<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 14, 1997
REGISTRATION NO. 333-22681
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
SEQUOIA MORTGAGE FUNDING CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 91-1771827
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
</TABLE>
------------------------
591 REDWOOD HIGHWAY
MILL VALLEY, CALIFORNIA 94941
(415) 381-1765
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
DOUGLAS B. HANSEN
SEQUOIA MORTGAGE FUNDING CORPORATION
591 REDWOOD HIGHWAY
MILL VALLEY, CALIFORNIA 94941
(415) 381-1765
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE OF
AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
PHILLIP R. POLLOCK, ESQ. EDWARD J. FINE, ESQ.
TOBIN & TOBIN BROWN & WOOD LLP
ONE MONTGOMERY STREET, 15TH FLOOR ONE WORLD TRADE CENTER
SAN FRANCISCO, CALIFORNIA 94104 NEW YORK, NEW YORK 10048
(415) 433-1400 (212) 839-5300
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC:
From time to time after the effective date of this Registration Statement
as determined by market conditions.
------------------------
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box: [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
===========================================================================================================
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED PER UNIT(1) PRICE(1) FEE(2)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Collateralized Mortgage Bonds...... $3,000,000,000 100% $3,000,000,000 $909,090.91
===========================================================================================================
</TABLE>
(1) Estimated for the purpose of calculating the registration fee.
(2) Of this amount, $303.03 has been previously paid.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED MAY 14, 1997
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED , 199 )
$
SEQUOIA MORTGAGE TRUST ________,
COLLATERALIZED MORTGAGE BONDS
------------------------
The Sequoia Mortgage Trust , Collateralized Mortgage Bonds (the
"Bonds"), in the aggregate principal amount of $ , consist of Class A-1,
Class B-1 and Class B-2 Bonds. The Issuer will also issue an Investor
Certificate (the "Investor Certificate") as described herein. Only the Class A-1
and Class B-1 Bonds (collectively, the "Offered Bonds") are offered hereby.
Interest on the Bonds will be payable [monthly on the th day of each month],
or if such day is not a business day, the next succeeding business day (each, a
"Payment Date"), commencing on , 199 . Interest on the Bonds will be
payable in an amount equal to the interest accrued during each Interest Accrual
Period (as defined herein). Interest accrued on the Bonds during any Interest
Accrual Period will be calculated on the basis of the related Class Principal
Amount (as defined herein) immediately prior to the related Payment Date. See
"DESCRIPTION OF THE BONDS -- Interest" herein. Payments of principal of the
Bonds on each Payment Date will be made in the manner described herein under
"DESCRIPTION OF THE BONDS -- Principal." The Bonds are redeemable only under the
circumstances described herein. See "INDEX OF CERTAIN DEFINITIONS" on page S-41
of this Prospectus Supplement and on page 85 of the Prospectus for the location
of the definitions of certain defined terms.
The Class A-1 Bonds are referred to herein as the "Senior Bonds" and the
Class B-1 and Class B-2 Bonds are referred to herein collectively as the
"Subordinated Bonds." The rights of the holders of the Subordinated Bonds to
receive payments of principal and interest will be subject to the priorities
described herein. See "DESCRIPTION OF THE BONDS -- Priority of Payments and
Allocation of Shortfalls" herein.
FOR A DISCUSSION OF CERTAIN RISK FACTORS RELATING TO INVESTMENTS IN THE
BONDS, SEE "RISK FACTORS" COMMENCING ON PAGE S-10 OF THIS PROSPECTUS SUPPLEMENT
AND ON PAGE 19 OF THE PROSPECTUS.
(Cover continued on next page)
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
==========================================================================================================
ORIGINAL CLASS BOND INTEREST STATED
PRINCIPAL AMOUNT RATE MATURITY(1)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Class A-1.............................................. $ (2)
- ----------------------------------------------------------------------------------------------------------
Class B-1.............................................. $ (3)
==========================================================================================================
</TABLE>
(1) Calculated as described herein under "DESCRIPTION OF THE BONDS -- Stated
Maturity."
(2) The Bond Interest Rate for the Senior Bonds (the "Senior Bond Interest
Rate") and any Interest Accrual Period will equal .
(3) The Bond Interest Rate for the Class B-1 Bonds (the "Class B-1 Bond Interest
Rate") and any Interest Accrual Period will equal .
The Offered Bonds will be purchased by (the "Underwriter") from the
Issuer and will be offered by the Underwriter from time to time in negotiated
transactions or otherwise at varying prices to be determined at the time of
sale. Proceeds to the Issuer from the sale of the Offered Bonds are expected to
be approximately % of the aggregate principal amount of the Offered Bonds plus
accrued interest, before deducting issuance expenses payable by the Issuer.
The Offered Bonds are offered by the Underwriter, subject to prior sale,
when, as and if delivered to and accepted by the Underwriter and subject to its
right to reject orders in whole or in part. It is expected that delivery of the
Offered Bonds will be made in book-entry form only through the facilities of The
Depository Trust Company on or about , 199 .
[UNDERWRITER]
, 199
<PAGE> 3
(Cover continued from previous page)
The Bonds will be issued by Sequoia Mortgage Trust (the "Issuer"), a
Delaware business trust established by Sequoia Mortgage Funding Corporation (the
"Company"), a wholly owned subsidiary of Redwood Trust, Inc., a Maryland
corporation ("Redwood Trust"). Prior to their sale to the Issuer by the Company,
the Pledged Mortgages will be held by Redwood Trust. The Bonds represent
obligations solely of the Issuer and are not insured or guaranteed by any
government agency or instrumentality, the Company, Redwood Trust, or any other
person or entity. The Issuer is not expected to have any significant assets
other than those pledged as collateral to secure the Bonds.
The Bonds will be collateralized by -year conventional mortgage loans
secured by first liens on one-to four-family residential properties (the
"Pledged Mortgages"). The Pledged Mortgages have been sold to the Company by
Redwood Trust. All of the Pledged Mortgages bear interest at [fixed] rates [that
adjust [annually] based on changes in the level of the Index (as defined
herein)]. The Bonds also will be secured by the Bond Account and the
Distribution Account described herein. Scheduled net payments on the Pledged
Mortgages will be sufficient, irrespective of the rate of prepayments on the
Pledged Mortgages, to make timely payments of interest on the Bonds and to
retire each Class of Bonds not later than its Stated Maturity.
THE YIELD TO INVESTORS ON EACH CLASS OF OFFERED BONDS WILL BE SENSITIVE IN
VARYING DEGREES TO, AMONG OTHER THINGS, THE RATE AND TIMING OF PRINCIPAL
PAYMENTS (INCLUDING PREPAYMENTS) OF THE PLEDGED MORTGAGES [AND THE LEVEL OF THE
INDEX, EACH OF] WHICH MAY VARY SIGNIFICANTLY OVER TIME. [THE BOND INTEREST RATE
FOR A CLASS OF OFFERED BONDS MAY ALSO CHANGE FROM PAYMENT DATE TO PAYMENT DATE
BASED ON THE NET MORTGAGE RATES (AS DEFINED HEREIN) AND THE OUTSTANDING
PRINCIPAL BALANCES OF THE PLEDGED MORTGAGES]. THE YIELD TO MATURITY OF A CLASS
OF OFFERED BONDS PURCHASED AT A DISCOUNT OR PREMIUM WILL BE MORE SENSITIVE TO
THE RATE AND TIMING OF PAYMENTS THEREON. HOLDERS OF THE OFFERED BONDS SHOULD
CONSIDER, IN THE CASE OF ANY SUCH BONDS PURCHASED AT A DISCOUNT, THE RISK THAT A
SLOWER THAN ANTICIPATED RATE OF PRINCIPAL PAYMENTS COULD RESULT IN AN ACTUAL
YIELD THAT IS LOWER THAN THE ANTICIPATED YIELD AND, IN THE CASE OF ANY OFFERED
BONDS PURCHASED AT A PREMIUM, THE RISK THAT A FASTER THAN ANTICIPATED RATE OF
PRINCIPAL PAYMENTS COULD RESULT IN AN ACTUAL YIELD THAT IS LOWER THAN THE
ANTICIPATED YIELD. THE YIELD TO INVESTORS IN THE OFFERED BONDS ALSO MAY BE
ADVERSELY AFFECTED BY NET INTEREST SHORTFALLS (AS DEFINED HEREIN) AND,
PARTICULARLY IN THE CASE OF THE CLASS B-1 BONDS, REALIZED LOSSES (AS DEFINED
HEREIN). NO REPRESENTATION IS MADE AS TO THE ANTICIPATED RATE OF PREPAYMENTS ON
THE PLEDGED MORTGAGES, THE AMOUNT AND TIMING OF NET INTEREST SHORTFALLS OR
REALIZED LOSSES, OR AS TO THE RESULTING YIELD TO MATURITY OF ANY CLASS OF
OFFERED BONDS.
