no contamination or effect exists, the servicer forecloses on mortgaged
premises and takes title to the mortgaged premises and thereafter the mortgaged
premises are determined to be so contaminated or affected.
DUE-ON-SALE CLAUSES
The forms of mortgage note, mortgage and deed of trust relating to
conventional mortgage loans may contain a due-on-sale clause permitting
acceleration of the maturity of a loan if the borrower transfers its interest in
the mortgaged premises. The Garn-St Germain Depository Institutions Act of 1982
preempts state laws which prohibit the enforcement of due-on-sale clauses by
providing, among other matters, that due-on-sale clauses in some loans, which
loans include conventional mortgage loans, made after the effective date of the
Garn-St Germain Depository Institutions Act of 1982 are enforceable within
limitations as set forth in the Act and the regulations promulgated under the
Act.
By virtue of the Garn-St Germain Depository Institutions Act, a
mortgage lender generally may accelerate any conventional mortgage loan which
contains a due-on-sale clause upon transfer of an interest in the mortgaged
premises. With respect to any mortgage loan secured by a residence occupied or
to be occupied by the borrower, this ability to accelerate will not apply to
certain types of transfers, including:
o the granting of a leasehold interest which has a term of three
years or less and which does not contain an option to
purchase,
o a transfer to a relative resulting from the death of a
borrower, or a transfer where the spouse or one or more
children become owners of the mortgaged premises, in each case
where the transferee(s) will occupy the mortgaged premises,
o a transfer resulting from a decree of dissolution of marriage,
legal separation agreement or an incidental property
settlement agreement by which the spouse becomes an owner of
the mortgaged premises,
o the creation of a lien or other encumbrance subordinate to the
lender's security instrument which does not relate to a
transfer of rights of occupancy in the mortgaged premises,
provided that the lien or encumbrance is not created under
contract for deed,
o a transfer by devise, descent or operation of law on the death
of a joint tenant or tenant by the entirety, and
o other transfers as set forth in the Garn-St Germain Depository
Institutions Act and the regulations thereunder.
As a result, a lesser number of mortgage loans which contain due-on-sale clauses
may extend to full maturity than earlier experience would indicate with respect
to single-family mortgage loans. The extent of the effect of the Act on the
average lives and delinquency rates of the mortgage loans, however, cannot be
predicted.
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ENFORCEABILITY OF PROVISIONS
The forms of mortgage note, mortgage and deed of trust used by the
servicers 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 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. Late charges and prepayment fees, to the extent
permitted by law and not waived by the servicers, will generally be retained by
the related servicer as additional servicing compensation.
Courts have imposed general equitable principles upon foreclosure.
These equitable principles are generally designed to relieve the borrower from
the legal effect of defaults under the loan documents. Examples of judicial
remedies that may be fashioned include judicial requirements that the lender
undertake affirmative and expensive actions to determine the causes for the
borrower's default and the likelihood that the borrower will be able to
reinstate the loan. In some cases, courts have substituted their judgment for
the lender's judgment and have required lenders to reinstate loans or recast
payment schedules to accommodate borrowers who are suffering from temporary
financial disability. In some cases, courts have limited the right of lenders to
foreclose if the default under the security instrument is not monetary, such as
the borrower failing to adequately maintain the mortgaged premises or the
borrower executing a second mortgage or deed of trust affecting the mortgaged
premises. In other cases, courts have been faced with the issue whether federal
or state constitutional provisions reflecting due process concerns for adequate
notice require that borrowers under deeds of trust receive notices in addition
to the statutorily prescribed minimum requirements. For the most part, these
cases have upheld the notice provisions as being reasonable or have found that
the sale by a trustee under a deed of trust or under a mortgage having a power
of sale does not involve sufficient state action to afford constitutional
protections to the borrower.
CONSUMER PROTECTION LAWS
A number of federal and state laws and regulations related to
residential mortgage refinance transactions contain stringent limits on interest
rates and origination fees, and impose detailed disclosure requirements. In some
instances, any violations of these laws and regulations by the originator of the
loan could cause any affected loan to be unenforceable, or give the borrower the
right to rescind or cancel the loan transaction. Any affected loan would have a
significantly increased risk of default or prepayment.
THE DEPOSITOR
The depositor was incorporated in Virginia on May 6, 1996, as a wholly
owned, limited-purpose financing subsidiary of Dominion Mortgage Services, Inc.,
a Virginia corporation. Dominion Mortgage is a wholly owned subsidiary of
Dominion Capital, Inc., a Virginia corporation. Dominion Capital is a wholly
owned subsidiary of Dominion Resources, Inc., a Virginia corporation. None of
Dominion Resources, Dominion Capital, Dominion Mortgage or the depositor has
guaranteed, or is otherwise obligated with respect to, the certificates of any
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series. The principal executive offices of the depositor are located at 4880 Cox
Road, Glen Allen, Virginia 23060, and the telephone number of the depositor is
(804) 967-7400. The depositor was formed solely for the purpose of facilitating
the financing and sale of mortgage assets and other related assets. It does not
intend to engage in any business or investment activities other than issuing and
selling securities secured primarily by, or evidencing interests in, mortgage
assets and other related assets and taking particular actions with respect to
those assets. The depositor's Articles of Incorporation limit the depositor's
business to the foregoing and place certain other restrictions on the
depositor's activities.
USE OF PROCEEDS
Substantially all the net proceeds from the sale of the certificates of
each series will be applied by the depositor to purchase the mortgage assets
assigned to the trust underlying the series and to fund any pre-funding account.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following discussion describes the material federal income tax
consequences of the purchase, ownership and disposition of the certificates.
McGuire, Woods, Battle & Boothe LLP, special counsel to the depositor, has
delivered to the depositor its opinion stating that the discussion of federal
income tax issues in this section accurately sets forth its views on those
issues.
The discussion does not, however, purport to cover all federal income
tax consequences applicable to particular investors, some of which may be
subject to special rules, including insurance companies, tax-exempt
organizations, financial institutions or broker-dealers and holders that will
hold the certificates as other than capital assets. In particular, this
discussion applies only to investors that purchase certificates directly from
the issuer and hold the certificates as capital assets. The discussion is based
upon laws, regulations, rulings and decisions now in effect, all of which are
subject to change or differing interpretation perhaps with retroactive effect.
The discussion does not address the state or local tax consequences of the
purchase, ownership and disposition of certificates. Investors should consult
their own tax advisers in determining the federal, state, local, or other tax
consequences to them of the purchase, ownership and disposition of the
certificates.
The discussion addresses certificates of five general types:
o REMIC certificates,
o FASIT certificates,
o trust certificates,
o partnership interests, and
o debt certificates.
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The prospectus supplement for each series of certificates will indicate
whether a REMIC or FASIT election or elections will be made for the trust and,
if a REMIC or FASIT election is to be made, will identify all regular interests
and residual interests in the REMIC or all regular interest, high-yield
interests or ownership interests in the FASIT. As used in this section and the
"ERISA Considerations" section of this prospectus, Code means the Internal
Revenue Code of 1986, as amended, and IRS means the Internal Revenue Service.
REMIC CERTIFICATES
With respect to each series of REMIC certificates representing
interests in all or a portion of a trust ("REMIC mortgage pool"), McGuire,
Woods, Battle & Boothe LLP, special counsel for the depositor, will deliver its
opinion generally to the effect that, assuming that:
o a REMIC election is timely made in the required form,
o there is ongoing compliance with all provisions of the related
trust agreement and
o particular representations set forth in the trust agreement
are true,
the REMIC mortgage pool will qualify as a REMIC and the classes of interests
offered will be considered to be regular interests or residual interests in that
REMIC mortgage pool within the meaning of the Code.
REMICs may issue one or more classes of regular interests and must
issue one and only one class of residual interest. A REMIC certificate
representing a regular interest in a REMIC mortgage pool will be referred to as
a "REMIC regular certificate" and a REMIC certificate representing a residual
interest in a REMIC mortgage pool will be referred to as a "REMIC residual
certificate."
If an entity elects to be treated as a REMIC but fails to comply with
one or more of the ongoing requirements of the Code for REMIC status during any
taxable year, the entity will not qualify as a REMIC for such year and
thereafter. In this event, the entity may be subject to taxation as a separate
corporation, and the certificates issued by the entity may not be accorded the
status described below under "-- Status of REMIC Certificates." In the case of
an inadvertent termination of REMIC status, the Treasury Department has
authority to issue regulations providing relief; however, sanctions, such as the
imposition of a corporate tax on all or a portion of the entity's income for the
period during which the requirements for REMIC status are not satisfied, may
accompany any such relief.
Among the ongoing requirements to qualify for REMIC treatment is that
substantially all the assets of the REMIC mortgage pool, as of the close of the
third calendar month beginning after the creation of the REMIC and continually
thereafter, must consist of only qualified mortgages and permitted investments.
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A qualified mortgage means:
o any obligation, including any participation or certificate of
beneficial ownership therein, which is principally secured by
an interest in real property, including for this purpose any
obligation secured by stock held by a person as a tenant
stockholder in a cooperative housing corporation, and which is
transferred to the REMIC on the closing date in exchange for
REMIC certificates or is purchased within three months of the
closing date,
o any qualified replacement mortgage,
o any regular interest in another REMIC transferred to the REMIC
on the closing date in exchange for REMIC certificates, or
o beginning on September 1, 1997, particular regular interests
in a FASIT.
Any property acquired as a result of a foreclosure or deed in lieu with
respect to a qualified mortgage ("foreclosure property") is required generally
to be disposed of within two years. The REMIC Regulations treat an obligation
secured by a manufactured home that has a minimum of 400 square feet of living
space and a minimum width in excess of 102 inches and that is of a kind
customarily used at a fixed location as an obligation secured by real property
without regard to the treatment of the obligation or the property under state
law.
TAXATION OF REMIC REGULAR CERTIFICATES. Except as otherwise stated in
this discussion, the REMIC regular certificates will be treated for federal
income tax purposes as debt instruments issued by the REMIC mortgage pool and
not as ownership interests in the REMIC mortgage pool or its assets. In general,
interest, original issue discount and market discount paid or accrued on a REMIC
regular certificate will be treated as ordinary income to the holder of the
REMIC regular certificate. Distributions in reduction of the stated redemption
price at maturity of the REMIC regular certificate will be treated as a return
of capital to the extent of such holder's basis in the REMIC regular
certificate. Holders of REMIC regular certificates that otherwise report income
under a cash method of accounting will be required to report income with respect
to REMIC regular certificates under an accrual method.
ORIGINAL ISSUE DISCOUNT. Certain REMIC regular certificates may be
issued with original issue discount within the meaning of section 1273(a) of the
Code. Holders of REMIC regular certificates issued with original issue discount
generally will be required to include original issue discount in income as it
accrues, in accordance with a constant yield method that takes into account the
compounding of interest, in advance of the receipt of the cash attributable to
such income. The certificateholders will receive reports annually, or more
frequently if required, with respect to the original issue discount accruing on
the REMIC regular certificates as may be required under section 6049 of the Code
and the regulations thereunder.
See "--Reporting and Other Administrative Matters of REMICs."
Rules governing original issue discount are set forth in sections 1271
through 1273 and 1275 of the Code and in the regulations thereunder (the "OID
Regulations"). Section 1272(a)(6) provides special original issue discount rules
applicable to REMIC regular certificates. The OID Regulations do not address all
issues presented by debt instruments subject to Code Section 1272(a)(6).
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Section 1272(a)(6) requires that a mortgage prepayment assumption be
used in computing the accrual of original issue discount on REMIC regular
certificates and for certain other federal income tax purposes. The prepayment
assumption is to be determined in the manner prescribed in Treasury regulations.
To date, no such regulations have been promulgated. The Conference Committee
Report to the Tax Reform Act of 1986 (the "Committee Report") indicates that the
regulations should provide that the prepayment assumption, if any, used with
respect to a particular transaction must be the same as that used by the parties
in pricing the transaction. In reporting original issue discount, a prepayment
assumption consistent with this standard will be used. Nevertheless, the
depositor does not make any representation that prepayment will in fact be made
at the rate reflected in the prepayment assumption or at any other rate. Each
investor must make its own decision as to the appropriate prepayment assumption
to be used in deciding to purchase any of the REMIC regular certificates. The
prospectus supplement with respect to a series of REMIC certificates will
disclose the prepayment assumption to be used in reporting original issue
discount, if any, and for certain other federal income tax purposes.
The total amount of original issue discount on a REMIC regular
certificate is the excess of the stated redemption price at maturity of the
REMIC regular certificate over its "issue price." Except as discussed in the
following two paragraphs, in general, the issue price of a particular class of
REMIC regular certificates will be the price at which a substantial amount
thereof are first sold to the public, excluding bond houses and brokers. The
stated redemption price at maturity of a REMIC regular certificate is equal to
the total of all payments to be made on such certificate other than qualified
stated interest.
If a REMIC regular certificate is sold with accrued interest that
relates to a period prior to the closing date of the REMIC regular certificate,
the amount paid for the accrued interest will be treated instead as increasing
the issue price of the REMIC regular certificate. In addition, that portion of
the first interest payment in excess of interest accrued from the closing date
to the first distribution date will be treated for federal income tax reporting
purposes as includible in the stated redemption price at maturity of the REMIC
regular certificates, and as excludable from income when received as a payment
of interest on the first distribution date, except to the extent of any accrued
market discount as of that date. The OID Regulations suggest, however, that some
or all of this pre-issuance accrued interest may be treated as a separate asset,
and hence is not includible in a REMIC regular certificate's issue price or
stated redemption price at maturity, whose cost is recovered entirely out of
interest paid on the first distribution date.
Under the OID Regulations, qualified stated interest is interest that
is unconditionally payable at least annually during the entire term of the
certificate at either:
o a single fixed rate that appropriately takes into account the
length of the interval between payments, or
o a current value of a single qualified floating rate or
"objective rate" (each, a "Single Variable Rate").
A current value is the value of a variable rate on any day that is no
earlier than three months prior to the first day on which that value is in
effect and no later than one year following that day.
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A qualified floating rate is a rate whose variations can reasonably be
expected to measure contemporaneous variations in the cost of newly borrowed
funds in the currency in which the debt instrument is denominated. Such a rate
remains qualified even though it is multiplied by
(1) a fixed, positive multiple greater than 0.65 but not exceeding
1.35,
(2) increased or decreased by a fixed rate, or
(3) both (1) and (2).
Certain combinations of rates constitute a single qualified floating
rate, including (1) interest stated at a fixed rate for an initial period of
less than one year followed by a qualified floating rate if the value of the
floating rate at the closing date is intended to approximate the fixed rate and
(2) two or more qualified floating rates that can reasonably be expected to have
approximately the same values throughout the term of the debt instrument. A
combination of these rates is conclusively presumed to be a single floating rate
if the values of all rates on the closing date are within 0.25 percentage points
of one another. A variable rate that is subject to an interest rate cap, floor,
governor or similar restriction on rate adjustment may be a qualified floating
rate only if the restriction is fixed throughout the term of the instrument, or
is not reasonably expected as of the closing date to cause the yield on the debt
instrument to differ significantly from the expected yield absent the
restriction.
An objective rate is a rate determined using a single fixed formula and
based on objective financial information or economic information, excluding a
rate based on information that is in the control of the issuer or that is unique
to the circumstances of a related party. A combination of interest stated at a
fixed rate for an initial period of less than one year followed by an objective
rate is treated as a single objective rate if the value of the objective rate at
the closing date is intended to approximate the fixed rate; such a combination
of rates is conclusively presumed to be a single objective rate if the objective
rate on the closing date does not differ from the fixed rate by more than 0.25
percentage points.