The Underwriter intends to make a secondary market in the Offered Bonds,
but has no obligation to do so. There is currently no secondary market for the
Offered Bonds and there can be no assurance that such a market will develop or,
if it does develop, that it will continue or that it will provide Bondholders
with a sufficient level of liquidity of investment. The Bonds will not be listed
on any national securities exchange.
------------------
This Prospectus Supplement does not contain complete information about the
offering of the Offered Bonds. Additional information is contained in the
Prospectus of the Company dated , 199 and purchasers are urged to read
both this Prospectus Supplement and the Prospectus in full. Sales of the Bonds
may not be consummated unless the purchaser has received both this Prospectus
Supplement and the Prospectus.
The Bond Trustee will provide without charge to each person to whom this
Prospectus Supplement is delivered, on the written or oral request of such
person, a copy of any or all of the documents referred to in the Prospectus
under "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE" that have been or may be
incorporated by reference in the Prospectus (not including exhibits to the
information that is incorporated by reference unless such exhibits are
specifically incorporated by reference into the information that the Prospectus
incorporates). Such requests should be directed to the Bond Trustee at
, telephone: , facsimile number: .
UNTIL 90 DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE OFFERED BONDS, WHETHER OR NOT PARTICIPATING IN
THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS SUPPLEMENT AND
PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS SUPPLEMENT AND PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH
RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
S-2
<PAGE> 4
SUMMARY
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus Supplement and in
the accompanying Prospectus. Certain capitalized terms used in this Summary are
defined elsewhere in this Prospectus Supplement or in the Prospectus. See "INDEX
OF CERTAIN DEFINITIONS" on page S-41 of this Prospectus Supplement and page 85
of the Prospectus for the location of the definitions of certain capitalized
terms.
Offered Bonds.............. Sequoia Mortgage Trust , Collateralized
Mortgage Bonds, Class A-1 and Class B-1 Bonds
(collectively, the "Offered Bonds"). Only the
Offered Bonds are offered hereby.
Securities Other than
the Offered Bonds........ In addition to the Offered Bonds, the Class B-2
Bonds and the Investor Certificate will be issued
in the initial amounts and will bear interest at
the interest rates indicated below, but are not
offered hereby:
<TABLE>
<CAPTION>
INITIAL INTEREST
AMOUNT RATE
-------- --------
<S> <C> <C>
Class B-2 Bonds(1)........................ $ (2)
Investor Certificate(1)................... $ (3)
</TABLE>
--------------------------------------------
(1) The Class B-2 Bonds and the Investor
Certificate will provide limited credit support
for the Offered Bonds as described herein.
(2) The interest rate for the Class B-2 Bonds (the
"Class B-2 Bond Interest Rate") and any
Interest Accrual Period will equal .
(3) The interest rate for the Investor Certificate
(the "Certificate Interest Rate") and any
Interest Accrual Period will equal .
Any information contained herein with respect to
the Class B-2 Bonds or the Investor Certificate is
provided only to permit a better understanding of
the Offered Bonds.
Designations
Senior Bonds............. Class A-1 Bonds.
Subordinated Bonds....... Class B-1 and Class B-2 Bonds.
Offered Bonds............ The Senior Bonds and the Class B-1 Bonds.
Book-Entry Bonds......... All Classes of Offered Bonds.
Issuer..................... The Issuer, Sequoia Mortgage Trust , is a
statutory business trust established under the laws
of the State of Delaware by the Deposit Trust
Agreement (as defined herein) for the sole purpose
of issuing the Bonds and the Investor Certificate.
The settlor and sole beneficiary of the Issuer is
Sequoia Mortgage Funding Corporation, a Delaware
corporation (the "Company"), and a wholly owned
subsidiary of Redwood Trust, Inc., a Maryland
corporation ("Redwood Trust"). The Owner Trustee of
the Issuer is . Redwood Trust will be the
manager of the Issuer pursuant to a management
agreement (the "Management Agreement") entered into
with the Issuer. None of the Company, Redwood Trust
or has guaranteed or is otherwise
obligated with respect to payment of the Bonds, and
no person or entity other than the Issuer is
obligated to pay the Bonds. See "THE ISSUER" herein
and in the Prospectus.
Bond Trustee............... , a banking corporation organized
under the laws of (the "Bond
Trustee").
Owner Trustee.............. , a banking corporation organized
under the laws of the State of Delaware (the "Owner
Trustee").
S-3
<PAGE> 5
Master Servicing
Agreement.................. The Pledged Mortgages will be serviced pursuant to
a master servicing agreement dated as of
1, 199 (the "Master Servicing Agreement") among the
Issuer, the Bond Trustee and the Master Servicer.
Master Servicer............ will act as Master Servicer for the
Pledged Mortgages (the "Master Servicer"). On or
prior to the Closing Date, the Master Servicer will
enter into mortgage servicing agreements (each, a
"Servicing Agreement") with certain servicers
(each, a "Servicer") pursuant to which each
Servicer will perform certain servicing functions
with respect to the Pledged Mortgages. See
"SERVICING OF THE PLEDGED MORTGAGES -- The Master
Servicer" herein. The Master Servicer will
administer and supervise the performance of each
Servicer, who may in turn be administering and
supervising the performance of one or more
subservicers of the Pledged Mortgages. The Master
Servicer will receive the Master Servicing Fee, and
each Servicer will receive the related Servicing
Fee, from interest collected on the Pledged
Mortgages. The Master Servicer will be obligated to
perform the obligations of a terminated Servicer or
appoint a successor Servicer. See "SERVICING OF THE
PLEDGED MORTGAGES -- Servicing Compensation and
Payment of Expenses" herein.
Deposit Trust Agreement.... The Issuer will be established and the Investor
Certificate will be issued pursuant to an amended
and restated deposit trust agreement dated as of
, 199 (the "Deposit Trust Agreement")
among the Company and the Owner Trustee.
Cut-off Date............... 1, 199 .
Closing Date............... On or about , 199 .
Determination Date......... The th day of each [month] or, if such day is not
a business day, the first business day thereafter.
Payment Date............... The th day of each [month] or, if such day is not
a business day, the first business day thereafter,
commencing in , 199 (each, a "Payment
Date"). Payments on each Payment Date will be made
to Bondholders of record as of the related Record
Date, except that the final payment on the Bonds
will be made only upon presentment and surrender of
the Bonds at the Corporate Trust Office of the Bond
Trustee.
Record Date................ The Record Date for any Payment Date will be the
last business day of the month preceding the month
of such Payment Date.
Priority of Payments....... Payments will be made on each Payment Date from
Available Funds in the following order of priority:
(i) to interest on the Senior Bonds; (ii) to
principal of the Senior Bonds; (iii) to interest on
the Class B-1 Bonds; (iv) to principal of the Class
B-1 Bonds; (v) to interest on the Class B-2 Bonds;
(vi) to principal of the Class B-2 Bonds; (vii) to
interest on the Investor Certificate; (viii) to
principal of the Investor Certificate; and (ix) to
the holder of the Investor Certificate, all
remaining Available Funds. Under certain
circumstances described herein, (i) payments from
Available Funds for a Payment Date that would
otherwise be made on the Subordinated Bonds may be
made instead on the Senior Bonds, and (ii) payments
from Available Funds for a Payment Date that would
otherwise be made on the Class B-2 Bonds may be
made instead on the Class B-1 Bonds. In addition,
under certain circumstances described herein,
payments from Available Funds for a Payment Date
that would otherwise be made on the Investor
Certificate may be made instead on the Senior Bonds
and the Subordinated Bonds. See "DESCRIPTION
S-4
<PAGE> 6
OF THE BONDS -- Priority of Payments and Allocation
of Shortfalls" herein.
Payments of Interest....... To the extent funds are available therefor, each
Class of Bonds will be entitled to receive interest
in the amount of the Interest Payment Amount for
such Class. See "DESCRIPTION OF THE BONDS --
Interest" herein and in the Prospectus.
A. Interest Payment
Amount................... For each Class of Bonds, the amount of interest
accrued during the related Interest Accrual Period
at the applicable Bond Interest Rate. With respect
to each Payment Date, the "Interest Accrual Period"
for each Class of Bonds will be the calendar
[month] preceding the month of such Payment Date.
B. Bond Interest Rate.... The Bond Interest Rate for each Class of Bonds for
each Payment Date will be as described herein or on
the cover page hereof.
Payments of Principal...... On each Payment Date, to the extent funds are
available therefor, principal payments in reduction
of the Class Principal Amount of each Class of
Bonds will be made in the order and subject to the
priorities set forth herein under "DESCRIPTION OF
THE BONDS -- Principal" in an amount equal to such
Class' allocable portion of the Principal Payment
Amount.
Stated Maturity............ The Stated Maturity for each Class of Bonds is the
date determined by the Company which is years after
the Payment Date immediately following the latest
maturity date of any Pledged Mortgage. The Stated
Maturity for each Class of Bonds is ,
20 . See "DESCRIPTION OF THE BONDS -- Stated
Maturity" and "-- Weighted Average Lives of the
Offered Bonds" herein.
Optional Redemption of
Bonds.................... The Bonds may be redeemed in whole, but not in
part, at the Issuer's option, on any Payment Date
on or after the earlier of (a) years after the
initial issuance of the Bonds and (b) the Payment
Date on which the sum of (i) the Senior Class
Principal Amount, (ii) the Class B-1 Principal
Amount, (iii) the Class B-2 Principal Amount and
(iv) the Invested Amount, in each case after giving
effect to payments to be made on such Payment Date,
is % or less of the aggregate of the Stated
Principal Balances of the Pledged Mortgages as of
the Cut-off Date, at a redemption price equal to
100% of the unpaid principal amount of such Bonds
(including, in the case of any Class of
Subordinated Bonds, any unpaid Class Principal
Carryover Shortfall relating thereto), plus accrued
and unpaid interest thereon at the applicable Bond
Interest Rate through the month preceding the month
in which such optional redemption date occurs. The
Bonds are not otherwise subject to redemption or
call at the option of the Issuer nor are they
subject to special redemption. See "DESCRIPTION OF
THE BONDS -- Redemption at the Option of the
Issuer" herein and in the Prospectus.
Credit Enhancement
Subordination............ Credit enhancement for the Senior Bonds will be
provided by the Subordinated Bonds and by the
Investor Certificate. Credit enhancement for the
Class B-1 Bonds will be provided by the Class B-2
Bonds and the Investor Certificate. Credit
enhancement for the Class B-2 Bonds will be
provided by the Investor Certificate.
The rights of holders of the Subordinated Bonds and
the Investor Certificate to receive payments with
respect to the Pledged Mortgages will be
subordinated to such rights of the holders of the
Senior Bonds,
S-5
<PAGE> 7
the rights of the holders of the Class B-2 Bonds
and the Investor Certificate will be further
subordinated to such rights of the holders of the
Class B-1 Bonds, and the rights of the holder of
the Investor Certificate will be further
subordinated to such rights of the holders of the
Class B-2 Bonds, in each case to the extent
described herein. See "DESCRIPTION OF THE
BONDS -- Priority of Payments and Allocation of
Shortfalls" and "CREDIT ENHANCEMENT" herein.
Advances................... The Master Servicer is obligated to make cash
advances ("Advances") with respect to delinquent
payments of principal and interest on any Pledged
Mortgage to the extent described herein. The Bond
Trustee will be obligated to make any such Advance
if the Master Servicer fails in its obligation to
do so, to the extent provided in the Master
Servicing Agreement. See "SERVICING OF THE PLEDGED
MORTGAGES" herein.
Certain Prepayment and
Yield
Considerations and Risks;
Reinvestment Risk........ The effective yields to the holders of the Offered
Bonds will be lower than the yields otherwise
produced by the applicable rate at which interest
is paid to such holders and the purchase price of
such Offered Bonds because [monthly] distributions
will not be payable to such holders until the th
day (or, if such day is not a business day, the
following business day) of the month following the
[month] in which interest accrues on the Pledged
Mortgages (without any additional payment of
interest or earnings thereon in respect of such
delay). The rate of principal payments on the
Offered Bonds, the aggregate amount of payments on
the Offered Bonds and the yields to maturity of the
Offered Bonds will be related to the rate and
timing of payments of principal on the Pledged
Mortgages [and the level of the Index].
Since the rate of payment of principal on the
Pledged Mortgages will depend on future events, no
assurance can be given as to such rate or the rate
of principal prepayments. The extent to which the
yield to maturity of a Class of Offered Bonds may
vary from the anticipated yield may depend upon the
degree to which it is purchased at a discount or
premium, and the degree to which the timing of
payments thereon is sensitive to prepayments,
liquidations and purchases of the Pledged
Mortgages. Further, an investor should consider the
risk that, in the case of any Offered Bond
purchased at a discount, a slower than anticipated
rate of principal payments (including prepayments)
on the Pledged Mortgages could result in an actual
yield to such investor that is lower than the
anticipated yield and, in the case of any Offered
Bond purchased at a premium, a faster than
anticipated rate of principal payments on the
Pledged Mortgages could result in an actual yield
to such investor that is lower than the anticipated
yield.
Because the Pledged Mortgages may be prepaid at any
time, it is not possible to predict the rate at
which payments of principal of the Offered Bonds
will be received. Since prevailing interest rates
are subject to fluctuation, there can be no
assurance that investors in the Offered Bonds will
be able to reinvest the payments thereon at yields
equaling or exceeding the yields on such Bonds. It
is possible that yields on any such reinvestments
will be lower, and may be significantly lower, than
the yields on the Offered Bonds. See "RISK
FACTORS -- Yield, Prepayment and Maturity Risks"
herein and "RISK FACTORS -- Prepayment and Yield
Considerations" in the Prospectus.
Security for the Bonds..... The Bonds will be secured by collateral consisting
of the items set forth below:
S-6
<PAGE> 8
A. Pledged Mortgages..... The Pledged Mortgages will consist primarily of a
pool (the "Pledged Mortgage Pool") of -year
conventional mortgage loans secured by first liens
on one- to four-family residential properties. Such
Pledged Mortgages will bear interest at [fixed]
rates [that adjust [annually] based on changes in
the level of the Index (as defined herein)].
Payments of principal and interest on the Bonds
will be based on payments received on the Pledged
Mortgages, as described herein. See "DESCRIPTION OF
THE BONDS -- Interest" and "-- Principal" herein
and "SECURITY FOR THE BONDS -- The Pledged
Mortgages" herein and in the Prospectus.
[The Mortgage Rate for each Pledged Mortgage will
adjust [annually] based on (the "Index").
See "SECURITY FOR THE BONDS -- The Pledged
Mortgages -- General", and "-- The Index" herein.]
B. Bond Account.......... On or prior to the Closing Date, the Master
Servicer will establish and maintain or cause to be
established and maintained a separate account or
accounts for the collection of payments on the
Pledged Mortgages (the "Bond Account"). See
"DESCRIPTION OF THE BONDS -- Payments on Pledged
Mortgages; Accounts" herein and "SERVICING OF THE
PLEDGED MORTGAGES" herein and in the Prospectus.
C. Distribution
Account.................... On or prior to the Closing Date, the Bond Trustee
will establish an account (the "Distribution
Account") which will be maintained with the Bond
Trustee for the benefit of the Bondholders. On or
prior to the business day immediately preceding
each Payment Date, the Master Servicer will
withdraw from the Bond Account the Bond
Distribution Amount (as defined herein) for such
Payment Date, to the extent of Available Funds on
deposit therein, and will deposit such amount in
the Distribution Account. See "DESCRIPTION OF THE
BONDS -- Payments on Pledged Mortgages; Accounts"
herein and "SERVICING OF THE PLEDGED MORTGAGES"
herein and in the Prospectus.
Federal Income Tax
Consequences............. The Bonds will be treated as debt for federal
income tax purposes, and interest, including
original issue discount with respect to any Class
of Offered Bonds issued with original issue
discount, will be taxable to non-exempt
Bondholders. The prepayment rate used by the Issuer
for purposes of determining the amount and rate of
accrual of original issue discount on the Offered
Bonds assumes that the Pledged Mortgages are
prepaid at a rate of % of the Prepayment
Assumption. Based upon the assumed prepayment rate
and the expected price to the public of each Class
of Offered Bonds as of the date hereof (including
interest accrued before the Closing Date, if any),
the Senior Bonds will not be issued with original
issue discount and the Class B-1 Bonds will be
treated as issued with original issue discount.
[Although it is unclear, the Issuer intends to
treat the Bonds as "Variable Rate Debt Instruments"
and the stated interest on the Bonds as "qualified
stated interest payments" (as each such term is
defined in the Prospectus under "FEDERAL INCOME TAX
CONSEQUENCES").]