Under the foregoing rules, some of the payments of interest on a REMIC
regular certificate bearing a fixed rate of interest for an initial period
followed by a qualified floating rate of interest in subsequent periods could be
treated as included in the stated redemption price at maturity if the initial
fixed rate were to differ sufficiently from the rate that would have been set
using the formula applicable to subsequent periods. REMIC regular certificates
other than certificates providing for variable rates of interest are not
anticipated to have stated interest other than qualified stated interest, but,
if any REMIC regular certificates are so offered, appropriate disclosures will
be made in the prospectus supplement. Some or all of the payments on REMIC
regular certificates providing for the accretion of interest will be included in
the stated redemption price at maturity of such certificates. Interest payments
are unconditionally payable only if a late payment or nonpayment is expected to
be penalized or reasonable remedies exist to compel payments or the terms of the
REMIC regular certificates or the conditions surrounding their issuance make the
likelihood of late payment or nonpayment a remote contingency. Although not free
from doubt, unless the prospectus supplement for a series indicates otherwise,
the trustee for each series will treat all stated interest on the certificates
as qualified stated interest.
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Under a de minimis rule in the Code, as interpreted in the OID
Regulations, original issue discount on a REMIC regular certificate will be
considered to be zero if it is less than 0.25% of the stated redemption price at
maturity of the REMIC regular certificate multiplied by the number of complete
years to its weighted average maturity. For this purpose, the weighted average
maturity is computed as the sum of the products of each payment, other than a
payment of qualified stated interest, multiplied by a fraction the numerator of
which is the number of complete years from the issue date until such payment is
made and the denominator of which is the stated redemption price at maturity.
Although not free from doubt, the trustee for each series will take into account
the prepayment assumption in computing the weighted average maturity of a
certificate for purposes of determining whether any certificate has de minimis
OID.
The OID Regulations generally treat de minimis original issue discount
as includible in income as each principal payment is made, based on the product
of the total amount of such de minimis original issue discount and a fraction,
the numerator of which is the amount of such principal payment and the
denominator of which is the outstanding principal balance of the REMIC regular
certificate. The OID Regulations also permit a certificateholder to elect to
accrue de minimis original issue discount, together with stated interest, market
discount and original issue discount, into income currently based on a constant
yield method. See "-- Market Discount" and "-- Premium."
Each holder of a REMIC regular certificate must include in gross income
the sum of the daily portions of original issue discount on its REMIC regular
certificate for each day during its taxable year on which it held such REMIC
regular certificate. For this purpose, in the case of an original holder of a
REMIC regular certificate, a calculation will first be made of the portion of
the original issue discount that accrued during each accrual period, generally
each period that ends on a date that corresponds to a distribution date on the
REMIC regular certificate and begins on the first day following the immediately
preceding accrual period, or in the case of the first such period, begins on the
closing date. For any accrual period, this portion will equal the excess of (1)
the sum of (A) the present value of all the distributions remaining to be made
on the REMIC regular certificate, as of the end of the accrual period, that are
included in the stated redemption price at maturity and (B) the sum of
distributions made on the REMIC regular certificate during the accrual period of
amounts included in the stated redemption price at maturity over (2) the
adjusted issue price of such REMIC regular certificate at the beginning of the
accrual period. The present value of the remaining distributions referred to in
clause (1)(A) of the preceding sentence will be calculated based on (1) the
yield to maturity of the REMIC regular certificate, calculated as of the closing
date, giving effect to the prepayment assumption, (2) events, including actual
prepayments, that have occurred prior to the end of the accrual period and (3)
the prepayment assumption. The adjusted issue price of a REMIC regular
certificate at the beginning of any accrual period will equal the issue price of
the certificate, increased by the aggregate amount of original issue discount
with respect to the REMIC regular certificate that accrued in prior accrual
periods, and reduced by the amount of any distributions made on the REMIC
regular certificate in prior accrual periods of amounts included in the stated
redemption price at maturity. The original issue discount accruing during any
accrual period will then be allocated ratably to each day during the period to
determine the daily portion of original issue discount for each day. With
respect to an accrual period between the closing date and the first distribution
date that is shorter than a full accrual period, the OID Regulations permit the
daily portions of original issue discount to be determined according to any
reasonable method.
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A subsequent purchaser of a REMIC regular certificate that purchases
such REMIC regular certificate at a cost, not including payment for accrued
qualified stated interest, less than its remaining stated redemption price at
maturity will also be required to include in gross income, for each day on which
it holds such REMIC regular certificate, the daily portions of original issue
discount with respect to such REMIC regular certificate, but reduced, if the
cost exceeds the adjusted issue price, by an amount equal to the product of (1)
the daily portions and (2) a constant fraction, the numerator of which is the
excess and the denominator of which is the sum of the daily portions of original
issue discount on the REMIC regular certificate for all days on or after the day
of purchase. The adjusted issue price of a REMIC regular certificate on any
given day is equal to the sum of the adjusted issue price, or, in the case of
the first accrual period, the issue price, of the REMIC regular certificate at
the beginning of the accrual period during which such day occurs and the daily
portions of original issue discount for all days during such accrual period
prior to such day, reduced by the aggregate amount of distributions made during
such accrual period prior to such day other than distributions of qualified
stated interest.
There is uncertainty concerning the application of section 1272(a)(6)
of the Code and the OID Regulations to REMIC regular certificates bearing
interest at one or more variable rates. In the absence of other authority, the
provisions of the OID Regulations governing variable rate debt instruments will
be used as a guide in adapting the provisions of section 1272(a)(6) to such
certificates for the purpose of preparing reports furnished to
certificateholders. A REMIC regular certificate bearing interest at a Single
Variable Rate will take into account for each accrual period an amount
corresponding to the sum of (1) the qualified stated interest accruing on the
outstanding principal balance of the REMIC regular certificate, as the stated
interest rate for that certificate varies from time to time, and (2) the amount
of original issue discount that would have been attributable to that period on
the basis of a constant yield to maturity for a bond issued at the same time and
issue price as the REMIC regular certificate, having the same principal balance
and schedule of payments of principal as such certificate, subject to the same
prepayment assumption, and bearing interest at a fixed rate equal to the
applicable qualified floating rate or qualified inverse floating rate in the
case of a REMIC regular certificate providing for either such rate, or equal to
the fixed rate that reflects the reasonably expected yield on the certificate in
the case of a REMIC regular certificate providing for an objective rate other
than a qualified inverse floating rate, in each case as of the closing date.
Holders of REMIC regular certificates bearing interest at a Multiple Variable
Rate generally will take into account interest and original issue discount under
a similar methodology, except that the amounts of qualified stated interest and
original issue discount attributable to such a certificate first will be
determined for an equivalent debt instrument bearing fixed rates, the assumed
fixed rates for which are (a) for a qualified floating rate or qualified inverse
floating rate, such rate as of the closing date, with appropriate adjustment for
any differences in intervals between interest adjustment dates, and (b) for any
other objective rate, the fixed rate that reflects the yield that is reasonably
expected for the REMIC regular certificate. If the interest paid or accrued with
respect to a Multiple Variable Rate certificate during an accrual period differs
from the assumed fixed interest rate, such difference will be an adjustment, to
interest or original issue discount, as applicable, to the certificateholder's
taxable income for the taxable period or periods to which such difference
relates.
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In the case of a REMIC regular certificate that provides for stated
interest at a fixed rate in one or more accrual periods and either one or more
qualified floating rates or a qualified inverse floating rate in other accrual
periods, the fixed rate is first converted into an assumed variable rate. The
assumed variable rate will be a qualified floating rate or a qualified inverse
floating rate according to the type of actual variable rate provided by the
certificate and must be such that the fair market value of the REMIC regular
certificate as of the closing date is approximately the same as the fair market
value of an otherwise identical debt instrument that provides for the assumed
variable rate in lieu of the fixed rate. The certificate is then subject to the
determination of the amount and accrual of original issue discount as described
above, by reference to the hypothetical variable rate instrument.
MARKET DISCOUNT. The purchaser of a REMIC regular certificate at a
market discount -- that is, at a purchase price less than the stated redemption
price at maturity (or, in the case of a REMIC regular certificate issued with
original issue discount, the REMIC regular certificate's adjusted issue price
(as defined under "REMIC Certificates -- Original Issue Discount")) -- will
recognize market discount upon receipt of each payment of principal. In
particular, the holder will generally be required to allocate each payment of
principal on a REMIC regular certificate first to accrued market discount and to
recognize ordinary income to the extent the principal payment does not exceed
the aggregate amount of accrued market discount on the REMIC regular certificate
not previously included in income. The market discount must be included in
income in addition to any original issue discount includible in income.
A certificateholder may elect to include market discount in income
currently as it accrues rather than including it on a deferred basis in
accordance with the foregoing. The election, if made, will apply to all market
discount bonds acquired by the certificateholder on or after the first day of
the first taxable year to which the election applies. In addition, the OID
Regulations permit a certificateholder to elect to accrue all interest and
discount, including de minimis market or original issue discount, reduced by any
premium, in income as interest, based on a constant yield method. If an election
is made, the certificateholder is deemed to have made an election to include on
a current basis market discount in income with respect to all other debt
instruments having market discount that such certificateholder acquires during
the year of the election or thereafter. Similarly, a certificateholder that
makes this election for a certificate that is acquired at a premium is deemed to
have made an election to amortize bond premium, as described below, with respect
to all debt instruments having amortizable bond premium that the
certificateholder owns or acquires. A taxpayer may not revoke an election to
accrue interest, discount and premium on a constant yield method without the
consent of the IRS.
Under a statutory de minimis exception, market discount with respect to
a REMIC regular certificate will be considered to be zero for purposes of
sections 1276 through 1278 of the Code if it is less than 0.25% of the stated
redemption price at maturity of such REMIC regular certificate multiplied by the
number of complete years to maturity remaining after the date of its purchase.
In interpreting the de minimis rule with respect to original issue discount, the
OID Regulations refer to the weighted average maturity of obligations, and it is
likely that the same principle will be applied in determining whether market
discount is de minimis. It appears that de minimis market discount on a REMIC
regular certificate would be treated in a manner similar to de minimis original
issue discount. See "REMIC certificates -- Original Issue Discount." Such
treatment would result in de minimis market discount being included in income at
a slower rate than market discount would be required to be included using the
method described in the preceding paragraph.
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The Treasury Department is authorized to issue regulations providing
for the method for accruing market discount of more than a de minimis amount on
debt instruments the principal of which is payable in more than one installment.
Nevertheless, no such regulations have been issued. Until regulations are
issued, certain rules described in the Committee Report might apply. Under those
rules, the holder of a REMIC regular certificate purchased with more than de
minimis market discount may elect to accrue such market discount either on the
basis of a constant yield method or on the basis of the appropriate
proportionate method described below. Under the proportionate method for
obligations issued with original issue discount, the amount of market discount
that accrues during a period is equal to the product of (i) the total remaining
market discount multiplied by (ii) a fraction the numerator of which is the
original issue discount accruing during the period and the denominator of which
is the total remaining original issue discount at the beginning of the period.
The prepayment assumption, if any, used in calculating the accrual of original
issue discount should be used in calculating the accrual of market discount.
Under the proportionate method for obligations issued without original issue
discount, the amount of market discount that accrues during a period is equal to
the product of (i) the total remaining market discount multiplied by (ii) a
fraction the numerator of which is the amount of stated interest paid during the
accrual period and the denominator of which is the total amount of stated
interest remaining to be paid at the beginning of the period. Because
regulations have not been issued, it is not possible to predict what effect such
regulations might have on the tax treatment of a REMIC regular certificate
purchased at a discount in the secondary market.
A certificateholder generally will be required to treat a portion of
any gain on sale or exchange of a REMIC regular certificate as ordinary income
to the extent of the market discount accrued to the date of disposition under
one of the foregoing methods less market discount previously reported as
ordinary income as distributions in reduction of the stated redemption price at
maturity were received. See "-- Sales of REMIC Certificates" below. A
certificateholder may be required to defer a portion of its interest deductions
for the taxable year attributable to any indebtedness incurred or continued to
purchase or carry such REMIC regular certificate. Any such deferred interest
expense, in general, is allowed as a deduction not later than the year in which
the related market discount income is recognized. If such holder elects to
include market discount in income currently as it accrues on all market discount
instruments acquired by such holder in that taxable year or thereafter, the
interest expense deferral rule described above will not apply.
PREMIUM. A REMIC regular certificate purchased at a cost, not including
payment for accrued qualified stated interest, greater than its remaining stated
redemption price at maturity will be considered to be purchased at a premium.
The holder of such a REMIC regular certificate may elect to amortize such
premium under the constant yield method. The OID Regulations also permit
certificateholders to elect to include all interest, discount and premium in
income based on a constant yield method, further treating the certificateholder
as having made the election to amortize premium generally, as described above.
The Committee Report indicates a Congressional intent that the same rules that
apply to accrual of market discount on installment obligations also apply in
amortizing premium under Code Section 171 on installment obligations such as the
REMIC regular certificates.
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Treasury regulations concerning amortization of premium ("the Premium
Regulations") describe the constant yield method under which premium is
amortized and provide that the resulting offset to interest income may be taken
into account only as a certificateholder takes the corresponding interest income
into account under the holder's regular accounting method. In the case of
instruments that may be called or repaid prior to maturity, the Premium
Regulations provide that the premium is calculated by assuming that the issuer
will exercise its redemption rights in the manner that maximizes the
certificateholder's yield and the certificateholder will exercise its option in
a manner that maximizes the certificateholder's yield. The Premium Regulations
do not apply to debt instruments subject to section 1272(a)(6) of the Code.
Nevertheless, if a certificateholder elects to amortize premium for the taxable
year containing the effective date of March 2, 1998, the Premium Regulations
will apply to all the certificateholder's debt instruments held on or after the
first day of that taxable year.
TREATMENT OF SUBORDINATED CERTIFICATES. REMIC regular certificates may
include one or more classes of subordinated certificates. Holders of
subordinated certificates will be required to report income with respect to such
certificates on the accrual method without giving effect to delays and
reductions in distributions attributable to defaults or delinquencies on any
mortgage loans, except possibly, in the case of income that constitutes
qualified stated interest, to the extent that it can be established that such
amounts are uncollectible. As a result, the amount of income reported by a
certificateholder of a subordinated certificate in any period could exceed the
amount of cash distributed to such certificateholder in that period.
Although not entirely clear, it appears that: (a) a holder who holds a
subordinated REMIC regular certificate in the course of a trade or business or a
corporate holder generally should be allowed to deduct as an ordinary loss any
loss sustained on account of its partial or complete worthlessness and (b) a
noncorporate holder who does not hold a subordinated REMIC regular certificate
in the course of a trade or business generally should be allowed to deduct as a
short-term capital loss any loss sustained on account of its complete
worthlessness. Special rules are applicable to banks and thrift institutions.
Holders of subordinated certificates should consult their own tax advisers
regarding the appropriate timing, character and amount of any loss sustained
with respect to subordinated certificates.