Notwithstanding the use of the Prepayment
Assumption in pricing the Offered Bonds, no
representation is made that the Pledged Mortgages
will actually prepay at such assumed prepayment
rate or at any other rate. The amount of original
issue discount, if any, and certain other
information with respect to each Offered Bond will
be set forth on the face of such Offered Bond as
required by applicable regulations. Payments on
Offered Bonds held by foreign persons will
generally be exempt from United States withholding
tax, subject to compliance with applica-
S-7
<PAGE> 9
ble certification procedures. Counsel to the Issuer
has advised the Issuer that in its opinion the
Offered Bonds will be treated as debt for federal
income tax purposes. The Issuer will not elect to
treat the segregated pool of assets securing the
Bonds as a "real estate mortgage investment
conduit" for federal income tax purposes. See
"FEDERAL INCOME TAX CONSEQUENCES" in the
Prospectus.
Offered Bonds owned by a real estate investment
trust will not be treated as "real estate assets"
or "Government securities" and interest on the
Offered Bonds will not be considered "interest on
obligations secured by mortgages on real property
or on interests in real property." Similarly, the
Offered Bonds will not constitute "qualifying real
property loans" for mutual savings banks or
domestic building and loan associations and will
not constitute "loans secured by an interest in
real property" or "obligations of the United
States" for domestic building and loan
associations. In addition, Offered Bonds held by a
regulated investment company will not constitute
"Government securities." See "FEDERAL INCOME TAX
CONSEQUENCES" in the Prospectus.
ERISA Matters.............. Fiduciaries of employee benefit plans and certain
other retirement plans and arrangements that are
subject to the Employee Retirement Income Security
Act of 1974, as amended ("ERISA"), or corresponding
provisions of the Internal Revenue Code of 1986, as
amended (the "Code"), including individual
retirement accounts and annuities, Keogh plans and
collective investment funds in which such plans,
accounts, annuities or arrangements are invested
(any of the foregoing a "Plan"), persons acting on
behalf of a Plan, or persons using the assets of a
Plan ("Plan Investors"), should review carefully
with their legal advisors whether the purchase or
holding of the Offered Bonds could either give rise
to a transaction that is prohibited under ERISA or
the Code or cause the Pledged Mortgages securing
the Offered Bonds to be treated as plan assets for
purposes of regulations of the Department of Labor
set forth in 29 C.F.R. 2510.3-101 (the "Plan Asset
Regulations"). Although certain exceptions from the
application of the prohibited transaction rules and
the Plan Asset Regulations exist, there can be no
assurance that any such exception will apply with
respect to the acquisition of the Offered Bonds.
See "ERISA MATTERS" herein and in the Prospectus.
Although not entirely free from doubt, the Issuer
believes that the Offered Bonds will be treated as
debt obligations without significant equity
features for purposes of the Plan Asset
Regulations. Accordingly, a Plan that acquires the
Offered Bonds should not be treated as having
acquired a direct interest in the assets of the
Issuer. See "ERISA MATTERS" herein and in the
Prospectus. However, there can be no complete
assurance that the Offered Bonds will be treated as
debt obligations without significant equity
features for purposes of the Plan Asset
Regulations.
Legal Investment........... The Offered Bonds will constitute "mortgage related
securities" for purposes of the Secondary Mortgage
Market Enhancement Act of 1984 ("SMMEA") so long as
they are rated in one of the two highest rating
categories by at least one nationally recognized
statistical rating organization and, as such, are
legal investments for certain entities to the
extent provided for in SMMEA. Institutions whose
investment activities are subject to review by
federal or state regulatory authorities should
consult with their counsel or the applicable
authorities to determine whether an investment in
the Offered Bonds complies with applicable
guidelines, policy statements or restrictions. See
"LEGAL INVESTMENT" in the Prospectus.
S-8
<PAGE> 10
Ratings.................... It is a condition of the issuance of the Senior
Bonds that they be rated [AAA] by
(" ") and [AAA] by
(" " and, together with , the "Rating
Agencies"). It is a condition to the issuance of
the Class B-1 Bonds that they be rated [AA] by
. The ratings of the Offered Bonds
of any Class should be evaluated independently from
similar ratings on other types of securities. A
rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or
withdrawal at any time by the Rating Agencies. See
"RATINGS" herein.
The Issuer has not requested a rating of the
Offered Bonds by any rating agency other than the
Rating Agencies; there can be no assurance,
however, as to whether any other rating agency will
rate the Offered Bonds or, if it does, what rating
would be assigned by such other rating agency. The
rating assigned by such other rating agency to the
Offered Bonds could be lower than the respective
ratings assigned by the Rating Agencies.
Use of Proceeds............ The Issuer intends to distribute all of the net
proceeds of the issuance of the Bonds to the
Company which will apply such proceeds to the
purchase of the Pledged Mortgages. The Pledged
Mortgages were purchased by the Company from
[Redwood Trust] and sold to the Issuer by the
Company. See "USE OF PROCEEDS" herein and in the
Prospectus and "METHOD OF DISTRIBUTION" herein.
Risk Factors............... For a discussion of certain risks associated with
an investment in the Bonds, see "RISK FACTORS"
commencing on page S-10 herein and on page 19 in
the Prospectus.
S-9
<PAGE> 11
RISK FACTORS
YIELD, PREPAYMENT AND MATURITY RISKS
EFFECT OF DELAYS ON PAYMENT ON THE BONDS. The effective yields to the
holders of the Offered Bonds will be lower than the yields otherwise produced by
the applicable rate at which interest is paid to such holders and the purchase
price of such Offered Bonds because [monthly] payments will not be payable to
such holders until the th day (or, if such day is not a business day, the
following business day) of the month following the [month] in which interest
accrues on the Pledged Mortgages (without any additional payment of interest or
earnings thereon in respect of such delay).
EFFECT OF DELINQUENCIES ON THE PLEDGED MORTGAGES. Delinquencies on the
Pledged Mortgages which are not advanced by or on behalf of the Master Servicer
(because amounts, if advanced, would be nonrecoverable), may adversely affect
the yield on the Offered Bonds. Because of the priority of distributions,
shortfalls resulting from delinquencies not so advanced will be borne first by
the Investor Certificate, second by the Class B-2 Bonds, third by the Class B-1
Bonds, and fourth by the Senior Bonds. If, as a result of such shortfalls, the
sum of (i) the Senior Class Principal Amount, (ii) the Class B-1 Principal
Amount, (iii) the Class B-2 Principal Amount and (iv) the Invested Amount
exceeds the Pool Principal Balance, the Invested Amount will be reduced by the
amount of such excess until the Invested Amount is reduced to zero, then, the
Class B-2 Principal Amount will be reduced by the remaining amount of such
excess, if any, until the Class B-2 Principal Amount is reduced to zero, and
thereafter, the Class B-1 Principal Amount will be reduced by the remaining
amount of such excess, if any.
[EFFECT OF PERIODIC RATE CAP AND MINIMUM RATE. The Mortgage Rate of each
Pledged Mortgage will be subject to a Periodic Rate Cap and a Maximum Rate. If
the Index changes substantially between Adjustment Dates, the adjusted Mortgage
Rate on a related Pledged Mortgage may not equal the applicable Index plus the
related Margin due to the constraint of such caps. In such event, the related
Net Mortgage Rate and consequently, each Bond Interest Rate, will be less than
would have been the case in the absence of such caps.]
[EFFECT OF DISPROPORTIONATE PREPAYMENTS. The Bond Interest Rate for each
Class of Offered Bonds will be based upon the weighted average of the Net
Mortgage Rates for the Pledged Mortgages. Any disproportionate prepayment of
Pledged Mortgages with higher Net Mortgage Rates may adversely affect the yield
on the Offered Bonds. The Bond Interest Rates for each Class of Offered Bonds
will vary from Payment Date to Payment Date due to (i) the timing of the
Mortgage Rate readjustments of the Pledged Mortgages and (ii) different rates of
payment of principal of such Pledged Mortgages bearing different Mortgage
Rates.]
EFFECT OF NET INTEREST SHORTFALLS AND REALIZED LOSSES. Net Interest
Shortfalls allocated to the Offered Bonds, if any, will reduce the amount of
interest payable on the Offered Bonds which will adversely affect the yields on
the Offered Bonds. In addition, although all losses initially will be borne by
the Investor Certificate and then by the Class B-2 Bonds, the yields on the
Offered Bonds will depend on the rate and timing of Realized Losses. Realized
Losses could occur at a time when the Investor Certificate and the Class B-2
Bonds are no longer outstanding and available to absorb Realized Losses.
Realized Losses in excess of the sum of the Invested Amount and the Class B-2
Principal Amount will reduce the funds available to make payments to the holders
of the Offered Bonds on the related Payment Date. As a result, holders of the
Offered Bonds, and particularly holders of the Class B-1 Bonds, may not receive
the full amount of interest and principal on a Payment Date that they would have
received in the absence of such Realized Losses. In the event that holders of
Offered Bonds do not receive the full amount of accrued interest for any Payment
Date, the amount which is not paid will be carried forward and will be payable
on future Payment Dates to the extent funds are available therefor. Any amount
of interest so carried forward will not (except in the case of the Subordinated
Bonds) accrue interest until the Bonds are declared due and payable upon the
occurrence of an Event of Default, as described herein under "DESCRIPTION OF THE
BONDS -- Priority of Payments and Allocation of Shortfalls." Any shortfall in
amounts otherwise payable as principal of the Subordinated Bonds will be paid on
future Payment Dates to the extent funds are available therefor. So long as the
Senior Bonds
S-10
<PAGE> 12
are outstanding, any shortfall in amounts available for payments of principal
of, or interest on, the Subordinated Bonds will not constitute an Event of
Default.
Under the Indenture, shortfalls in amounts required to be distributed to
Bondholders ("Shortfalls") that affect only the Subordinated Bonds will not
constitute an Event of Default until all the Senior Bonds have been paid in full
and then only if Shortfalls on the Subordinated Bonds have not been paid. In
addition, an Event of Default by reason of any Shortfalls that affect the Senior
Bonds will occur on any Payment Date only when the Pool Principal Balance is
less than the principal amount of the Senior Bonds outstanding after application
of all available amounts on deposit in the Distribution Account on such Payment
Date. As described herein, on any Payment Date on which a Shortfall occurs,
payments of accrued interest on the Class B-1 Bonds will be subject to the
availability of funds in the Distribution Account after payment of accrued
interest on and principal then due on all outstanding Senior Bonds. On any
Payment Date on which a Shortfall occurs, payments of principal on the Class B-2
Bonds will be subject to the availability of funds therefor after payment of
interest on all outstanding Senior Bonds and Class B-1 Bonds and principal of
all outstanding Senior Bonds. Also, upon the occurrence of each Shortfall, the
Senior Percentage, the Class B-1 Percentage, the Class B-2 Percentage and the
Investor Percentage will shift in the manner described herein under "DESCRIPTION
OF THE BONDS -- Priority of Payments and Allocation of Shortfalls." Therefore,
following the occurrence of any Shortfall allocable to the Class B-1 Bonds, such
Class B-1 Bonds will amortize more slowly than would otherwise have been the
case in the absence of such Shortfall. As a result of these factors, the yield
on the Class B-1 Bonds will be more sensitive than the yield on the Senior Bonds
to the occurrence of Shortfalls.
The weighted average life of, and the yield to maturity on, the Class B-1
Bonds will be sensitive to the rate and timing of mortgagor defaults and the
severity of ensuing losses on the Pledged Mortgages. If the actual rate and
severity of losses on the Pledged Mortgages is higher than those assumed by a
holder of a Class B-1 Bond, the actual yield to maturity of such Bond may be
lower than the yield expected by such holder based on such assumption. The
timing of losses on the Pledged Mortgages will also affect an investor's actual
yield to maturity, even if the rate of defaults and severity of losses over the
life of the Pledged Mortgage Pool are consistent with an investor's
expectations. In general, the earlier a loss occurs, the greater the effect on
an investor's yield to maturity. The yield to maturity of the Class B-1 Bonds
will also be affected by Net Interest Shortfalls allocated to the Class B-1
Bonds, if any, and other cash shortfalls in Available Funds. See "DESCRIPTION OF
THE BONDS -- Priority of Payments and Allocation of Shortfalls" herein.
EFFECT OF RATE AND TIMING OF PRINCIPAL PAYMENTS. The rate of principal
payments on the Offered Bonds, the aggregate amount of payments on the Offered
Bonds and the yields to maturity of the Offered Bonds will be related to the
rate and timing of payments of principal on the Pledged Mortgages. The rate of
principal payments on the Pledged Mortgages will in turn be affected by the
amortization schedules of the Pledged Mortgages and by the rate of principal
prepayments (including for this purpose prepayments resulting from refinancing,
liquidations of the Pledged Mortgages due to defaults, casualties, condemnations
and purchases by Redwood Trust [or any optional purchase by the Master Servicer
or the Company of a defaulted Pledged Mortgage]). [The Pledged Mortgages may be
prepaid by the Mortgagors at any time without a prepayment penalty.] [The
Pledged Mortgages are subject to the "due-on-sale" provisions included therein].
See "SECURITY FOR THE BONDS -- The Pledged Mortgages" herein.
Prepayments, liquidations and purchases of the Pledged Mortgages (including
[any optional purchase by the Master Servicer or the Company of a defaulted
Pledged Mortgage] and any optional repurchase by the Issuer of the remaining
Pledged Mortgages in connection with the optional redemption of the Bonds, in
each case as described herein) will result in payments on the Offered Bonds of
principal amounts which would otherwise be distributed over the remaining terms
of the Pledged Mortgages. Since the rate of payment of principal on the Pledged
Mortgages will depend on future events, no assurance can be given as to such
rate or the rate of principal prepayments. The extent to which the yield to
maturity of a Class of Offered Bonds may vary from the anticipated yield will
depend upon the degree to which such Bond is purchased at a discount or premium,
and the degree to which the timing of payments thereon is sensitive to
prepayments, liquidations and purchases of the Pledged Mortgages. Further, an
investor should consider the risk that, in the case of any Offered Bond
purchased at a discount, a slower than anticipated rate of principal payments
(including
S-11
<PAGE> 13
prepayments) on the Pledged Mortgages could result in an actual yield to such
investor that is lower than the anticipated yield and, in the case of any
Offered Bond purchased at a premium, a faster than anticipated rate of principal
payments on the Pledged Mortgages could result in an actual yield to such
investor that is lower than the anticipated yield.
The rate of principal payments (including prepayments) on pools of mortgage
loans may vary significantly over time and may be influenced by a variety of
economic, geographic, social and other factors, including changes in mortgagors'
housing needs, job transfers, unemployment, mortgagors' net equity in the
mortgaged properties and servicing decisions. In general, if prevailing interest
rates were to fall significantly below the Mortgage Rates on the Pledged
Mortgages, the Pledged Mortgages could be subject to higher prepayment rates
than if prevailing interest rates were to remain at or above the Mortgage Rates
on the Pledged Mortgages. Conversely, if prevailing interest rates were to rise
significantly, the rate of prepayments on the Pledged Mortgages would generally
be expected to decrease. No assurances can be given as to the rate of
prepayments on the Pledged Mortgages in stable or changing interest rate
environments.
The timing of changes in the rate of prepayments on the Pledged Mortgages
may significantly affect an investor's actual yield to maturity, even if the
average rate of principal payments is consistent with an investor's expectation.
In general, the earlier a prepayment of principal on the Pledged Mortgages, the
greater the effect on an investor's yield to maturity. The effect on an
investor's yield as a result 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 Bonds may not be offset by a
subsequent like decrease (or increase) in the rate of principal payments.
NO REPRESENTATION IS MADE AS TO THE RATE OF PRINCIPAL PAYMENTS ON THE
PLEDGED MORTGAGES OR AS TO THE YIELD TO MATURITY OF ANY CLASS OF OFFERED BONDS.
INVESTORS ARE URGED TO MAKE AN INVESTMENT DECISION WITH RESPECT TO THE OFFERED
BONDS BASED ON THE ANTICIPATED YIELD TO MATURITY OF SUCH BONDS RESULTING FROM
THEIR RESPECTIVE PRICES AND EACH INVESTOR'S OWN DETERMINATION AS TO ANTICIPATED
PLEDGED MORTGAGE PREPAYMENT RATES.
CASH FLOW CONSIDERATIONS AND RISKS
Minimum monthly payments on the Pledged Mortgages will at least equal and
may exceed accrued interest thereon. Even assuming that the Mortgaged Properties
provide adequate security for the Pledged Mortgages, substantial delays could be
encountered in connection with the liquidation of Pledged Mortgages that are
delinquent and resulting shortfalls in distributions to holders of the Offered
Bonds could occur. Further, liquidation expenses (such as legal fees, real
estate taxes, and maintenance and preservation expenses) will reduce the
security for the related Pledged Mortgages and could thereby reduce the proceeds
payable to holders of the Offered Bonds. In the event any of the Mortgaged
Properties fail to provide adequate security for the related Pledged Mortgages,
holders of the Offered Bonds could experience a loss to the extent that any
applicable credit enhancement has been exhausted.