STATUS OF REMIC CERTIFICATES. REMIC certificates held by a domestic
building and loan association will constitute a "loans secured by interests in
real property" within the meaning of section 7701(a)(19)(C)(xi) of the Code in
the same proportion that the assets of the REMIC mortgage pool underlying such
certificates would be treated as "loans secured by an interest in real property"
within the meaning of section 7701(a)(19)(C)(v) or as other assets described in
section 7701(a)(19)(C)(i) through (x). REMIC certificates held by a real estate
investment trust will constitute "real estate assets" within the meaning of
section 856(c)(5)(B), and any amount includible in gross income with respect to
the REMIC certificates will be considered "interest on obligations secured by
mortgages on real property or on interests in real property" within the meaning
of section 856(c)(3)(B) in the same proportion that, for both purposes, the
assets and income of the REMIC would be treated as "interests in real property"
as defined in section 856(c)(5)(C) or, as provided in the Committee Report, as
"real estate assets" as defined in section 856(c)(5)(B)) and as "interest on
obligations secured by mortgages on real property or on interests in real
property," respectively. See, in this regard, "Trust Certificates --
Characterization of Investments in Trust Certificates -- Buydown Mortgage
Loans," below. Moreover, if 95% or more of the assets qualify for any of the
foregoing treatments, the REMIC certificates, and income thereon, will qualify
for the corresponding status in their entirety. The investment of amounts in any
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reserve fund in non-qualifying assets would, and, holding property acquired by
foreclosure pending sale might, reduce the amount of the REMIC certificates that
would qualify for the foregoing treatment. The REMIC Regulations provide that
payments on qualified mortgages held pending distribution are considered part of
the qualified mortgages for purposes of section 856(c)(5)(B) of the Code; it is
unclear whether such collected payments would be so treated for purposes of
section 7701(a)(19)(C)(v), but there appears to be no reason why analogous
treatment should be denied. The determination as to the percentage of the
REMIC's assets, or income, that will constitute assets, or income, described in
the foregoing sections of the Code will be made with respect to each calendar
quarter based on the average adjusted basis, or average amount of income, of
each category of the assets held, or income accrued, by the REMIC during such
calendar quarter. The REMIC will report those determinations to
certificateholders in the manner and at the times required by applicable
Treasury regulations. The prospectus supplement or the related Current Report on
Form 8-K for each series of REMIC certificates will describe the assets as of
the cut off date. REMIC certificates held by certain financial institutions will
constitute an "evidence of indebtedness" within the meaning of section
582(c)(1).
For purposes of characterizing an investment in REMIC certificates, a
contract secured by a manufactured home qualifying as a single family residence
under section 25(e)(10) of the Code will constitute (1) a real estate asset
within the meaning of section 856 and (2) an asset described in section
7701(a)(19)(C).
TIERED REMIC STRUCTURES. For certain series of certificates, two or
more separate elections may be made to treat designated portions of the related
trust as REMICs ("Tiered REMICs") for federal income tax purposes. Upon the
issuance of any such series of certificates, McGuire, Woods, Battle & Boothe
LLP, special counsel to the depositor, will deliver its opinion generally to the
effect that, assuming compliance with all provisions of the related trust
agreement, the Tiered REMICs will each qualify as a REMIC and the REMIC
certificates issued by the Tiered REMICs will be considered to evidence
ownership of REMIC regular certificates or REMIC residual certificates in the
related REMIC within the meaning of the Code. Solely for purposes of determining
whether the REMIC certificates will be real estate assets within the meaning of
section 856(c)(5)(B) of the Code, and assets described in section 7701(a)(19)(C)
of the Code, and whether the income on such certificates is interest described
in section 856(c)(3)(B), the Tiered REMICs will be treated as one REMIC.
TAXATION OF REMLC RESIDUAL CERTIFICATES. An owner of a REMIC residual
certificate ("Residual Owner") generally will be required to report its daily
portion of the taxable income or, subject to the limitation described below in
"Basis Rules and Distributions", the net loss of the REMIC mortgage pool for
each day during a calendar quarter that the Residual Owner owned such REMIC
residual certificate. For this purpose, the daily portion will be determined by
allocating to each day in the calendar quarter, using a 30 days per month/90
days per quarter/360 days per year counting convention, its ratable portion of
the taxable income or net loss of the REMIC mortgage pool for such quarter, and
by allocating the daily portions among the Residual Owners, on such day, in
accordance with their percentage of ownership interests on such day. Any amount
included in the gross income of, or allowed as a loss to, any Residual Owner by
virtue of the rule referred to in this paragraph will be treated as ordinary
income or loss. Taxable income from Residual certificates may exceed cash
distributions with respect thereto in any taxable year.
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The tax treatment of any payments received by a Residual Owner in
connection with the acquisition of such certificate is unclear. Such payments
may be taken into account in determining the income of such holder.
Alternatively, a holder may take another position. Because of the uncertainty
concerning the treatment of such payments, Residual Owners should consult their
tax advisers concerning the treatment of such payments for income tax purposes.
TAXABLE INCOME OR NET LOSS OF THE REMIC MORTGAGE POOL. The taxable
income or net loss of the REMIC mortgage pool reflects a netting of income from
the qualified mortgages, any cancellation of indebtedness income due to the
allocation of realized losses to REMIC regular certificates and the deductions
and losses allowed to the REMIC mortgage pool. Such taxable income or net loss
for a given calendar quarter is determined in the same manner as for an
individual having the calendar year as his taxable year and using the accrual
method of accounting, with certain modifications. First, a deduction is allowed
for accruals of interest, including original issue discount, on the REMIC
regular certificates. Second, market discount equal to the excess of any
qualified mortgage's adjusted issue price (as determined under "-- REMIC
Certificates -- Market Discount", and "--Premium") over its fair market value at
the time of its transfer to the REMIC mortgage pool generally will be included
in income as it accrues, based on a constant yield method and on the prepayment
assumption. For this purpose, the fair market value of the mortgage loans will
be treated as being equal to the aggregate issue prices of the REMIC regular
certificates and REMIC residual certificates. If one or more classes of REMIC
regular certificates or REMIC residual certificates are retained by the
depositor, the value of such retained interests will be estimated in order to
determine the fair market value of the qualified mortgages for this purpose.
Third, no item of income, gain, loss or deduction allocable to a prohibited
transaction (see "-- Prohibited Transactions and Other Possible REMIC Taxes") is
taken into account. Fourth, the REMIC mortgage pool generally may deduct only
items that would be allowed in calculating the taxable income of a partnership
by virtue of section 703(a)(2) of the Code. Fifth, the limitation on
miscellaneous itemized deductions imposed on individuals by section 67 does not
apply at the REMIC mortgage pool level to investment expenses such as trustee
fees or the servicing fees paid to the master servicer or sub-servicers, if any.
See, however, "-- Pass through of Servicing Fees". If the deductions allowed to
the REMIC mortgage pool exceed its gross income for a calendar quarter, such
excess will be the net loss for the REMIC mortgage pool for that calendar
quarter.
BASIS RULES AND DISTRIBUTIONS. A Residual Owner will not include any
distribution by a REMIC mortgage pool in gross income to the extent it is less
than the adjusted basis of such Residual Owner's interest in a REMIC residual
certificate. The distribution will reduce the adjusted basis of such interest,
but not below zero. To the extent a distribution exceeds the adjusted basis of
the REMIC residual certificate, it will be treated as gain from the sale of the
REMIC residual certificate. See "-- Sales of REMIC Certificates." The adjusted
basis of a REMIC residual certificate is equal to the amount paid for the REMIC
residual certificate, increased by amounts included in the income of the
Residual Owner and decreased by distributions and by net losses taken into
account with respect to such interest.
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A Residual Owner is not allowed to take into account any net loss for
any calendar quarter to the extent such net loss exceeds such Residual Owner's
adjusted basis in its REMIC residual certificate as of the close of such
calendar quarter, determined without regard to such net loss. Any loss
disallowed by reason of this limitation may be carried forward indefinitely to
future calendar quarters and, subject to the same limitation, may be used by
that Residual Owner to offset income from the REMIC residual certificate.
The effect of these basis and distribution rules is that a Residual
Owner may not amortize its basis in a REMIC residual certificate but may only
recover its basis through distributions, through the deduction of any net losses
of the REMIC mortgage pool or upon the sale of its REMIC residual certificate.
See "-- Sales of REMIC Certificates."
EXCESS INCLUSIONS. Excess inclusions with respect to a REMIC residual
certificate are subject to special tax rules. With respect to a Residual Owner,
the excess inclusion for any calendar quarter is defined as the excess of the
daily portions of taxable income over the sum of the "daily accruals" for each
day during such quarter that the Residual Owner held such REMIC residual
certificate. The daily accruals are determined by allocating to each day during
a calendar quarter its ratable portion of the product of the adjusted issue
price of the REMIC residual certificate at the beginning of the calendar quarter
and 120 percent of the long-term "applicable federal rate," generally, an
average of current yields on Treasury securities of comparable maturity, and
hereafter the "AFR," in effect at the time of issuance of the REMIC residual
certificate. For this purpose, the adjusted issue price of a REMIC residual
certificate as of the beginning of any calendar quarter is the issue price of
the REMIC residual certificate, increased by the amount of daily accruals for
all prior quarters and decreased by any distributions made with respect to such
REMIC residual certificate before the beginning of such quarter. The issue price
of a REMIC residual certificate (a) if it is publicly offered is the initial
offering price to the public, excluding bond houses and brokers, at which a
substantial amount of the REMIC residual certificates were sold, or (b) if it is
not public offered, is its fair market value on the pricing date when the prices
of the REMIC regular certificates are fixed.
For Residual Owners, an excess inclusion may not be offset by
deductions, losses or loss carryovers from other activities. For Residual Owners
that are subject to tax on unrelated business taxable income (as defined in
section 511 of the Code), an excess inclusion is treated as unrelated business
taxable income. For Residual Owners that are nonresident alien individuals or
foreign corporations generally subject to United States withholding tax, even if
interest paid to such Residual Owners is generally eligible for exemptions from
such tax, an excess inclusion will be subject to such tax and no tax treaty rate
reduction or exemption may be claimed with respect thereto. See "--Foreign
Investors in REMIC Certificates."
Alternative minimum taxable income for a Residual Owner is determined
without regard to the special rule that taxable income may not be less than
excess inclusions and may not be less than the excess inclusions for the year.
The amount of any alternative minimum tax net operating loss deductions must be
computed without regard to any excess inclusions.
In the case of any REMIC residual certificates held by a real estate
investment trust, the aggregate excess inclusions with respect to such REMIC
residual certificates, reduced (but not below zero) by the real estate
investment trust taxable income (within the meaning of section 857(b)(2) of the
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Code, excluding any net capital gain), will be allocated among the shareholders
of such trust in proportion to the dividends received by such shareholders from
such trust, and any amount so allocated will be treated as an excess inclusion
with respect to a REMIC residual certificate as if held directly by such
shareholder.
NONECONOMIC REMIC RESIDUAL CERTIFICATES. Under the REMIC Regulations,
transfers of "noneconomic" REMIC residual certificates are disregarded for all
federal income tax purposes if "a significant purpose of the transfer was to
enable the transferor to impede the assessment or collection of tax." If such
transfer is disregarded, the purported transferor will continue to remain liable
for any taxes due with respect to the income on such noneconomic REMIC residual
certificate. The REMIC Regulations provide that a REMIC residual certificate is
noneconomic unless, at the time of its transfer and based on the prepayment
assumption and any required or permitted clean up calls or required liquidation
provided for in the REMIC's organizational documents: (1) the present value of
the expected future distributions (discounted using the AFR) on the REMIC
residual certificate equals at least the product of the present value of the
anticipated excess inclusions and the highest tax rate applicable to
corporations for the year of the transfer and (2) the transferor reasonably
expects that the transferee will receive distributions with respect to the REMIC
residual certificate at or after the time the taxes accrue on the anticipated
excess inclusions in an amount sufficient to satisfy the accrued taxes.
Accordingly, all transfers of REMIC residual certificates will be subject to
certain restrictions under the terms of the related agreement that are intended
to reduce the possibility of any such transfer being disregarded. Such
restrictions will require each party to a transfer to provide an affidavit that
no purpose of such transfer is to impede the assessment or collection of tax,
including certain representations as to the financial condition of the
prospective transferee. Prior to purchasing a REMIC residual certificate,
prospective purchasers should consider the possibility that a purported transfer
of such REMIC residual certificate by such a purchaser to another purchaser at
some future date may be disregarded in accordance with the above-described
rules, which would result in the retention of tax liability by such purchaser.
The applicable prospectus supplement will disclose whether offered REMIC
residual certificates may be considered noneconomic residual interests under the
REMIC Regulations; provided, however, that any disclosure that a REMIC residual
certificate will or will not be considered noneconomic will be based upon
certain assumptions, and the depositor will make no representation that a REMIC
residual certificate will not be considered noneconomic for purposes of the
above-described rules or that a Residual Owner will receive distributions
calculated pursuant to such assumptions. See "-- Foreign Investors in REMIC
Certificates" below for additional restrictions applicable to transfers of
certain REMIC residual certificates to foreign persons.
TAX-EXEMPT INVESTORS. Tax-exempt organizations, including employee
benefit plans, that are subject to tax on unrelated business taxable income, as
defined in section 511 of the Code, will be subject to tax on any excess
inclusions attributed to them as owners of Residual certificates. Excess
inclusion income associated with a Residual certificate may significantly exceed
cash distributions with respect thereto. See "-- Excess Inclusions."
Generally, tax-exempt organizations that are not subject to federal
income taxation on unrelated business taxable income pursuant to section 511 of
the Code are treated as disqualified organizations. Under provisions of the
agreement, such organizations generally are prohibited from owning Residual
certificates. See "-- Sales of REMIC Certificates."
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MARK-TO-MARKET RULES. Section 475 of the Code generally requires that
securities dealers include securities in inventory at their fair market value,
recognizing gain or loss as if the securities were sold at the end of each tax
year. The Treasury regulations provide that a REMIC residual certificate is not
treated as a security and thus may not be marked to market.
SALES OF REMIC CERTIFICATES. If a REMIC certificate is sold, the seller
will recognize gain or loss equal to the difference between the amount realized
on the sale and its adjusted basis in the REMIC certificate. The adjusted basis
of a REMIC regular certificate generally will equal the cost of such REMIC
regular certificate to the seller, increased by any original issue discount or
market discount included in the seller's gross income with respect to such REMIC
regular certificate and reduced by premium amortization deductions and
distributions previously received by the seller of amounts included in the
stated redemption price at maturity of such REMIC regular certificate. The
adjusted basis of a REMIC residual certificate will be determined as described
under "-- Basis Rules and Distributions." Gain from the disposition of a REMIC
regular certificate that might otherwise be treated as a capital gain will be
treated as ordinary income to the extent that such gain does not exceed the
excess of (1) the amount that would have been includible in such holder's income
had income accrued at a rate equal to 110% of the AFR as of the date of purchase
over (2) the amount actually includible in such holder's income. Except as
otherwise provided under "-- Market Discount" and "-- Premium" and under section
582(c) of the Code, any additional gain or any loss on the sale or exchange of a
REMIC certificate will be capital gain or loss, provided such REMIC certificate
is held as a capital asset (generally, property held for investment) within the
meaning of section 1221. The Code currently provides for a top marginal tax rate
of 39.6% for individuals with a maximum marginal tax rate for long-term capital
gains of individuals at 20%. There is no such rate differential for
corporations. In addition, the distinction between a capital gain or loss and
ordinary income or loss is relevant for other purposes, including limitations on
the use of capital losses to offset ordinary income.
All or a portion of any gain from the sale of a REMIC certificate that
might otherwise be capital gain may be treated as ordinary income (1) if such
certificate is held as part of a "conversion transaction" as defined in section
1258(c) of the Code, up to the amount of interest that would have accrued on the
holder's net investment in the conversion transaction at 120% of the appropriate
AFR in effect at the time the taxpayer entered into the transaction reduced by
any amount treated as ordinary income with respect to any prior disposition or
other termination of a position that was held as part of such transaction or (2)
in the case of a noncorporate taxpayer that has made an election under section
163(d)(4) to have net capital gains taxed as investment income at ordinary
income rates.