LIMITED RECOURSE
The Offered Bonds represent obligations solely of the Issuer and are not
insured or guaranteed by any governmental agency or instrumentality, the
Company, Redwood Trust, the Master Servicer, any Servicer or any other person or
entity.
DELINQUENCIES MAY ADVERSELY AFFECT INVESTMENT
As of the Cut-off Date, (i) not more than % of the Pledged Mortgages (by
Cut-off Date Stated Principal Balance) were delinquent by one or more Scheduled
Payments and (ii) not more than % of the Pledged Mortgages (by Cut-off Date
Stated Principal Balance) were delinquent by two or more Scheduled Payments.
Investors should consider the risk that the inclusion of such loans in the
Pledged Mortgages may effect the rates of defaults and prepayments on such
Pledged Mortgages and the yields on the Offered Bonds. See "SECURITY FOR THE
BONDS -- The Pledged Mortgages" herein.
S-12
<PAGE> 14
PLEDGED MORTGAGE CONCENTRATION
Approximately % and % of the Pledged Mortgages (by Cut-off Date Stated
Principal Balance) are expected to be secured by Mortgaged Properties located in
and , respectively. Consequently, losses and
prepayments on the Pledged Mortgages and the resultant payments on the Bonds may
be affected significantly by changes in the housing markets and the regional
economies in these areas, and also by the occurrence of natural disasters (such
as earthquakes, fires and floods) in these areas.
LIMITED LIQUIDITY OF INVESTMENTS
There can be no assurance that a secondary market will develop for the
Offered Bonds, or, if one does develop, that it will provide the holders of the
Offered Bonds with liquidity of investment or that it will continue to exist for
the term of the Offered Bonds.
BANKRUPTCY AND INSOLVENCY RISKS
Redwood Trust and the Company will treat the transfer of the Pledged
Mortgages by Redwood Trust to the Company as a sale. Nevertheless, in the event
of a bankruptcy of Redwood Trust the trustee in bankruptcy could attempt to
recharacterize the sale of the Pledged Mortgages as a borrowing secured by a
pledge of mortgage loans. The Company and the Issuer will treat the transfer of
the Pledged Mortgages by the Company to the Issuer as a sale. Nevertheless, in
the event of a bankruptcy of the Company, the trustee in bankruptcy could
attempt to recharacterize the sale of the Pledged Mortgages as a borrowing
secured by a pledge of mortgage loans.
In either case, if such an attempt to recharacterize the transfer of the
loans were successful, a trustee in bankruptcy could elect to accelerate payment
of the Bonds and liquidate the Pledged Mortgages, with the holders of the
Offered Bonds entitled to no more than the then outstanding Class Principal
Amount, if any, of such Bonds together with interest at the applicable Bond
Interest Rates to the date of payment. In the event of an acceleration of the
Bonds, the holders of the Offered Bonds would lose the right to future payments
of interest, might suffer reinvestment losses in a lower interest rate
environment and may fail to recover their initial investment.
BOOK-ENTRY BONDS
LIMITED LIQUIDITY. Issuance of the Offered Bonds in book-entry form may
reduce the liquidity of such Offered Bonds in the secondary trading market since
investors may be unwilling to purchase Offered Bonds for which they cannot
obtain physical certificates. See "DESCRIPTION OF THE BONDS -- Book-Entry Bonds"
herein and in the Prospectus and "RISK FACTORS -- Book-Entry Registration" in
the Prospectus.
DIFFICULTY IN PLEDGING. Since transactions in the Offered Bonds can be
effected only through DTC, CEDEL, Euroclear, participating organizations,
indirect participants and certain banks, the ability of Bond Owners to pledge an
Offered Bond to persons or entities that do not participate in the DTC, CEDEL or
Euroclear system may be limited due to lack of a physical certificate
representing the Offered Bonds. See "DESCRIPTION OF THE BONDS -- Book-Entry
Bonds" herein and in the Prospectus and "RISK FACTORS -- Book-Entry
Registration" in the Prospectus.
POTENTIAL DELAYS IN PAYMENT. Bond Owners may experience some delay in
their receipt of payments of interest and principal on the Offered Bonds since
such payments will be forwarded by the Bond Trustee to DTC and DTC will credit
such payments to the accounts of its Participants (as defined herein) which will
thereafter credit them to the accounts of Bond Owners either directly or
indirectly through indirect participants. Bond Owners will not be recognized as
Bondholders as such term is used in the Indenture, and Bond Owners will be
permitted to exercise the rights of Bondholders only indirectly through DTC and
its Participants. See "DESCRIPTION OF THE BONDS -- Book-Entry Bonds" herein and
in the Prospectus and "RISK FACTORS -- Book-Entry Registration" in the
Prospectus.
S-13
<PAGE> 15
RATINGS
The ratings of the Classes of Offered Bonds will depend primarily on an
assessment by the Rating Agencies of the Pledged Mortgages. The rating by the
Rating Agencies of the Classes of Offered Bonds is not a recommendation to
purchase, hold or sell the Offered Bonds, inasmuch as such rating does not
comment as to the market price or suitability for a particular investor. There
is no assurance that the ratings will remain in place for any given period of
time or that the ratings will not be lowered or withdrawn by the Rating
Agencies. In general, ratings assess credit risk and do not address likelihood
of prepayments.
FOR A DISCUSSION OF CERTAIN ADDITIONAL RISK FACTORS RELATING TO INVESTMENTS
IN THE BONDS, SEE "RISK FACTORS" IN THE PROSPECTUS.
THE ISSUER
The Issuer is a statutory business trust established under the laws of the
State of Delaware by an amended and restated deposit trust agreement, dated as
of , 199 . The Issuer was formed for the sole purpose of issuing the
Bonds and the Investor Certificate. The Company is the settlor and sole
beneficiary of the Issuer and is the Owner Trustee of the Issuer.
The Company is a limited purpose finance corporation the capital stock of which
is wholly owned by Redwood Trust, Inc., a Maryland corporation ("Redwood
Trust"). Redwood Trust will be the manager of the Issuer pursuant to a
management agreement entered into with the Issuer. None of the Company, Redwood
Trust, or any of their respective affiliates has guaranteed or is
otherwise obligated with respect to payment of the Bonds and no person or entity
other than the Issuer is obligated to pay the Bonds.
The Issuer's assets will consist almost entirely of the Pledged Mortgages
which will be pledged to secure the Bonds. If the Pledged Mortgages and other
collateral securing the Bonds are insufficient for payment of the Offered Bonds,
it is unlikely that significant other assets of the Issuer will be available for
payment of the Offered Bonds. The amount of funds available to pay the Offered
Bonds may be affected by, among other things, Realized Losses incurred on
defaulted Pledged Mortgages. See "RISK FACTORS" herein and in the Prospectus and
"THE ISSUER" in the Prospectus.
The Indenture prohibits the Issuer from incurring any indebtedness other
than the Bonds, or assuming or guaranteeing the indebtedness of any other
person.
DESCRIPTION OF THE BONDS
GENERAL
The Bonds will be issued pursuant to the Indenture. Set forth below are
summaries of the specific terms and provisions pursuant to which the Bonds will
be issued. The following summaries are subject to, and are qualified in their
entirety by reference to, the provisions of the Indenture. When particular
provisions or terms used in the Indenture are referred to, the actual provisions
(including definitions of terms) are incorporated by reference.
The Sequoia Mortgage Trust , Collateralized Mortgage Bonds (the
"Bonds"), will consist of the Class A-1 Bonds (the "Senior Bonds") and the Class
B-1 and Class B-2 Bonds (collectively, the "Subordinated Bonds"). The Issuer
will also issue the Investor Certificate (the "Investor Certificate") as
described herein. The Senior Bonds and the Class B-1 Bonds are collectively
referred to herein as the "Offered Bonds." Only the Offered Bonds are offered
hereby. The Classes of Offered Bonds will have the respective Bond Interest
Rates described on the cover hereof. The Class B-2 Bonds and the Investor
Certificate will bear interest at the Bond Interest Rate and Certificate
Interest Rate, respectively, described herein.
The "Class Principal Amount" of (a) the Senior Bonds (the "Senior Class
Principal Amount") as of any Payment Date is the Original Senior Class Principal
Amount reduced by all amounts previously distributed to holders of the Senior
Bonds as payments of principal, (b) the Class B-1 Bonds (the "Class B-1
Principal Amount") as of any Payment Date is the lesser of (i) the aggregate of
the Stated Principal Balances of the
S-14
<PAGE> 16
Pledged Mortgages, less the Senior Class Principal Amount immediately prior to
such date, and (ii) the Original Class B-1 Principal Amount reduced by all
amounts previously distributed to holders of the Class B-1 Bonds as payments of
principal and (c) the Class B-2 Bonds (the "Class B-2 Principal Amount") as of
any Payment Date is the lesser of (i) the aggregate of the Stated Principal
Balances of the Pledged Mortgages, less the sum of the Senior Class Principal
Amount and the Class B-1 Principal Amount, in each case immediately prior to
such date, and (ii) the Original Class B-2 Principal Amount reduced by all
amounts previously distributed to holders of the Class B-2 Bonds as payments of
principal. The Senior Bonds will have an original Senior Class Principal Amount
of $ (the "Original Senior Class Principal Amount"), the Class B-1 Bonds
will have an original Class B-1 Principal Amount of $ (the "Original Class
B-1 Principal Amount") and the Class B-2 Bonds will have an original Class B-2
Principal Amount of $ (the "Original Class B-2 Principal Amount"). The
"Invested Amount" of the Investor Certificate as of any Payment Date is the
lesser of (i) the aggregate of the Stated Principal Balances of the Pledged
Mortgages, less the sum of (x) the Senior Class Principal Amount, (y) the Class
B-1 Principal Amount and (z) the Class B-2 Principal Amount, in each case
immediately prior to such date, and (ii) the Original Invested Amount reduced by
all amounts previously distributed to the holder of the Investor Certificate in
reduction of the Invested Amount. The Investor Certificate will have an original
Invested Amount of approximately $ (the "Original Invested Amount").
BOOK-ENTRY BONDS
The Offered Bonds will be book-entry Bonds (each, a Class of "Book-Entry
Bonds"). Persons acquiring beneficial ownership interests in the Offered Bonds
("Bond Owners") may elect to hold their Offered Bonds through the Depository
Trust Company ("DTC") in the United States, or CEDEL or Euroclear (in Europe) if
they are participants of such systems, or indirectly through organizations which
are participants in such systems. The Book-Entry Bonds will be issued in one or
more certificates which equal the aggregate principal amount of the Offered
Bonds and will initially be registered in the name of Cede & Co., the nominee of
DTC. CEDEL and Euroclear will hold omnibus positions on behalf of their
participants through customers' securities accounts in CEDEL's and Euroclear's
names on the books of their respective depositaries which in turn will hold such
positions in customers' securities accounts in the depositaries' names on the
books of DTC. Citibank, N.A., will act as depositary for CEDEL and The Chase
Manhattan Bank will act as depositary for Euroclear (in such capacities,
individually the "Relevant Depositary" and collectively the "European
Depositaries"). Investors may hold such beneficial interests in the Book-Entry
Bonds in minimum denominations representing Class Principal Amounts of
$ and in multiples of $1,000 in excess thereof. Except as described
below, no person acquiring a Book-Entry Bond (each, a "beneficial owner") will
be entitled to receive a physical certificate representing such Offered Bond (a
"Definitive Bond"). Unless and until Definitive Bonds are issued, it is
anticipated that the only "Bondholders" of the Offered Bonds will be Cede & Co.,
as nominee of DTC. Bond Owners will not be Bondholders as that term is used in
the Indenture. Bond Owners are only permitted to exercise their rights
indirectly through the participating organizations that utilize the services of
DTC, including securities brokers and dealers, banks and trust companies and
clearing corporations and certain other organizations ("Participants") and DTC.
The beneficial owner's ownership of a Book-Entry Bond will be recorded on
the records of the brokerage firm, bank, thrift institution or other financial
intermediary (each, a "Financial Intermediary") that maintains the beneficial
owner's account for such purpose. In turn, the Financial Intermediary's
ownership of such Book-Entry Bond will be recorded on the records of DTC (or of
a participating firm that acts as agent for the Financial Intermediary, whose
interest will in turn be recorded on the records of DTC, if the beneficial
owner's Financial Intermediary is not a DTC participant, and on the records of
CEDEL or Euroclear, as appropriate).
Bond Owners will receive all payments of principal of, and interest on, the
Offered Bonds from the Bond Trustee through DTC and DTC participants. While the
Offered Bonds are outstanding (except under the circumstances described below),
under the rules, regulations and procedures creating and affecting DTC and its
operations (the "Rules"), DTC is required to make book-entry transfers among
Participants on whose behalf it acts with respect to the Offered Bonds and is
required to receive and transmit payments of principal of, and interest on, the
Bonds. Participants and indirect participants which have indirect access to the
DTC
S-15
<PAGE> 17
system, such as banks, brokers, dealers and trust companies that clear through
or maintain a custodial relationship with a Participant, either directly or
indirectly ("Indirect Participants"), with whom Bond Owners have accounts with
respect to Offered Bonds are similarly required to make book-entry transfers and
receive and transmit such payments on behalf of their respective Bond Owners.
Accordingly, although Bond Owners will not possess certificates, the Rules
provide a mechanism by which Bond Owners will receive payments and will be able
to transfer their interest.
Bond Owners will not receive or be entitled to receive certificates
representing their respective interests in the Bonds, except under the limited
circumstances described below. Unless and until Definitive Bonds are issued,
Bond Owners who are not Participants may transfer ownership of Offered Bonds
only through Participants and Indirect Participants by instructing such
Participants and Indirect Participants to transfer Offered Bonds, by book-entry
transfer, through DTC for the account of the purchasers of such Offered Bonds,
which account is maintained with their respective Participants. Under the Rules
and in accordance with DTC's normal procedures, transfers of ownership of
Offered Bonds will be executed through DTC and the accounts of the respective
Participants at DTC will be debited and credited. Similarly, the Participants
and Indirect Participants will make debits or credits, as the case may be, on
their records on behalf of the selling and purchasing Bond Owners.
Because of time zone differences, credits of securities received in CEDEL
or Euroclear as a result of a transaction with a Participant will be made during
subsequent securities settlement processing and dated the business day following
the DTC settlement date. Such credits or any transactions in such securities
settled during such processing will be reported to the relevant Euroclear or
CEDEL Participants on such business day. Cash received in CEDEL or Euroclear as
a result of sales of securities by or through a CEDEL Participant (as defined
herein) or Euroclear Participant (as defined herein) to a DTC Participant will
be received with value on the DTC settlement date but will be available in the
relevant CEDEL or Euroclear cash account only as of the business day following
settlement in DTC. For information relating to tax documentation procedures
relating to the Offered Bonds, see "FEDERAL INCOME TAX CONSEQUENCES -- Foreign
Investors" and "-- Backup Withholding" in the Prospectus and "GLOBAL CLEARANCE,
SETTLEMENT AND TAX DOCUMENTATION PROCEDURES -- Certain U.S. Federal Income Tax
Documentation Requirements" in Annex I hereto.
Transfers between Participants will occur in accordance with DTC Rules.
Transfers between CEDEL Participants and Euroclear Participants will occur in
accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through CEDEL
Participants or Euroclear Participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by the Relevant Depositary; however, such cross-market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in accordance
with its rules and procedures and within its established deadlines (European
time). The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to the
Relevant Depositary to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving payment in
accordance with normal procedures for same day fund settlement applicable to
DTC. CEDEL Participants and Euroclear Participants may not deliver instructions
directly to the European Depositaries.
DTC, which is a New York-chartered limited purpose trust company, performs
services for its participants, some of which (and/or their representatives) own
DTC. In accordance with its normal procedures, DTC is expected to record the
positions held by each DTC participant in the Book-Entry Bonds, whether held for
its own account or as nominee for another person. In general, beneficial
ownership of Book-Entry Bonds will be subject to the rules, regulations and
procedures governing DTC and DTC participants as in effect from time to time.
CEDEL is incorporated under the laws of Luxembourg as a professional
depository. CEDEL holds securities for its participating organizations ("CEDEL
Participants") and facilitates the clearance and
S-16
<PAGE> 18
settlement of securities transactions between CEDEL Participants through
electronic book-entry changes in accounts of CEDEL Participants, thereby
eliminating the need for physical movement of certificates. Transactions may be
settled in CEDEL in any of 28 currencies, including United States dollars. CEDEL
provides to its CEDEL Participants, among other things, services for
safekeeping, administration, clearance and settlement of internationally traded
securities and securities lending and borrowing. CEDEL interfaces with domestic
markets in several countries. As a professional depository, CEDEL is subject to
regulation by the Luxembourg Monetary Institute. CEDEL participants are
recognized financial institutions around the world, including underwriters,
securities brokers and dealers, banks, trust companies, clearing corporations
and certain other organizations. Indirect access to CEDEL is also available to
others, such as banks, brokers, dealers and trust companies that clear through
or maintain a custodial relationship with a CEDEL Participant, either directly
or indirectly.