If a Residual Owner sells a REMIC residual certificate at a loss, the
loss will not be recognized if, within six months before or after the sale of
the REMIC residual certificate, the Residual Owner purchases another residual
interest in any REMIC or any interest in a taxable mortgage pool (as defined in
section 7701(i) of the Code) comparable to a residual interest in a REMIC. Such
disallowed loss will be allowed upon the sale of the other residual interest (or
comparable interest) if the rule referred to in the preceding sentence does not
apply to that sale. While the Committee Report states that this rule may be
modified by Treasury regulations, the REMIC Regulations do not address this
issue and it is not clear whether any such modification will in fact be
implemented or, if implemented, what its precise nature or effective date would
be.
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Transfers of a REMIC residual certificate to certain disqualified
organizations are subject to an additional tax on the transferor in an amount
equal to the maximum corporate tax rate applied to the present value (using a
discount rate equal to the AFR) of the total anticipated excess inclusions with
respect to such residual interest for the periods after the transfer. For this
purpose, disqualified organizations include the United States, any state or
political subdivision of a state, any foreign government or international
organization or any agency or instrumentality of any of the foregoing; any
tax-exempt entity (other than a section 521 cooperative) which is not subject to
the tax on unrelated business income; and any rural electrical or telephone
cooperative. The anticipated excess inclusions must be determined as of the date
that the REMIC residual certificate is transferred and must be based on events
that have occurred up to the time of such transfer, the prepayment assumption,
and any required or permitted clean up calls or required liquidation provided
for in the REMIC's organizational documents. The tax generally is imposed on the
transferor of the REMIC residual certificate, except that it is imposed on an
agent for a disqualified organization if the transfer occurs through such agent.
The agreement requires, as a prerequisite to any transfer of a residual
certificate, the delivery to the trustee of an affidavit of the transferee to
the effect that it is not a disqualified organization and contains other
provisions designed to render any attempted transfer of a residual certificate
to a disqualified organization void.
In addition, if a pass through entity includes in income excess
inclusions with respect to a REMIC residual certificate, and a disqualified
organization is the record holder of an interest in such entity at any time
during any taxable year of such entity, then a tax will be imposed on the entity
equal to the product of (1) the amount of excess inclusions on the REMIC
residual certificate for such taxable year that are allocable to the interest in
the pass through entity held by such disqualified organization and (2) the
highest marginal federal income tax rate imposed on corporations. A pass through
entity will not be subject to this tax for any period, however, if the record
holder of an interest in such entity furnishes to such entity (1) such holder's
social security number and a statement under penalties of perjury that such
social security number is that of the record holder or (2) a statement under
penalties of perjury that such record holder is not a disqualified organization.
For these purposes, a pass through entity means any regulated investment
company, real estate investment trust, trust, partnership or certain other
entities described in section 860E(e)(6) of the Code. In addition, a person
holding an interest in a pass through entity as a nominee for another person
shall, with respect to such interest, be treated as a pass through entity.
PASS THROUGH OF SERVICING FEES. In general, Residual Owners take into
account taxable income or net loss of the related REMIC mortgage pool.
Consequently, expenses of the REMIC mortgage pool to service providers, such as
servicing compensation of the master servicer and the servicers, will be
allocated to the holders of the REMIC residual certificates, and therefore will
not affect the income or deductions of holders of REMIC regular certificates. In
the case of a single-class REMIC (as described below), however, such expenses
and an equivalent amount of additional gross income will be allocated among all
holders of REMIC regular certificates and REMIC residual certificates for
purposes of the limitations on the deductibility of certain miscellaneous
itemized deductions by individuals contained in sections 56(b)(1) and 67 of the
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Code. Generally, any holder of a REMIC residual certificate and any holder of a
REMIC regular certificate issued by a "single-class REMIC" who is an individual,
estate or trust (including such a person that holds an interest in a pass
through entity holding such a REMIC certificate) are permitted to deduct such
expenses in determining regular taxable income only to the extent that such
expenses together with certain other miscellaneous itemized deductions of such
individual, estate or trust exceed 2% of adjusted gross income; such a holder
may not deduct such expenses to any extent in determining liability for
alternative minimum tax. Accordingly, REMIC residual certificates, and REMIC
regular certificates receiving an allocation of servicing compensation, may not
be appropriate investments for individuals, estates or trusts.
A single-class REMIC is a REMIC that either (i) would be treated as an
investment trust under the provisions of Treasury Regulation section
301.7701-4(c) in the absence of a REMIC election or (ii) is substantially
similar to such an investment trust and is structured with the principal purpose
of avoiding the allocation of investment expenses to holders of REMIC regular
certificates. The master servicer intends (subject to certain exceptions which,
if applicable, will be stated in the applicable prospectus supplement) to treat
each REMIC mortgage pool as other than a single-class REMIC, consequently
allocating servicing compensation expenses and related income amounts entirely
to REMIC residual certificates.
PROHIBITED TRANSACTIONS AND OTHER POSSIBLE REMIC TAXES. The Code
imposes a tax on REMIC mortgage pools equal to 100% of the net income derived
from prohibited transactions. In general, a prohibited transaction means the
disposition of a qualified mortgage other than pursuant to certain specified
exceptions, the receipt of income from a source other than a qualified mortgage
or certain other permitted investments, the receipt of compensation for
services, or gain from the disposition of an asset purchased with the payments
on the qualified mortgages for temporary investment pending distribution on the
REMIC certificates. The Code also imposes a 100% tax on the value of any
contribution of assets to the REMIC after the closing date other than pursuant
to specified exceptions, and subjects net income from foreclosure property to
tax at the highest corporate rate. It is not anticipated that a REMIC mortgage
pool will engage in any such transactions or receive any such income.
TERMINATION OF A REMIC MORTGAGE POOL. In general, no special tax
consequences will apply to a holder of a REMIC regular certificate upon the
termination of the REMIC mortgage pool by virtue of the final payment or
liquidation of the last mortgage asset remaining in the REMIC mortgage pool. If
a Residual Owner's adjusted basis in its REMIC residual certificate at the time
such termination occurs exceeds the amount of cash distributed to such Residual
Owner in liquidation of its interest, then, although the matter is not entirely
free from doubt, it appears that the Residual Owner would be entitled to a loss
(which could be a capital loss) equal to the amount of such excess.
REPORTING AND OTHER ADMINISTRATIVE MATTERS OF REMICS. Reporting of
interest income, including any original issue discount, with respect to REMIC
regular certificates is required annually, and may be required more frequently
under Treasury regulations. Certain holders of REMIC regular certificates which
are generally exempt from information reporting on debt instruments, such as
corporations, banks, registered securities or commodities brokers, real estate
investment trusts, registered investment companies, common trust funds,
charitable remainder annuity trusts and unitrusts, will be provided interest and
original issue discount income information and the information set forth in the
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following paragraph upon request in accordance with the requirements of the
Treasury regulations. The information must be provided by the later of 30 days
after the end of the quarter for which the information was requested, or two
weeks after the receipt of the request. The REMIC mortgage pool must also comply
with rules requiring the face of a REMIC certificate issued at more than a de
minimis discount to disclose the amount of original issue discount and the issue
date and requiring such information to be reported to the Treasury Department.
The REMIC regular certificate information reports must include a
statement of the adjusted issue price of the REMIC regular certificate at the
beginning of each accrual period. In addition, the reports must include
information necessary to compute the accrual of any market discount that may
arise upon secondary trading of REMIC regular certificates. Because exact
computation of the accrual of market discount on a constant yield method would
require information relating to the holder's purchase price which the REMIC
mortgage pool may not have, it appears that this provision will only require
information pertaining to the appropriate proportionate method of accruing
market discount.
BACKUP WITHHOLDING WITH RESPECT TO REMIC CERTIFICATES. Distribution of
interest and principal on REMIC regular certificates, as well as payment of
proceeds from the sale of REMIC certificates, may be subject to the backup
withholding tax under section 3406 of the Code at a rate of 31 percent if
recipients fail to furnish certain information, including their taxpayer
identification numbers, or 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. Furthermore, certain
penalties may be imposed by the IRS on a recipient that is required to supply
information but that does not do so in the manner required.
FOREIGN INVESTORS IN REMIC CERTIFICATES. Except as qualified below,
payments made on a REMIC regular certificate to a REMIC regular
certificateholder that is not a U.S. Person, as hereinafter defined (a "Non-U.S.
Person"), or to a person acting on behalf of such a certificateholder, generally
will be exempt from U.S. federal income and withholding taxes, provided that (1)
the holder of the certificate is not subject to U.S. tax as a result of a
connection to the United States other than ownership of such certificate, (2)
the holder of such certificate signs a statement under penalties of perjury that
certifies that such holder is a Non-U.S. Person, and provides the name and
address of such holder and (3) the last U.S. Person in the chain of payment to
the holder receives such statement from such holder or a financial institution
holding on its behalf and does not have actual knowledge that such statement is
false. If the holder does not qualify for exemption, distributions of interest,
including distributions in respect of accrued original issue discount, to such
holder may be subject to a withholding tax rate of 30 percent, subject to
reduction under an applicable tax treaty.
"U.S. Person" means (i) a citizen or resident of the United States;
(ii) a corporation (or entity treated as a corporation for tax purposes) created
or organized in the United States or under the laws of the United States or of
any state thereof, including, for this purpose, the District of Columbia; (iii)
a partnership (or entity treated as a partnership for tax purposes) organized in
the United States or under the laws of the United States or of any state
thereof, including, for this purpose, the District of Columbia (unless provided
otherwise by future Treasury regulations); (iv) an estate whose income is
includible in gross income for United States income tax purposes regardless of
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its source; or (v) 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 U.S. Persons having authority to control all substantial decisions of the
trust. Notwithstanding the last clause of the preceding sentence, to the extent
provided in Treasury regulations, certain trusts in existence on August 20,
1996, and treated as U.S. Persons prior to such date, may elect to continue to
be U.S. Persons.
Holders of REMIC regular certificates should be aware that the IRS may
take the position that exemption from U.S. withholding taxes does not apply to
such a holder that also directly or indirectly owns 10 percent or more of the
REMIC residual certificates. Further, the foregoing rules will not apply to
exempt a United States shareholder (as such term is defined in section 951 of
the Code) of a controlled foreign corporation from taxation on such United
States shareholder's allocable portion of the interest or original issue
discount income earned by such controlled foreign corporation.
Amounts paid to a Residual Owner that is a Non-U.S. Person generally
will be treated as interest for purposes of applying the withholding tax on
Non-U.S. Persons with respect to income on its REMIC residual certificate. It is
unclear, however, whether distributions on REMIC residual certificates will be
eligible for the general exemption from withholding tax that applies to REMIC
regular certificates as described above. Treasury regulations provide that, for
purposes of the portfolio interest exception, payments to the foreign owner of a
REMIC residual certificate are to be considered paid on the obligations held by
the REMIC mortgage pool, rather than on the certificate itself. Such payments
will thus only qualify for the portfolio interest exception if the underlying
obligations held by the REMIC mortgage pool would so qualify. Such withholding
tax generally is imposed at a rate of 30 percent but is subject to reduction
under any tax treaty applicable to the Residual Owner. Nevertheless, there is no
exemption from withholding tax nor may the rate of such tax be reduced, under a
tax treaty or otherwise, with respect to any distribution of income that is an
excess inclusion. Although no regulations have been proposed or adopted
addressing withholding on residual interests held by Non-U.S. Persons, the
provisions of the REMIC Regulations, relating to the transfer of residual
interests to Non-U.S. Persons may be read to imply that withholding with respect
to excess inclusion income is to be determined by reference to the amount of the
excess inclusion income rather than to the amount of cash distributions. If the
IRS were successfully to assert such a position, cash distributions on Residual
certificates held by Non-U.S. Persons could be subject to withholding at rates
as high as 100%, depending on the relationship of accrued excess inclusion
income to cash distributions with respect to such Residual certificates. See
"REMIC Certificates -- Excess Inclusions."
Certain restrictions relating to transfers of REMIC residual
certificates to and by investors who are Non-U.S. Persons are also imposed by
the REMIC Regulations. First, transfers of REMIC residual certificates to a
Non-U.S. Person that have tax avoidance potential are disregarded for all
federal income tax purposes. If such transfer is disregarded, the purported
transferor of such a REMIC residual certificate to a Non-U.S. Person continues
to remain liable for any taxes due with respect to the income on such REMIC
residual certificate. A transfer of a REMIC residual certificate has tax
avoidance potential unless, at the time of the transfer, the transferor
reasonably expects (1) that the REMIC will distribute to the transferee Residual
certificateholder amounts that will equal at least 30 percent of each excess
inclusion and (2) that such amounts will be distributed at or after the time at
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which the excess inclusion accrues and not later than the close of the calendar
year following the calendar year of accrual. This rule does not apply to
transfers if the income from the REMIC residual certificate is taxed in the
hands of the transferee as income effectively connected with the conduct of a
U.S. trade or business. Second, if a Non-U.S. Person transfers a REMIC residual
certificate to a U.S. Person (or to a Non-U.S. Person in whose hands income from
the REMIC residual certificate would be effectively connected) and the transfer
has the effect of allowing the transferor to avoid tax on accrued excess
inclusions, that transfer is disregarded for all federal income tax purposes and
the purported Non-U.S. Person transferor continues to be treated as the owner of
the REMIC residual certificate. Thus, the REMIC's liability to withhold 30
percent of the excess inclusions is not terminated even though the REMIC
residual certificate is no longer held by a Non-U.S. Person.
Treasury regulations may affect the United States taxation of foreign
investors in REMIC certificates. The withholding regulations are generally
proposed to be effective for payments after December 31, 2000, regardless of the
issue date of the REMIC certificate with respect to which such payments are
made, subject to certain transition rules. The withholding regulations provide
certain presumptions with respect to withholding for holders not providing the
required certifications to qualify for the withholding exemption described above
and would replace a number of current tax certification forms with a single,
restated form and standardize the period of time for which withholding agents
could rely on such certifications. The withholding regulations also provide
rules to determine whether, for purposes of United States federal withholding
tax, interest paid to a Non-U.S. Person that is an entity should be treated as
paid to the entity or those holding an interest in that entity.
FASIT CERTIFICATES
General. With respect to a particular series of certificates, an
election may be made to treat the trust or one or more trusts or segregated
pools of assets therein as one or more FASITs within the meaning of section 860L
of the Code. The FASIT provisions of the Code were enacted by the Small Business
Job Protection Act of 1996 and create a new elective statutory vehicle for the
issuance of mortgage-backed and asset-backed securities. A trust or a portion or
portions thereof as to which one or more FASIT elections will be made will be
referred to as a "FASIT Pool." For purposes of this discussion, certificates of
a series as to which one or more FASIT elections are made are referred to as
"FASIT certificates" and will consist of one or more classes of "FASIT Regular
certificates" and one "Ownership Interest Security" in the case of each FASIT
Pool. Although the FASIT provisions of the Code became effective on September 1,
1997, no Treasury regulations or other administrative guidance has been issued
with respect to those provisions. Accordingly, definitive guidance cannot be
provided with respect to many aspects of the tax treatment of Holders of FASIT
certificates. Investors also should note that the FASIT discussion contained
herein constitutes only a summary of the federal income tax consequences to
Holders of FASIT certificates.
Qualification as a FASIT requires ongoing compliance with certain
conditions. With respect to each series of FASIT certificates, special counsel
has advised the depositor that in their opinion (unless otherwise limited in the
related prospectus supplement), assuming (1) the making of an appropriate
election, (2) compliance with all provisions of the related agreement and (3)
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compliance with the applicable provisions of the law, including any amendments
to the Code or applicable Treasury regulations thereunder, each FASIT Pool will
qualify as a FASIT. In such case, the FASIT Regular certificates will be
considered to be "regular interests" in the FASIT Pool and generally will be
treated for federal income tax purposes as if they were newly originated debt
instruments, and the Ownership Interest Security will be considered to be the
"ownership interest" in the FASIT Pool, which generally is not treated as debt
for tax purposes, but rather as representing rights and responsibilities with
respect to the taxable income or loss of the FASIT Pool. The prospectus
supplement for each series of certificates will indicate whether one or more
FASIT elections with respect to the related trust will be made and will also
cover any material federal income tax consequences applicable to the holders of
FASIT certificates.
Status of FASIT Regular Certificates. FASIT Regular certificates held
by a REIT will qualify as "real estate assets" within the meaning of section
856(c)(4)(A) of the Code, and interest on such certificates will be considered
Qualifying REIT Interest to the same extent that REMIC certificates would be so
considered. FASIT Regular certificates held by a thrift institution taxed as a
domestic building and loan association will represent qualifying assets for
purposes of the qualification requirements set forth in section 7701(a)(19) to
the same extent that REMIC certificates would be so considered. See "-- REMIC
Certificates -- Status as REMIC Certificates." In addition, FASIT Regular
certificates held by a financial institution to which section 585 applies will
be treated as evidences of indebtedness for purposes of Code Section 582(c)(1).
FASIT certificates will not qualify as "Government Securities" for either REIT
or RIC qualification purposes.
Qualification as a FASIT. On order for the FASIT Pool to qualify as a
FASIT, there must be ongoing compliance on the part of the FASIT Pool with the
requirements set forth in the Code. The FASIT Pool will qualify under the Code
as a FASIT in which the FASIT Regular certificates and the Ownership Interest
Security will constitute the "regular interests" and the "ownership interest,"
respectively, if (1) a FASIT election is in effect, (2) certain tests concerning
(a) the composition of the FASIT Pool's assets and (b) the nature of the
Holders' interests in the FASIT Pool are met on a continuing basis and (3) the
FASIT Pool is not a regulated company as defined in section 851(a) of the Code.
Asset Composition. In order for a FASIT Pool to be eligible for FASIT
status, substantially all of the assets of the FASIT Pool must consist of
permitted assets as of the close of the third month beginning after the closing
date and at all times thereafter (the "FASIT Qualification Test"). Permitted
assets include
o cash or cash equivalents,
o debt instruments with fixed terms that would qualify as REMIC
regular interests if issued by a REMIC (generally, instruments
that provide for interest at a fixed rate, a qualifying
variable rate, or a qualifying interest-only type rate),
o foreclosure property,
o certain hedging instruments (generally, interest and currency
rate swaps and credit enhancement contracts) that are
reasonably required to guarantee or hedge against the FASIT's
risks associated with being the obligor on FASIT interests,
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o contract rights to acquire qualifying debt instruments or
qualifying hedging instruments,
o FASIT regular interests and
o REMIC regular interests.
Permitted assets do not include any debt instruments issued by the Holder of the
Ownership Interest Security or by any person related to such Holder.
Interests in a FASIT. In addition to the FASIT Qualification Test, the
interests in a FASIT also must meet certain requirements. All the interests in a
FASIT must belong to either of the following: (1) one or more classes of regular
interests or (2) a single class of ownership interest that is held directly by a
fully taxable domestic corporation. A FASIT interest generally qualifies as a
regular interest if,
(1) it is designated as a regular interest,
(2) it has a stated maturity (including options to renew) no
greater than thirty years,
(3) it entitles its Holder to a specified principal amount,
(4) the issue price of the interest does not exceed 125% of its
stated principal amount,
(5) the yield to maturity of the interest is less than the
applicable federal rate published by the IRS plus 5%, and
(6) if it pays interest, such interest is payable at either (a) a
fixed rate with respect to the principal amount of the regular
interest or (b) a permissible variable rate with respect to
such principal amount. Permissible variable rates for FASIT
regular interests are the same as those for REMIC regular
interest (i.e., certain qualified floating rates and weighted
average rates). See "-- REMIC Certificates -- Taxation of
Regular Certificates -- Variable Rate Regular Certificates."
If a FASIT certificate fails to meet one or more of the requirements
set out in items 3, 4 or 5 above, but otherwise meets the above requirements, it
may still qualify as a type of regular interest known as a "High-Yield
Interest." In addition, if a FASIT certificate fails to meet the requirements of
item (6), but the interest payable on the FASIT certificate consists of a
specified portion of the interest payments on permitted assets and that portion
does not vary over the life of the certificate, the certificate also will
qualify as a High-Yield Interest. A High-Yield Interest may be held only by
domestic corporations that are fully subject to corporate income tax ("Eligible
Corporations"), other FASITs and dealers in securities who acquire such
interests as inventory, rather than for investment. In addition, Holders of
High-Yield Interests are subject to limitations on the use of losses to offset
income derived from such interest. See "-- FASIT Certificates -- Tax Treatment
of FASIT Regular Certificates -- Treatment of High-Yield Interests."
Consequences of Disqualification. If a FASIT Pool fails to comply with
one or more of the Code's ongoing requirements for FASIT status during any
taxable year, the Code provides that its FASIT status may be lost for that year
and thereafter. If FASIT status is lost, the treatment of the former FASIT and
the interests therein for federal income tax purposes is uncertain. The former
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FASIT might be treated as a grantor trust, as a separate association taxable as
a corporation, or as a partnership. The FASIT Regular certificates could be
treated as debt instruments for federal income tax purposes or as equity
interests in the former FASIT. Although the Code authorizes the Treasury to
issue regulations that address situations where a failure to meet the
requirements for FASIT status occurs inadvertently and in good faith, such
regulations have not yet been issued. It is possible that disqualification
relief might be accompanied by sanctions, such as the imposition of a corporate
tax on all or a portion of the FASIT's income for a period of time in which the
requirements for FASIT status are not satisfied.
Tax Treatment of FASIT Regular Certificates. Payments received by
Holders of FASIT Regular certificates generally should be accorded the same tax
treatment under the Code as payments received on other taxable corporate debt
instruments and on REMIC regular certificates. As in the case of Holders of
REMIC regular certificates, Holders of FASIT Regular certificates must report
income from such certificates under an accrual method of accounting, even if
they otherwise would have used the cash receipts and disbursements method.
Except in the case of FASIT Regular certificates issued with original issue
discount or acquired with market discount or premium, interest paid or accrued
on a FASIT Regular certificate generally will be treated as ordinary income to
the Holder and a principal payment on such certificate will be treated as a
return of capital to the extent that the Holder's basis is allocable to that
payment. Holders of FASIT Regular certificates issued with original issue
discount or acquired with market discount or premium, generally will treat
interest and principal payments on such certificates in the same manner
described for REMIC regular certificates. See""-- REMIC Certificates --Taxation
of Regular Certificates -- Market Discount," and "--Premium."
If a FASIT Regular certificate is sold or exchanged, the Holder
generally will recognize gain or loss upon the sale in the same manner as that
described for REMIC regular certificates. See "-- REMIC Certificates -- Taxation
of Regular Certificates -- Sale or Exchange of Regular Certificates." In
addition, if a FASIT Regular certificate becomes wholly or partially worthless
as a result of default and delinquencies of the underlying assets, the Holder of
such certificate should be allowed to deduct the loss sustained (or
alternatively be able to report a lesser amount of income).
Treatment of High-Yield Interests. High-Yield Interests are subject to
taxation as FASIT Regular Interests. In addition, High-Yield Interests are
subject to special rules regarding the eligibility of Holders of such interests,
and the ability of such Holders to offset income derived from their FASIT
certificate with losses. High-Yield Interests may be held only by Eligible
Corporations, other FASITs, and dealers in securities who acquire such interests
as inventory. If a securities dealer (other than an Eligible Corporation)
initially acquires a High-Yield Interest as inventory, but later begins to hold
it for investment or ceases to be a dealer, the dealer will become subject to an
excise tax equal to the income from the High-Yield Interest multiplied by the
highest corporate income tax rate. In addition, transfers of High-Yield
Interests to disqualified Holders will be disregarded for federal income tax
purposes, and the transferor still will be treated as the Holder of the
High-Yield Interest.
The Holder of a High-Yield Interest may not use non-FASIT current
losses or net operating loss carryforwards or carrybacks to offset any income
derived from the High-Yield Interest, for either regular income tax purposes or
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for alternative minimum tax purposes. In addition, the FASIT provisions contain
an anti-abuse rule that imposes corporate income tax on income derived from a
FASIT Regular certificate that is held by a pass through entity (other than
another FASIT) that issues debt or equity securities backed by the FASIT Regular
certificate and that have the same features as High-Yield Interests.
Tax Treatment of Ownership Interest Security. A FASIT is not subject to
taxation. An Ownership Interest Security represents the residual equity interest
in a FASIT. As such, the Holder of an Ownership Interest Security determines its
taxable income by taking into account all assets, liabilities and items of
income, gain, deduction, loss and credit of a FASIT (other than those allocable
to prohibited transactions as described below). In general, the character of the
income to the Holder of an Ownership Interest Security will be the same as the
character of such income of the FASIT, except that any tax-exempt interest
income taken into account by the Holder of an Ownership Interest Security is
treated as ordinary income. In determining that taxable income, the Holder of an
Ownership Interest Security must determine the amount of interest, original
issue discount, market discount and premium recognized with respect to the
FASIT's assets and the FASIT Regular certificates issued by the FASIT according
to a constant yield methodology and under an accrual method of accounting. In
addition, the Holder of Ownership Interest certificates are subject to the same
limitations on its ability to use losses to offset income from its FASIT
Security as are the Holders of High-Yield Interests. See "-- FASIT Certificates
-- Treatment of High-Yield Interests."
Rules similar to the wash sale rules applicable to REMIC residual
certificates also will apply to Ownership Interest certificates. Accordingly,
losses on dispositions of an Ownership Interest Security generally will be
disallowed where, within six months before or after the disposition, the seller
of such Security acquires any other Ownership Interest Security or, in the case
of a FASIT holding mortgage assets, any interest in a taxable mortgage pool that
is economically comparable to an Ownership Interest Security. In addition, if
any security that is sold or contributed to a FASIT by the Holder of the related
Ownership Interest Security was required to be marked-to-market under section
475 of the Code by such Holder, then section 475 will continue to apply to such
securities, except that the amount realized under the mark-to-market rules will
be a greater of the securities' value under present law or the securities' value
after applying special valuation rules contained in the FASIT provisions. Those
special valuation rules generally require that the value of debt instruments
that are not traded on an established securities market be determined by
calculating the present value of the reasonably expected payments under the
instrument using a discount rate of 120% of the applicable federal rate,
compounded semiannually.
The Holder of an Ownership Interest Security will be subject to a tax
equal to 100% of the net income derived by the FASIT from any "prohibited
transactions." Prohibited transactions include:
o the receipt of income derived from assets that are not
permitted assets,
o certain dispositions of permitted assets,
o the receipt of any income derived from any loan originated by
a FASIT, and
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o in certain cases, the receipt of income representing a
servicing fee or other compensation. Any FASIT Pool for which
a FASIT election is made generally will be structured in order
to avoid application of the prohibited transaction tax.
Backup Withholding, Reporting and Tax Administration. Holders of FASIT
certificates will be subject to backup withholding to the same extent as Holders
of REMIC certificates. See "-- REMIC Certificates -- Backup Withholding." For
purposes of reporting and tax administration, Holders of FASIT certificates
generally will be treated in the same manner as Holders of REMIC certificates.
TRUST CERTIFICATES
CLASSIFICATION OF TRUST CERTIFICATES. With respect to each series of
trust certificates for which no REMIC or FASIT election is made and which are
not subject to partnership treatment or debt treatment (without reference to the
REMIC Provisions and the FASIT Provisions), McGuire, Woods, Battle & Boothe LLP,
special counsel to the depositor, will deliver its opinion (unless otherwise
limited by the related prospectus supplement) generally to the effect that the
arrangements pursuant to which the related trust will be administered and such
trust certificates will be issued will not be classified as an association
taxable as a corporation and that each such trust will be classified as a trust
whose taxation will be governed by the provisions of subpart E, Part I, of
subchapter J of the Code.
A trust certificate representing an undivided equitable ownership
interest in the principal of the mortgage loans constituting the related trust,
together with interest thereon at a remittance rate (which may be less than,
greater than, or equal to the net rate on the related mortgage assets) is
referred to as a "trust fractional certificate" and a trust certificate
representing an equitable ownership of all or a portion of the interest paid on
each mortgage loan constituting the related trust (net of normal servicing fees)
is referred to as a "trust interest certificate."
CHARACTERIZATION OF INVESTMENTS IN TRUST CERTIFICATES.
Trust Fractional Certificates. In the case of trust fractional
certificates, McGuire, Woods, Battle & Boothe LLP, special counsel to the
depositor, will deliver their opinion that, in general (and subject to the
discussion below under "-- Buydown Mortgage Loans"), (1) trust fractional
certificates held by a thrift institution taxed as a "domestic building and loan
association" will represent "loans . . . secured by an interest in real
property" within the meaning of section 7701(a)(19)(C)(v) of the Code; (2) trust
fractional certificates held by a real estate investment trust will represent
"real estate assets" within the meaning of section 856(c)(5)(B) and interest on
trust fractional certificates will be considered "interest on obligations
secured by mortgages on real property or on interests in real property" within
the meaning of section 856(c)(5)(B) of the Code; and (3) trust fractional
certificates acquired by a REMIC in accordance with the requirements of section
860G (a)(3)(A)(i) and (ii) or section 860G(a)(4)(B) will be treated as qualified
mortgages within the meaning of section 860D(a)(4).
Trust Interest Certificates. Although there appears to be no policy
reason not to accord to Trust Interest certificates the treatment described
above for trust fractional certificates, there is no authority addressing such
characterization for instruments similar to trust Interest certificates.
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Consequently, it is unclear to what extent, if any, (1) a trust Interest
certificate owned by a domestic building and loan association within the meaning
of section 7701 (a) (19) of the Code will be considered to represent "loans . .
secured by an interest in real property" within the meaning of section
7701(a)(19)(C)(v); and (2) a real estate investment trust which owns a trust
Interest certificate will be considered to own real estate assets within the
meaning of section 856(c)(5)(B), and interest income thereon will be considered
"interest on obligations secured by mortgages on real property" within the
meaning of section 856(c)(3)(B). Prospective purchasers to which such
characterization of an investment in trust Interest certificates is material
should consult their own tax advisers regarding whether the trust Interest
certificates, and the income therefrom, will be so characterized.
Buydown Mortgage Loans. The assets of certain trusts may include
buydown mortgage loans. The characterization of an investment in buydown
mortgage loans will depend upon the precise terms of the related buydown
agreement. There are no directly applicable precedents with respect to the
federal income tax treatment or the characterization of investments in buydown
mortgage loans. Accordingly, holders of trust certificates should consult their
own tax advisers with respect to characterization of investments in trusts that
include buydown mortgage loans.
Although the matter is not entirely free from doubt, the portion of a
trust certificate representing an interest in buydown mortgage loans may be
considered to represent an investment in "loans . . . secured by an interest in
real property" within the meaning of section 7701(a)(19)(C)(v) of the Code to
the extent the outstanding principal balance of the buydown mortgage loans
exceeds the amount held from time to time in the buydown fund. It is also
possible that the entire interest in buydown mortgage loans may be so
considered, because the fair market value of the real property securing each
buydown mortgage loan will exceed the amount of such loan at the time it is
made. Section 1.593-11(d)(2) of the Treasury regulations suggests that this
latter treatment may be available, and Revenue Ruling 81-203, 1981-2 C.B. 137
may be read to imply that apportionment is generally required whenever more than
a minimal amount of assets other than real property may be available to satisfy
purchasers' claims.
For similar reasons, the portion of such trust certificate representing
an interest in buydown mortgage loans may be considered to represent "real
estate assets" within the meaning of section 856(c)(5)(B) of the Code. Section
1.856-5 (c)(1)(i) of the Treasury regulations specifies that, if a mortgage loan
is secured by both real property and by other property and the value of the real
property alone equals or exceeds the amount of the loan, then all interest
income will be treated as "interest on obligations secured by mortgages on real
property" within the meaning of section 856(c)(3)(B).
TAXATION OF TRUST FRACTIONAL CERTIFICATES. Each holder of a trust
fractional certificate (a "trust fractional certificateholder") will be treated
as the owner of an undivided percentage interest in the principal of, and
possibly a different undivided percentage interest in the interest portion of,
each of the assets in a trust. Accordingly, each trust fractional
certificateholder must report on its federal income tax return its allocable
share of income from its interests, as described below, at the same time and in
the same manner as if it had held directly interests in the mortgage assets and
received directly its share of the payments on such mortgage assets. Because
those interests may represent interests in "stripped bonds" or "stripped
coupons" within the meaning of section 1286 of the Code, such interests would be
considered to be newly issued debt instruments, and thus to have no market
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discount or premium, and the amount of original issue discount may differ from
the amount of original issue discount on the mortgage assets and the amount
includible in income on account of a trust fractional certificate may differ
significantly from the amount payable thereon from payments of interest on the
mortgage assets. Each trust fractional certificateholder may report and deduct
its allocable share of the servicing and related fees and expenses at the same
time, to the same extent, and in the same manner as such items would have been
reported and deducted had it held directly interests in the mortgage assets and
paid directly its share of the servicing and related fees and expenses. A holder
of a trust fractional certificate who is an individual, estate or trust will be
allowed a deduction for servicing fees in determining its regular tax liability
only to the extent that the aggregate of such holder's miscellaneous itemized
deductions exceeds 2 percent of such holder's adjusted gross income and will be
allowed no deduction for such fees in determining its liability for alternative
minimum tax. Amounts received by trust fractional certificateholders in lieu of
amounts due with respect to any mortgage assets but not received from the
mortgagor will be treated for federal income tax purposes as having the same
character as the payments which they replace.
Purchasers of trust fractional certificates identified in the
applicable prospectus supplement as representing interests in Stripped mortgage
assets should read the material under "-- Application of Stripped Bond Rules,"
"-- Market Discount and Premium" and "-- Allocation of Purchase Price" for a
discussion of particular rules applicable to their certificates. A "stripped
mortgage asset" means a mortgage asset having a Retained Yield (as that term is
defined below) or a mortgage asset included in a trust having either trust
interest certificates or more than one class of trust fractional certificates or
identified in the prospectus supplement as related to a class of trust
certificates identified as representing interests in stripped mortgage assets.
Purchasers of trust fractional certificates identified in the
applicable prospectus supplement as representing interests in unstripped
mortgage assets should read the material under "-- Treatment of Unstripped
Certificate," "-- Market Discount and Premium," and "-- Allocation of Purchase
Price" for a discussion of particular rules applicable to their certificates.
Nevertheless, the IRS has indicated that under some circumstances it will view a
portion of servicing and related fees and expenses paid to or retained by the
master servicer or sub-servicers as an interest in the mortgage assets,
essentially equivalent to that portion of interest payable with respect to each
mortgage asset that is retained ("Retained Yield"). If such a view were
sustained with respect to a particular trust, such purchasers would be subject
to the rules set forth under "-- Application of Stripped Bond Rules" rather than
those under "-- Treatment of Unstripped Certificates." Saxon Asset Securities
Company does not expect any servicing fee or master servicing fee to constitute
a retained interest in the mortgage assets; nevertheless, prospective purchasers
are advised to consult their own tax advisers with respect to the existence of a
retained interest and any effects on investment in trust fractional
certificates.
Application of Stripped Bond Rules. Each trust will consist of an
interest in each of the mortgage assets relating thereto, exclusive of the
Retained Yield, if any. With respect to each series of certificates McGuire,
Woods, Battle & Boothe LLP, special counsel to the depositor, will deliver their
opinion (unless otherwise limited by the related prospectus supplement)
generally to the effect that any Retained Yield will be treated for federal
income tax purposes as an ownership interest retained by the owner thereof in a
portion of each interest payment on the underlying mortgage assets. The sale of
the trust certificates associated with any trust for which there is a class of
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trust interest certificates or two or more classes of trust fractional
certificates bearing different interest rates or of trust certificates
identified in the prospectus supplement as representing interests in stripped
mortgage assets (subject to certain exceptions which, if applicable, will be
stated in the applicable prospectus supplement) will be treated for federal
income tax purposes as having effected a separation in ownership between the
principal of each mortgage asset and some of or all the interest payable
thereon. As a consequence, each stripped mortgage asset will become subject to
the "stripped bond" rules of the Code (the "Stripped Bond Rules"). The effect of
applying those rules will generally be to require each trust fractional
certificateholder to accrue and report income attributable to its share of the
principal and interest on each of the stripped mortgage assets as original issue
discount on the basis of the yield to maturity of such stripped mortgage assets,
as determined in accordance with the provisions of the Code dealing with
original issue discount. For a description of the general method of calculating
original issue discount, see "REMIC Certificates -- Original Issue Discount."
The yield to maturity of a trust fractional certificateholder's interest in the
stripped mortgage loans will be calculated taking account of the price at which
the holder purchased the certificate and the holder's share of the payments of
principal and interest to be made thereon. Although the provisions of the Code
and the OID Regulations do not directly address the treatment of instruments
similar to trust fractional certificates, in reporting to trust fractional
certificateholders such certificates will be treated as a single obligation with
payments corresponding to the aggregate of the payments allocable thereto from
each of the mortgage assets and the amount of original issue discount on such
certificates will be determined accordingly.
See "--Aggregate Reporting."
Under Treasury regulations, original issue discount determined with
respect to a particular stripped mortgage loan may be considered to be zero
under the de minimis rule described above, in which case it is treated as market
discount. See "-- REMIC Certificates -- Original Issue Discount." Those
regulations also provide that original issue discount so determined with respect
to a particular stripped mortgage asset will be treated as market discount if
the rate of interest on the stripped mortgage asset, including a reasonable
servicing fee, is no more than one percentage point less than the unstripped
rate of interest. See "-- Market Discount and Premium." The foregoing de minimis
and market discount rules will be applied on an aggregate poolwide basis,
although it is possible that investors may be required to apply them on a
loan-by-loan basis. The loan-by-loan information required for such application
of those rules may not be available. See "-- Aggregate Reporting."
Subsequent purchasers of the certificates may be required to include
"original issue discount" in an amount computed using the price at which such
subsequent purchaser purchased the certificates. Further, such purchasers may be
required to determine if the above described de minimis and market discount
rules apply at the time a trust fractional certificate is acquired, based on the
characteristics of the mortgage assets at that time.
Variable Rate Certificates. There is considerable uncertainty
concerning the application of the OID Regulations to mortgage assets bearing a
variable rate of interest. Although such regulations are subject to a different
interpretation, as discussed below, in the absence of other contrary authority
in preparing reports furnished to certificateholders, stripped mortgage assets
bearing a variable rate of interest (other than those treated as having market
discount pursuant to the regulations described above) will be treated as subject
to the provisions of the OID Regulations governing variable rate debt
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instruments. The effect of the application of such provisions generally will be
to cause certificateholders holding trust fractional certificates bearing
interest at a Single Variable Rate or at a Multiple Variable Rate (as defined
above under "-- REMIC Certificates -- Original Issue Discount") to accrue
original issue discount and interest as though the value of each variable rate
were a fixed rate, which is (a) for each qualified floating rate, such rate as
of the closing date (with appropriate adjustment for any differences in
intervals between interest adjustment dates), (b) for a qualified inverse
floating rate, such rate as of the closing date and (c) for any other objective
rate, the fixed rate that reflects the yield that is reasonably expected for the
trust fractional certificate. If the interest paid or accrued with respect to a
variable rate trust fractional certificate during an accrual period differs from
the assumed fixed interest rate, such difference will be an adjustment (to
interest or original issue discount, as applicable) to the certificateholder's
taxable income for the taxable period or periods to which such difference
relates.
The provisions in the OID Regulations applicable to variable rate debt
instruments may not apply to certain adjustable and variable rate mortgage
loans, possibly including the mortgage assets, or to stripped certificates
representing interests in such mortgage assets. If variable rate trust
fractional certificates are not governed by the provisions of the OID
Regulations applicable to variable rate debt instruments, such certificates may
be subject to the provisions of the Contingent Debt Regulations. The application
of those provisions to instruments such as the trust fractional certificates is
subject to differing interpretations. Prospective purchasers of variable rate
trust fractional certificates are advised to consult their tax advisers
concerning the tax treatment of such certificates.
Aggregate Reporting. The trustee intends in reporting information
relating to original issue discount to certificateholders to provide such
information on an aggregate poolwide basis. Applicable law is unclear, however,
and it is possible that investors may be required to compute original issue
discount on a loan-by-loan basis (or on the basis of the rights to individual
payments) taking account of an allocation of the investor's basis in the
certificates among the interests in the various mortgage assets represented by
such certificates according to their respective fair market values. Investors
should be aware that after the fact it may not be possible to reconstruct fact
sufficient loan-by-loan information should the IRS require a computation on that
basis.
Because the treatment of the certificates under the OID Regulations is
both complicated and uncertain, certificateholders should consult their tax
advisers to determine the proper method of reporting amounts received or accrued
on certificates.
Treatment of Unstripped Certificates. Mortgage assets in a fund for
which there is neither any class of trust interest certificates, nor more than
one class of trust fractional certificates, nor any Retained Yield otherwise
identified in the prospectus supplement as being unstripped mortgage assets
("unstripped mortgage assets") will be treated as wholly owned by the trust
fractional certificateholders of the stated trust. Trust fractional
certificateholders using the cash method of accounting must take into account
their pro rata shares of original issue discount as it accrues and qualified
stated interest (as described in "-- REMIC Certificates -- Original Issue
Discount") from unstripped mortgage assets as and when collected by the trustee.
Trust fractional certificateholders using an accrual method of accounting must
take into account their pro rata shares of qualified stated interest from
unstripped mortgage assets as it accrues or is received by the trustee,
whichever is earlier.
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Sections 1272 through 1275 of the Code provide generally for the
inclusion of original issue discount in income on the basis of a constant yield
to maturity. Nevertheless, the application of the OID Regulations to mortgage
loans is unclear in certain respects. The OID Regulations provide a de minimis
rule for determining whether certain self-amortizing installment obligations are
to be treated as having original issue discount. Such obligations have original
issue discount if the points charged at origination (or other loan discount)
exceed the greater of one-sixth of one percent times the number of full years to
final maturity or one-fourth of one percent times weighted average maturity. The
OID Regulations treat certain variable rate mortgage loans as having original
issue discount because of an initial rate of interest that differs from that
determined by the mechanism for setting the interest rate during the remainder
of the term of the mortgage loan, or because of the use of an index that does
not vary in a manner approved in the OID Regulations. For a description of the
general method of calculating the amount of original issue discount see "--
REMIC Certificates -- Original Issue Discount" and "-- Application of Stripped
Bond Rules" and "-- Variable Rate Certificates."
A subsequent purchaser of a trust fractional certificate that purchases
such certificate at a cost (not including payment for accrued qualified stated
interest) less than its allocable portion of the aggregate of the remaining
stated redemption prices at maturity of the unstripped mortgage assets will also
be required to include in gross income, for each day on which it holds such
trust fractional certificate, its allocable share of the daily portion of
original issue discount with respect to each unstripped mortgage asset. That
allocable share is reduced, if the cost of such subsequent purchaser's interest
in such unstripped mortgage asset exceeds its adjusted issue price, by an amount
equal to the product of (1) the daily portion and (2) a constant fraction, the
numerator of which is such excess and the denominator of which is the sum of the
daily portions of original issue discount allocable to such subsequent
purchaser's interest for all days on or after the day of purchase. The adjusted
issue price of an unstripped mortgage asset on any given day is equal to the sum
of the adjusted issue price (or, in the case of the first accrual period, the
issue price) of such unstripped mortgage asset at the beginning of the accrual
period during which such day occurs and the daily portions of original issue
discount for all days during such accrual period prior to such day reduced by
the aggregate amount of payments made (other than payments of qualified stated
interest) during such accrual period prior to such day.
Market Discount and Premium. In general, if the Stripped Bond Rules do
not apply to a trust fractional certificate, a purchaser of a trust fractional
certificate will be treated as acquiring market discount bonds to the extent
that the share of such purchaser's purchase price allocable to any unstripped
mortgage asset is less than its allocable share of the "adjusted issue price" of
such mortgage asset. See "-- Treatment of Unstripped Certificates" and "--
Application of Stripped Bond Rules." Thus, with respect to such mortgage assets,
a holder will be required, under section 1276 of the Code, to include as
ordinary income the previously unrecognized accrued market discount in an amount
not exceeding each principal payment on any such mortgage assets at the time
each principal payment is received or due, in accordance with the purchaser's
method of accounting, or upon a sale or other disposition of the certificate. In
general, the amount of market discount that has accrued is determined on a
ratable basis. A trust fractional certificateholder may, however, elect to
determine the amount of accrued market discount on a constant-yield-to-maturity
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basis. This election is made on a loan-by-loan basis and is irrevocable. In
addition, the description of the market discount rules under "REMIC Certificates
-- Market Discount" and "-- Premium" with respect to (1) conversion to ordinary
income of a portion of any gain recognized on sale or exchange of a market
discount bond, (2) deferral of interest expense deductions, (3) the de minimis
exception from the market discount rules and (4) the elections to include in
income either market discount or all interest, discount and premium as they
accrue, is also generally applicable to trust fractional certificates. Treasury
regulations implementing the market discount rules have not yet been issued and
investors therefore should consult their own tax advisers regarding the
application of these rules.
If a trust fractional certificate is purchased at a premium, under
existing law such premium must be allocated to each of the mortgage assets (on
the basis of its relative fair market value). In general, the portion of any
premium allocated to unstripped mortgage assets can be amortized and deducted
under the provisions of the Code relating to amortizable bond premium.
The application of the Stripped Bond Rules to stripped mortgage assets
will generally cause any premium allocable to stripped mortgage assets to be
amortized automatically by adjusting the rate of accrual of interest and
discount to take account of the allocable portion of the actual purchase price
of the certificate. In that event, no additional deduction for the amortization
of premium would be allowed. See "REMIC Certificates -- Market Discount" and "--
Premium" for a discussion of the application of the Premium Regulations.
Allocation of Purchase Price. As noted above, a purchaser of a trust
fractional certificate relating to unstripped mortgage assets will be required
to allocate the purchase price therefor to the undivided interest it acquires in
each of the mortgage assets, in proportion to the respective fair market values
of the portions of such mortgage assets included in the trust at the time the
certificate is purchased. The depositor believes that it may be reasonable to
make such allocation in proportion to the respective principal balances of the
mortgage assets, where the interests in the mortgage assets represented by a
trust fractional certificate have a common remittance rate and other common
characteristics, and otherwise so as to produce a common yield for each interest
in a mortgage asset, provided the mortgage assets are not so diverse as to evoke
differing prepayment expectations. Nevertheless, if there is any significant
variation in interest rates among the mortgage assets, a disproportionate
allocation of the purchase price taking account of prepayment expectations may
be required.
TAXATION OF TRUST INTEREST CERTIFICATES. With respect to each series of
certificates McGuire, Woods, Battle & Boothe LLP, special counsel to the
depositor, will deliver its opinion (unless otherwise limited by the related
prospectus supplement) generally to the effect that each holder of a trust
interest certificate (a "trust interest certificateholder") will be treated as
the owner of an undivided interest in the interest portion ("Interest Portion")
of each of the mortgage assets in the related trust. Accordingly, and subject to
the discussion below, each trust interest certificateholder is treated as owning
its allocable share of the Interest Portion from the mortgage assets, will
report income as described below, and may deduct its allocable share of the
servicing and related fees and expenses paid to or retained by the related trust
at the same time and in the same manner as such items would have been reported
under the trust interest certificateholder's tax accounting method had it held
directly an interest in the Interest Portion from the mortgage assets, received
directly its share of the amounts received with respect to the mortgage assets
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and paid directly its share of the servicing and related fees and expenses. An
individual, estate or trust holder of a trust interest certificate will be
allowed a deduction for servicing fees in determining its regular tax liability
only to the extent that the aggregate of such holder's miscellaneous itemized
deductions exceeds 2 percent of such holder's adjusted gross income, and will be
allowed no deduction for such fees in determining its liability for alternative
minimum tax. Amounts, if any, received by trust interest certificateholders in
lieu of amounts due with respect to any mortgage asset but not received from the
mortgagor will be treated for federal income tax purposes as having the same
character as the payment which they replace.
A trust interest certificate will consist of an undivided interest in
the Interest Portion of each of the mortgage assets in the related trust. With
respect to each series of certificates, a trust interest certificate will be
treated for federal income tax purposes as comprised of an ownership interest in
a portion of the Interest Portion of each of the mortgage assets (a "Stripped
Interest") separated by Saxon Asset Securities Company from the right to receive
principal payments and the remainder, if any, of each interest payment on the
underlying mortgage asset. As a consequence, the trust interest certificates
will become subject to the Stripped Bond Rules. Each trust interest
certificateholder will be required to apply the Stripped Bond Rules to its
interest in the Interest Portion under the method prescribed by the Code, taking
account of the price at which the holder purchased the trust interest
certificate. The Stripped Bond Rules generally require a holder of stripped
bonds or coupon portions to accrue and report income therefrom daily on the
basis of the yield to maturity of such stripped bonds or coupons, as determined
in accordance with the provisions of the Code dealing with original issue
discount. For a discussion of the general method of calculating original issue
discount, see "-- REMIC Certificates -- Original Issue Discount." The provisions
of the Code and the OID Regulations do not directly address the treatment of
instruments similar to trust interest certificates. In reporting to trust
interest certificateholders such certificates will be treated as a single
obligation with payment corresponding to the aggregate of the payment allocable
thereto from each of the mortgage assets.
Alternatively, the IRS may require trust interest certificateholders to
treat each scheduled payment on each Stripped Interest (or their interests in
all scheduled payments from each of the Stripped Interests) as a separate
obligation for purposes of allocating purchase price and computing original
issue discount.
The tax treatment of the trust interest certificates with respect to
the application of the original issue discount provisions of the Code is
currently unclear. Each trust interest certificate will be treated as a single
debt instrument issued on the day it is purchased for purposes of calculating
any original issue discount. Original issue discount with respect to a trust
interest certificate must be included in ordinary gross income for federal
income tax purposes as it accrues in accordance with a constant yield method
that takes into account the compounding of interest and such accrual of income
may be in advance of the receipt of any cash attributable to such income. In
general, the rules for accruing original issue discount set forth above under
"REMIC Certificates -- Original Issue Discount" apply; however, there is no
authority permitting trust interest certificateholders to take into account the
prepayment assumption in computing original issue discount accruals. See "--
Prepayments" below. For purposes of applying the original issue discount
provisions of the Code, the issue price used in reporting original issue
discount with respect to a trust interest certificate will be the purchase price
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paid by each holder thereof and the stated redemption price at maturity may
include the aggregate amount of all payments to be made with respect to the
trust interest certificate whether or not denominated as interest. The amount of
original issue discount with respect to a trust interest certificate may be
treated as zero under the original issue discount de minimis rules described
above.
The trustee intends in reporting information relating to original issue
discount to certificateholders to provide such information on an aggregate
poolwide basis. Applicable law is, however, unclear, and it is possible that
certificateholders may be required to compute original issue discount either on
a loan-by-loan basis or on a payment-by-payment basis taking account of an
allocation of their basis in the certificates among the interests in the various
mortgage loans represented by such certificates according to their respective
fair market values. The effect of an aggregate computation for the inclusion of
original issue discount in income may be to defer the recognition of losses due
to early prepayments relative to a computation on a loan-by-loan basis. It may
not be possible to reconstruct after the fact sufficient loan-by-loan
information should the IRS require a computation on that basis.
Because the treatment of the trust interest certificates under current
law and the potential application of the Contingent Debt Regulations are both
complicated and uncertain, trust interest certificateholders should consult
their tax advisers to determine the proper method of reporting amounts received
or accrued on trust interest certificates.
PREPAYMENTS. The proper treatment of interests, such as the trust
fractional certificates and the trust interest certificates, in debt instruments
that are subject to prepayment is unclear. The rules of section 1272(a)(6) of
the Code described above require original issue discount to be taken into
account on the basis of a constant yield to assumed maturity and actual
prepayments to any pool of debt instruments the payments on which may be
accelerated by reason of prepayments. The manner of determining the prepayment
assumption is to be determined under Treasury regulations, but no regulations
have been issued. Trust fractional certificateholders and trust interest
certificateholders should consult their tax advisers as to the proper reporting
of income from trust fractional certificates and trust interest certificates, as
the case may be, in the light of the possibility of prepayment and, with respect
to the trust interest certificates, as to the possible application of the
Contingent Debt Regulations.
SALES OF TRUST CERTIFICATES. If a certificate is sold, gain or loss
will be recognized by the holder thereof in an amount equal to the difference
between the amount realized on the sale and the certificateholder's adjusted tax
basis in the certificate. Such tax basis will equal the certificateholder's cost
for the certificate, increased by any original issue or market discount
previously included in income and decreased by any deduction previously allowed
for premium and by the amount of payments, other than payments of qualified
stated interest, previously received with respect to such certificate. The
portion of any such gain attributable to accrued market discount not previously
included in income will be ordinary income, as will gain attributable to a
certificate which is part of a conversion transaction or which the holder elects
to treat as ordinary. See "REMIC Certificates -- Sales of REMIC Certificates"
above. Any remaining gain or any loss will be capital gain or loss if the
certificate was held as a capital asset except to the extent that section 582(c)
of the Code applies to such gain or loss.
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TRUST REPORTING. Each holder of a trust fractional certificate will be
furnished with each distribution a statement setting forth the allocation of
such distribution to principal and interest. In addition, within a reasonable
time after the end of each calendar year each holder of a trust certificate who
was such a holder at any time during such year will be furnished with
information regarding the amount of servicing compensation and such other
customary factual information necessary or desirable to enable holders of trust
certificates to prepare their tax returns.
BACK-UP WITHHOLDING. In general, the rules described in "REMIC
Certificates-- Back-up Withholding" will also apply to trust certificates.
FOREIGN CERTIFICATEHOLDERS. Payments in respect of interest or original
issue discount (including amounts attributable to servicing fees) to a
certificateholder who is not a U.S. Person, will not generally be subject to
United States withholding tax, provided that the certificateholder (1) does not
own, directly or indirectly, 10% or more of, and is not a controlled foreign
corporation (within the meaning of section 957 of the Code) related to, each of
the issuers of the mortgage assets and (2) provides required certification as to
its non-United States status under penalty of perjury. Any withholding tax that
does apply may be reduced or eliminated by an applicable tax treaty.
Notwithstanding the foregoing, if any such payments are effectively connected
with a United States trade or business conducted by the certificateholder, they
will be subject to regular United States income tax and, in the case of a
corporation, to a possible branch profits tax, but will ordinarily be exempt
from United States withholding tax provided that applicable documentation
requirements are met.
See further the discussion of the Withholding Regulations, under "REMIC
Certificates--Foreign Investors in REMIC Certificates."
CERTIFICATES CLASSIFIED AS PARTNERSHIP INTERESTS
Certain arrangements may be treated as partnerships for federal income
tax purposes. In such event, the related certificates will characterized, for
federal income tax purposes, as Partnership Interests as discussed in the
related prospectus supplement. With respect to certificates classified as
partnership interests, McGuire, Woods, Battle & Boothe LLP, special counsel to
the depositor, will deliver their opinion (unless otherwise limited in the
related prospectus supplement) generally to the effect that the arrangement
pursuant to which such certificates are issued will be characterized as a
partnership and not as an association taxable as a corporation or taxable
mortgage pool for federal income tax purposes. The related prospectus supplement
will also address any material federal income tax consequences applicable to the
holder.
DEBT CERTIFICATES
GENERAL. Debt certificates may be treated, for federal income tax
purposes, either as (1) non-recourse debt of the depositor secured by the
related mortgage assets, in which case the related trust will constitute only a
security device that constitutes a collateral arrangement for the issuance of
secured debt and not an entity for federal income tax purposes or (2) debt of a
partnership, in which case the related trust will constitute a partnership for
federal income tax purposes, in either case without reliance on the REMIC
Provisions or the FASIT Provisions. McGuire, Woods, Battle & Boothe LLP, special
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counsel to the depositor, will deliver its opinion (unless otherwise limited by
the related prospectus supplement) generally to the effect that, for federal
income tax purposes, assuming compliance with all the provisions of the related
agreement, (1) the debt certificates will be characterized as debt issued by,
and not equity in, the related trust and (2) the related trust will not be
characterized as an association (or publicly traded partnership within the
meaning of section 7704 of the Code) taxable as a corporation or as a taxable
mortgage pool within the meaning of section 7701(i). Because, however, different
criteria are used to determine the accounting treatment of the issuance of debt
certificates, the depositor may treat such transactions, for financial
accounting purposes, as a transfer of an ownership interest in the related
mortgage assets to the related trust and not as the issuance of debt
obligations. In that regard, it should be noted that the IRS has issued a notice
stating that, upon examination, it will scrutinize instruments treated as debt
for federal income tax purposes but as equity for regulatory, rating agency or
financial accounting purposes to determine if their purported status as debt for
federal income tax purposes is appropriate. Assuming that debt certificates will
be treated as indebtedness for federal income tax purposes, holders of debt
certificates, using their method of tax accounting, will follow the federal
income tax treatment hereinafter described.
ORIGINAL ISSUE DISCOUNT. It is likely that the debt certificates will
be treated as having been issued with "original issue discount" within the
meaning of section 1273(a) of the Code because interest payments on the debt
certificates may, in the event of certain shortfalls, be deferred for periods
exceeding one year. As a result, interest payments may not be considered
qualified stated interest payments.
In general, a holder of a debt certificate having original issue
discount must include original issue discount in ordinary income as it accrues
in advance of receipt of the cash attributable to the discount, regardless of
the method of accounting otherwise used. The amount of original issue discount
on a debt certificate will be computed generally as described under "-- REMIC
Certificates -- Original Issue Discount." The depositor intends to report any
information required with respect to the debt certificates based on the OID
Regulations.
MARKET DISCOUNT. A purchaser of a debt certificate may be subject to
the market discount rules of Code sections 1276 through 1278. In general, market
discount is the amount by which the stated redemption price at maturity (or, in
the case of a debt certificate issued with original issue discount, the adjusted
issue price) of the debt certificate exceeds the purchaser's basis in a debt
certificate. The holder of a debt certificate that has market discount generally
will be required to include accrued market discount in ordinary income to the
extent payments includible in the stated redemption price at maturity of such
debt certificate are received. The amount of market discount on a debt
certificate will be computed generally as described under "-- REMIC Certificates
-- Market Discount."
PREMIUM. A debt certificate purchased at a cost greater than its stated
redemption price at maturity is considered to be purchased at a premium. A
holder of a debt certificate who holds a debt certificate as a capital asset
within the meaning of section 1221 of the Code may elect under section 171 to
amortize the premium under the constant interest method. That election will
apply to all premium obligations that the holder of a debt certificate acquires
on or after the first day of the taxable year for which the election is made,
unless the IRS permits the revocation of the election. In addition, it appears
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that the same rules that apply to the accrual of market discount on installment
obligations are intended to apply in amortizing premium on installment
obligations such as the debt certificates. The treatment of premium incurred
upon the purchase of a debt certificate will be determined generally as
described above under "-- REMIC Certificates -- Premium."
SALE OR EXCHANGE OF DEBT CERTIFICATES. If a holder of a debt
certificate sells or exchanges a debt certificate, such holder will recognize
gain or loss equal to the difference, if any, between the amount received and
such holder's adjusted basis in the debt certificate. The adjusted basis in the
debt certificate generally will equal its initial cost, increased by any
original issue discount or market discount with respect to the debt certificate
previously included in such holder's gross income and reduced by the payments
previously received on the debt certificate, other than payments of qualified
stated interest, and by any amortized premium.
In general, except as described above with respect to market discount,
and except for certain financial institutions subject to section 582(c) of the
Code, any gain or loss on the sale or exchange of a debt certificate recognized
by an investor who holds the debt certificate as a capital asset (within the
meaning of section 1221), will be capital gain or loss and will be long term or
short term depending on whether the debt certificate has been held for more than
one year. For corporate taxpayers, there is no preferential rate afforded to
long-term capital gains. For individual taxpayers, net capital gains are subject
to varying tax rates depending upon the holding period of the debt certificates.
BACKUP WITHHOLDING. Holders of debt certificates will be subject to
backup withholding rules identical to those applicable to REMIC regular
Certificates. See "-- REMIC Certificates -- Backup Withholding" with respect to
REMIC Certificates.
TAX TREATMENT OF FOREIGN INVESTORS. Holders of debt certificates who
are not U.S. Persons will be subject to taxation in the same manner as foreign
holders of REMIC regular certificates. See "-- REMIC Certificates -- Foreign
Investors in REMIC Certificates."
For federal income tax purposes, (1) debt certificates held by a thrift
institution taxed as a domestic building and loan association will not
constitute "loans ... secured by an interest in real property" within the
meaning of section 7701(a)(19)(C)(v) of the Code; (2) interest on debt
certificates held by a real estate investment trust will not be treated as
"interest on obligations secured by mortgages on real property or on interests
in real property" within the meaning of section 856(c)(3)(B); (3) debt
certificates held by a real estate investment trust will not constitute real
estate assets or Government securities within the meaning of section
856(c)(5)(B); and (4) debt certificates held by a regulated investment company
will not constitute Government securities within the meaning of section
851(b)(3)(A)(i).
STATE AND LOCAL TAX CONSIDERATIONS
In addition to the federal income tax consequences described above,
potential investors should consider the state and local income tax consequences
of the acquisition, ownership and disposition of the certificates. State and
local income tax law may differ substantially from the corresponding federal
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law, and this discussion does not purport to describe any aspect of the income
tax laws of any state or locality.
For example, a REMIC or FASIT mortgage pool or Non-REMIC or Non-FASIT
trust may be characterized as a corporation, a partnership or some other entity
for purposes of state income tax law. Such characterization could result in
entity level income or franchise taxation of the REMIC mortgage pool or trust
fund formed in, owning mortgages or property in, or having servicing activity
performed in a state. Further, REMIC regular certificateholders resident in
non-conforming states may have their ownership of REMIC regular certificates
characterized as an interest other than debt of the REMIC, such as stock or a
partnership interest. Therefore, potential investors should consult their own
tax advisers with respect to the various state and local tax consequences of an
investment in the certificates.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended
("ERISA"), imposes certain requirements and restrictions on employee benefit
plans within the meaning of Section 3(3) of ERISA, including collective
investment funds, separate accounts and insurance company general accounts in
which such plans are invested. ERISA also imposes certain duties on those
persons who are fiduciaries with respect to employee benefit plans that are
subject to ERISA. Investments by employee benefit plans covered by ERISA are
subject to the general fiduciary requirements of ERISA, including the
requirement of investment prudence and diversification, and the requirement that
the employee benefit plan's investments be made in accordance with the documents
governing the employee benefit plan.
In addition, employee benefit plans subject to ERISA (including
collective investment funds, separate accounts and insurance company general
accounts in which such plans are invested), and individual retirement accounts
and annuities or certain types of Keogh plans not subject to ERISA but subject
to section 4975 of the Code (each, a "Plan"), are prohibited from engaging in a
broad range of transactions involving Plan assets and persons having certain
specified relationships to a Plan ("parties in interest" under ERISA and
"disqualified persons" under the Code). Such transactions are treated as
"prohibited transactions" under sections 406 and 407 of ERISA and excise taxes
are imposed upon disqualified persons by section 4975 of the Code (or, in some
cases, a civil penalty may be assessed pursuant to Section 502(i) of ERISA). The
depositor, the credit enhancer, the underwriters and the trustee, and certain of
their affiliates, might be considered parties in interest or disqualified
persons with respect to a Plan. If so, the acquisition or holding or transfer of
certificates by or on behalf of such Plan could be considered to give rise to a
prohibited transaction within the meaning of ERISA and the Code unless an
exemption is available. The United States Department of Labor ("DOL") has issued
regulations (29 C.F.R. Sections 2510.3-101 and 2550.401c-1) concerning the
definition of what constitutes the assets of a Plan (the "Plan Asset
Regulations"). Under the Plan Asset Regulations, the underlying assets and
properties of corporations, partnerships, trusts and certain other entities in
which Plan assets are used to make an "equity interest" investment could be
deemed for purposes of ERISA to be assets of the investing Plan unless certain
exceptions apply. If an investing Plan's assets were deemed to include an
interest in the mortgage assets and any other assets of a trust and not merely
an interest in the certificates, the assets of the trust would become subject to
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the fiduciary responsibility standards of ERISA, and transactions occurring
between the depositor, the servicer, the credit enhancer, the underwriters and
the trustee, or any of their affiliates, might constitute prohibited
transactions, unless an administrative exemption applies. Certain such
exemptions which may be applicable to the acquisition and holding of the
certificates or to the servicing of the mortgage assets are discussed below.
DOL has issued an administrative exemption, Prohibited Transaction
Class Exemption 83-1 ("PTCE 83-1"), which, under certain conditions, exempts
from the application of the prohibited transaction rules of ERISA and the excise
tax provisions of section 4975 of the Code transactions involving a Plan in
connection with the operation of a "mortgage pool" and the purchase, sale and
holding of "mortgage pool pass through certificates." A "mortgage pool" is
defined as an investment pool which is held in trust and which consists solely
of interest bearing obligations secured by first or second mortgages or deeds of
trust on single-family residential property, property acquired in foreclosure
and undistributed cash. A "mortgage pool pass through certificate" is defined as
a certificate which represents a beneficial undivided fractional interest in a
mortgage pool which entitles the holder to pass through payments of principal
and interest from the mortgage loans, less any fees retained by the pool
sponsor.
For the exemption to apply, PTCE 83-1 requires that:
o The depositor and the trustee maintain a system of insurance
or other protection for the pooled mortgage loans and the
property securing such loans, and for indemnifying holders of
certificates against reductions in pass through payments due
to defaults in loan payments or property damage in an amount
at least equal to the greater of 1% of the aggregate principal
balance of the covered pooled mortgage loans and 1% of the
principal balance of the largest covered pooled mortgage loan;
o the trustee may not be an affiliate of the depositor; and
o the payments made to and retained by the depositor in
connection with the trust, together with all funds inuring to
its benefit for administering the trust, represent no more
than "adequate consideration" for selling the mortgage loans,
plus reasonable compensation for services provided to the
trust.
In addition, PTCE 83-1 exempts the initial sale of certificates to a
Plan with respect to which the depositor, the servicer, any credit enhancer or
the trustee is a party in interest if the Plan does not pay more than fair
market value for such certificates and the rights and interests evidenced by
such certificates are not subordinated to the rights and interests evidenced by
other certificates of the same pool. PTCE 83-1 also exempts from the prohibited
transaction rules transactions in connection with the servicing and operation of
the trust, provided that any payments made to the servicer in connection with
the servicing of the trust are made in accordance with a binding agreement,
copies of which must be made available to prospective investors before they
purchase certificates.
In the case of any Plan with respect to which the depositor, the
servicer, the credit enhancer or the trustee is a fiduciary, PTCE 83-1 will only
apply if, in addition to the other requirements:
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o the initial sale, exchange or transfer of certificates is
expressly approved by an independent fiduciary who has
authority to manage and control those plan assets being
invested in certificates;
o the Plan pays no more for the certificates than would be paid
in an arm's-length transaction;
o no investment management, advisory or underwriting fee, sale
commission, or similar compensation is paid to the depositor
with regard to the sale, exchange or transfer of certificates
to the Plan;
o the total value of the certificates purchased by the Plan does
not exceed 25% of the amount issued; and
o at least 50% of the aggregate amount of certificates is
acquired by persons independent of the depositor, the
servicer, the credit enhancer or the trustee.
Before purchasing certificates, a fiduciary of a Plan should confirm
that the trust is a "mortgage pool," that the certificates constitute "mortgage
pool pass through certificates" and that the conditions set forth in PTCE 83-1
would be satisfied. In addition to making its own determination as to the
availability of the exemptive relief provided in PTCE 83-1, the Plan fiduciary
should consider the availability of any other prohibited transaction exemptions.
The Plan fiduciary also should consider its general fiduciary obligations under
ERISA in determining whether to purchase any certificates on behalf of a Plan.
In addition, the DOL has granted to certain underwriters and/or
placement agents individual prohibited transaction exemptions which may be
applicable to avoid certain of the prohibited transaction rules of ERISA with
respect to the initial purchase, the holding and the subsequent resale in the
secondary market by Plans of pass through certificates representing a beneficial
undivided ownership interest in the assets of a trust that consist of certain
receivables, loans and other obligations that meet the conditions and
requirements of the individual exemption which may be applicable to the
certificates.
One or more other prohibited transaction exemptions issued by the DOL
may be available to a Plan investing in certificates, depending in part upon the
type of Plan fiduciary making the decision to acquire a certificate and the
circumstances under which such decision is made, including, but not limited to,
PTCE 90-1, regarding investments by insurance company pooled separate accounts,
PTCE 91-38, regarding investments by bank collective investment funds and PTCE
95-60, regarding investments by insurance company general accounts.
Nevertheless, even if the conditions specified in PTCE 83-1 or one or more of
these other exemptions are met, the scope of the relief provided might not cover
all acts which might be construed as prohibited transactions.
Certain classes of certificates may not be offered for sale or be
transferable to Plans. The prospectus supplement for each series will indicate
which classes of certificates are subject to restrictions on transfer to Plans.
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Any Plan fiduciary considering the purchase of a certificate should
consult with its counsel with respect to the potential applicability of ERISA
and the Code to such investment. Moreover, each Plan fiduciary should determine
whether, under the general fiduciary standards of investment prudence and
diversification, an investment in the 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 MATTERS
If so specified in the prospectus supplement for a series, the
certificates of such series will constitute "mortgage related securities" for
purposes of the Secondary Mortgage Market Enhancement Act of 1984, so long as
they are rated in one of the two highest rating categories by one or more
nationally recognized statistical rating organizations, and, as such, will be
legal investments for persons, trusts, corporations, partnerships, associations,
business trusts and business entities, including, but not limited to,
state-chartered savings banks, commercial banks, savings and loan associations,
and insurance companies, as well as trustees and state government employee
retirement systems, created pursuant to or existing under the laws of the United
States or any state, territory or possession of the United States, including the
District of Columbia or Puerto Rico, whose authorized investments are subject to
state regulation to the same extent that, under applicable law, obligations
issued by or guaranteed as to principal and interest by the United States or any
agency or instrumentality thereof constitute legal investments for such
entities. Pursuant to SMMEA, a number of states enacted legislation, on or
before the October 3, 1991 cut off for such enactments, limiting to varying
extents the ability of certain entities, in particular, insurance companies, to
invest in "mortgage related securities," in most cases by requiring the affected
investors to rely solely upon existing state law and not SMMEA. Accordingly, the
investors affected by such legislation will be authorized to invest in the
certificates only to the extent provided in such legislation. Institutions whose
investment activities are subject to legal investment laws and regulations or to
review by certain regulatory authorities may be subject to restrictions on
investment in certain classes of the certificates of a series.
SMMEA also amended the legal investment authority of federally
chartered depository institutions as follows: federal savings and loan
associations and federal savings banks may invest in, sell or otherwise deal
with mortgage related securities without limitation as to the percentage of
their assets represented thereby; federal credit unions may invest in mortgage
related securities; and national banks may purchase mortgage related securities
for their own account without regard to the limitations generally applicable to
investment securities set forth in 12 U.S.C. ss. 24 (Seventh), subject in each
case to such regulations as the applicable federal regulatory authority may
prescribe. Federal credit unions should review National Credit Union
Administration (the "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.
The NCUA has adopted rules, effective December 2, 1991, which prohibit federal
credit unions from investing in some types of mortgage related securities,
possibly including specified series or classes of certificates, except under
limited circumstances. The OTS has issued Thrift Bulletin 13a (December 1,
1998), "Management of Interest Rate Risk, Investment Securities and Derivative
Activities," which thrift institutions subject to the jurisdiction of the OTS
should consider before investing in any certificates.
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If specified in the prospectus supplement for a series, one or more
classes of certificates of the series will not constitute "mortgage related
securities" for purposes of SMMEA. In this event, persons whose investments are
subject to state or federal regulation may not be legally authorized to invest
in such classes of certificates.
All depository institutions considering an investment in the
certificates should review the "Supervisory Policy Statement on Investment
Securities and End-User Derivatives Activities" (the "Policy Statement") of the
Federal Financial Institution Examination Council. The Policy Statement, which
has been adopted by the Board of Governors of the Federal Reserve System, the
FDIC, the Office of the Comptroller of the Currency and the Office of Thrift
Supervision, effective May 26, 1998, and by the NCUA effective October 1, 1998,
among other things, sets forth general guidelines which depository institutions
must follow in managing risks, including market, credit, liquidity, operational,
and legal risks, applicable to all securities used for investment purposes. In
addition, depository institutions and other financial institutions should
consult their regulators concerning the risk-based capital treatment of any
certificates. Any financial institution that is subject to the jurisdiction of
the Comptroller of the Currency, the Board of Governors of the Federal Reserve
System, the Federal Deposit Insurance Corporation, the Office of Thrift
Supervision, the National Credit Union Administration or other federal or state
agencies with similar authority should review any applicable rules, guidelines
and regulations prior to purchasing the certificates of a series.
Institutions whose investment activities are subject to regulation by
federal or state authorities should review the rules, policies and guidelines
adopted from time to time by these authorities before purchasing certificates,
since some certificates may be deemed unsuitable investments, or may otherwise
be restricted, under these rules, policies or guidelines, in some instances
irrespective of SMMEA.
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines or agreements generally
governing investments made by a particular investor, including, but not limited
to, "prudent investor" provisions, percentage-of-assets limits, provisions which
may restrict or prohibit investments in securities which are not
"interest-bearing" or "income-paying," and, with regard to any book-entry
certificates, provisions which may restrict or prohibit investments in
securities which are issued in book-entry form.
Prospective investors should consult their own legal advisors in
determining whether and to what extent the certificates constitute legal
investments for such investors.
PLAN OF DISTRIBUTION
The depositor may sell the certificates offered by this prospectus and
by the related prospectus supplement either directly or through one or more
underwriters or underwriting syndicates. The prospectus supplement for each
series will set forth the terms of the offering of the series and of each class
of the series, including the name or names of the underwriters, the proceeds to
and their use by the depositor and either the initial public offering price, the
discounts and commissions to the underwriters and any discounts or concessions
allowed or reallowed to certain dealers or the method by which the price at
which the underwriters will sell the certificates will be determined.
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The certificates of a series may be acquired by the underwriters for
their own account and may be resold from time to time in one or more
transactions, including negotiated transactions, at a fixed public offering
price or at varying prices determined at the time of sale. The obligations of
the underwriters will be subject to certain conditions precedent, and the
underwriters will be severally obligated to purchase all the certificates of a
series described in the related prospectus supplement if any are purchased. If
certificates of a series are offered other than through underwriters, the
related prospectus supplement will contain information regarding the nature of
the offering and any agreements to be entered into between the depositor and the
purchasers of the certificates of the series.
The place and time of delivery for the certificates of a series in
respect of which this prospectus is delivered will be set forth in the related
prospectus supplement.
AVAILABLE INFORMATION
The depositor has filed a registration statement with the Securities
and Exchange Commission with respect to the certificates. The registration
statement and amendments thereto and the exhibits thereto as well as reports
filed with the Commission on behalf of each trust may be inspected and copied at
the public reference facilities maintained by the Commission at Room 1024, 450
Fifth Street, N.W., Washington, D.C. 20549, and at the following Regional
Offices: Chicago Regional Office, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511; and New York Regional Office, 7 World Trade Center, Suite
1300, New York, New York 10048. Copies of these materials can also be obtained
from the Public Reference Section of the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates and electronically through the
Electronic Data Gathering, Analysis and Retrieval system at the Commission's web
site (http:\\www.sec.gov). The Commission maintains computer terminals providing
access to the EDGAR system at each of the offices referred to above.
This prospectus does not contain all the information set forth in the
registration statement of which this prospectus is a part, or in the exhibits
relating thereto, which the depositor has filed with the Commission in
Washington, D.C. Copies of the information and the exhibits are on file at the
offices of the Commission and may be obtained upon payment of the fee prescribed
by the Commission or may be examined without charge at the offices of the
Commission. Copies of the agreement for a particular series will be provided to
each person to whom a prospectus is delivered upon written or oral request,
provided that the request is made to Saxon Asset Securities Company, 4880 Cox
Road, Glen Allen, Virginia 23060 ((804) 967-7400).
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INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents filed with respect to each trust pursuant to Sections
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 the offering
of the certificates of the trust under this prospectus shall be deemed to be
incorporated into and made a part of this prospectus from the date of filing of
those documents. Any statement contained in a document incorporated or deemed to
be incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this prospectus to the extent that a statement contained herein
or in any other subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes 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. The depositor will
provide a copy of any and all information that has been incorporated by
reference into this prospectus, not including exhibits to the information so
incorporated by reference unless such exhibits are specifically incorporated by
reference into the information that this prospectus incorporates, upon written
or oral request of any person, without charge to such person, provided that the
request is made to the depositor, 4880 Cox Road, Glen Allen, Virginia 23060
((804) 967-7400).
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SAXON
[GRAPHIC OMITTED]
$460,000,000
SAXON ASSET SECURITIES TRUST 2000-4
SAXON ASSET SECURITIES COMPANY,
AS DEPOSITOR
MORTGAGE LOAN ASSET BACKED CERTIFICATES
SERIES 2000-4
CREDIT SUISSE FIRST BOSTON
BANC OF AMERICA SECURITIES LLC
CHASE SECURITIES INC.
GREENWICH CAPITAL MARKETS, INC.
-----------------------------
PROSPECTUS SUPPLEMENT
-----------------------------
DECEMBER 15, 2000