Euroclear was created in 1968 to hold securities for its participants
("Euroclear Participants") and to clear and settle transactions between
Euroclear Participants through simultaneous electronic book-entry delivery
against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Transactions may be settled in any of 32 currencies, including United
States dollars. Euroclear includes various other services, including securities
lending and borrowing and interfaces with domestic markets in several countries
generally similar to the arrangements for cross-market transfers with DTC
described above. Euroclear is operated by the Brussels, Belgium office of Morgan
Guaranty Trust Company of New York ("Morgan" and in such capacity, the
"Euroclear Operator"), under contract with Euroclear Clearance Systems S.C., a
Belgian cooperative corporation (the "Cooperative"). All operations are
conducted by Morgan, and all Euroclear securities clearance accounts and
Euroclear cash accounts are accounts with the Euroclear Operator, not the
Belgian Cooperative. The Belgian Cooperative establishes policy for Euroclear on
behalf of Euroclear Participants. Euroclear Participants include banks
(including central banks), securities brokers and dealers and other professional
financial intermediaries. Indirect access to Euroclear is also available to
other firms that clear through or maintain a custodial relationship with a
Euroclear Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with Morgan are governed by
the Terms and Conditions Governing Use of Euroclear and the related Operating
Procedures of the Euroclear System and applicable Belgian law (collectively, the
"Terms and Conditions"). The Terms and Conditions govern transfers of securities
and cash within Euroclear, withdrawals of securities and cash from Euroclear,
and receipts of payments with respect to securities in Euroclear. All securities
in Euroclear are held on a fungible basis without attribution of specific
certificates to specific securities clearance accounts. The Euroclear Operator
acts under the Terms and Conditions only on behalf of Euroclear Participants,
and has no record of or relationship with persons holding through Euroclear
Participants.
Payments on the Book-Entry Bonds will be made on each Distribution Date by
the Bond Trustee to DTC. DTC will be responsible for crediting the amount of
such payments to the accounts of the applicable DTC participants in accordance
with DTC's normal procedures. Each DTC participant will be responsible for
disbursing such payments to the beneficial owners of the Book-Entry Bonds that
it represents and to each Financial Intermediary for which it acts as agent.
Each such Financial Intermediary will be responsible for disbursing funds to the
beneficial owners of the Book-Entry Bonds that it represents.
Under a book-entry format, beneficial owners of the Book-Entry Bonds may
experience some delay in their receipt of payments, since such payments will be
forwarded by the Bond Trustee to Cede & Co., as nominee of DTC. Payments with
respect to Offered Bonds held through CEDEL or Euroclear will be credited to the
cash accounts of CEDEL Participants or Euroclear Participants in accordance with
the relevant system's rules and procedures, to the extent received by the
Relevant Depositary. Such payments will be subject to tax reporting in
accordance with relevant United States tax laws and regulations. See "FEDERAL
S-17
<PAGE> 19
INCOME TAX CONSEQUENCES -- Withholding with Respect to Certain Foreign
Investors" and "-- Backup Withholding" in the Prospectus. Because DTC can only
act on behalf of Financial Intermediaries, the ability of a beneficial owner to
pledge Book-Entry Bonds to persons or entities that do not participate in the
depository system, or otherwise take actions in respect of such Book-Entry Bond,
may be limited due to the lack of physical certificates for such Book-Entry
Bonds. In addition, issuance of the Offered Bonds in book-entry form may reduce
the liquidity of such Offered Bonds in the secondary market since certain
potential investors may be unwilling to purchase Offered Bonds for which they
cannot obtain physical certificates.
Monthly and annual reports on the Issuer will be provided to Cede & Co., as
nominee of DTC, and may be made available by Cede & Co. to beneficial owners
upon request, in accordance with the rules, regulations and procedures creating
and affecting DTC or the Relevant Depositary, and to the Financial
Intermediaries to whose DTC accounts the Book-Entry Bonds of such beneficial
owners are credited.
DTC has advised the Issuer and the Bond Trustee that, unless and until
Definitive Bonds are issued in respect of the Offered Bonds, DTC will take any
action permitted to be taken by the holders of the Book-Entry Bonds under the
Indenture only at the direction of one or more Financial Intermediaries to whose
DTC accounts the Book-Entry Bonds are credited, to the extent that such actions
are taken on behalf of Financial Intermediaries whose holdings include such
Book-Entry Bonds. CEDEL or the Euroclear Operator, as the case may be, will take
any other action permitted to be taken by a Bondholder under the Indenture on
behalf of a CEDEL Participant or Euroclear Participant only in accordance with
its relevant rules and procedures and subject to the ability of the Relevant
Depositary to effect such actions on its behalf through DTC. DTC may take
actions, at the direction of the related Participants, with respect to some
Offered Bonds which conflict with actions taken with respect to other Offered
Bonds.
Definitive Bonds will be issued to beneficial owners of the Book-Entry
Bonds, or their nominees rather than to DTC, only if (a) DTC or the Issuer
advises the Bond Trustee in writing that DTC is no longer willing, qualified or
able to discharge properly its responsibilities as nominee and depositary with
respect to the Book-Entry Bonds and the Issuer or the Bond Trustee is unable to
locate a qualified successor or (b) the Issuer, at its sole option, elects to
terminate a book-entry system through DTC.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Bond Trustee will be required to notify all beneficial
owners of the occurrence of such event and the availability through DTC of the
Definitive Bonds. Upon surrender by DTC of the global certificate or
certificates representing the Book-Entry Bonds and instructions for
re-registration, the Bond Trustee will issue Definitive Bonds, and thereafter
the Bond Trustee will recognize the holders of such Definitive Bonds as
Bondholders under the Indenture.
Although DTC, CEDEL and Euroclear have agreed to the foregoing procedures
in order to facilitate transfers of Offered Bonds among participants of DTC,
CEDEL and Euroclear, they are under no obligation to perform or continue to
perform such procedures and such procedures may be discontinued at any time.
None of the Master Servicer, the Company, the Issuer or the Bond Trustee
will have any responsibility for any aspect of the records relating to or
payments made on account of beneficial ownership interests of the Book-Entry
Bonds held by Cede & Co., as nominee of DTC, or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interests.
For a description of the procedures generally applicable to the Book-Entry
Bonds, see "DESCRIPTION OF THE BONDS -- Book-Entry Bonds" in the Prospectus.
PAYMENTS ON PLEDGED MORTGAGES; ACCOUNTS
On or prior to the Closing Date, the Master Servicer will establish and
maintain or cause to be established and maintained a separate account or
accounts for the collection of payments on the Pledged Mortgages (the "Bond
Account"). On or prior to the Closing Date, the Bond Trustee will establish an
account (the "Distribution Account"), which will be maintained with the Bond
Trustee in trust for the benefit of the Bondholders. On or prior to the business
day immediately preceding each Payment Date, the Master Servicer will withdraw
from the Bond Account the Bond Distribution Amount for such Payment Date, to the
extent of
S-18
<PAGE> 20
Available Funds on deposit therein, and will deposit such amount in the
Distribution Account. The "Bond Distribution Amount" for any Payment Date will
equal the sum of (i) the Senior Interest Payment Amount, (ii) the Senior
Principal Payment Amount, (iii) the Class B-1 Interest Payment Amount, (iv) the
Class B-1 Principal Payment Amount, (v) the Class B-2 Interest Payment Amount
and (vi) the Class B-2 Principal Payment Amount (as each such term is defined
herein). Funds credited to the Bond Account or the Distribution Account may be
invested at the direction of the Company for the benefit and at the risk of the
Company in Permitted Investments, as defined in the Master Servicing Agreement,
that are scheduled to mature on or prior to the business day preceding the next
Payment Date.
PAYMENTS
Payments on the Bonds will be made by the Bond Trustee on [the th day of
each month], or if such day is not a business day, on the first business day
thereafter, commencing in 199 (each, a "Payment Date"), to the persons
in whose names such Bonds are registered at the close of business on the last
business day of the month preceding the month of such Payment Date (the "Record
Date").
Payments on each Payment Date will be made by check mailed to the address
of the person entitled thereto as it appears on the applicable bond register or,
in the case of a Bondholder who holds 100% of a Class of Bonds or who holds
Bonds with an aggregate initial Class Principal Amount of $1,000,000 or more and
who has so notified the Bond Trustee in writing in accordance with the
Indenture, by wire transfer in immediately available funds to the account of
such Bondholder at a bank or other depository institution having appropriate
wire transfer facilities; provided, however, that the final payment in
retirement of the Bonds will be made only upon presentment and surrender of such
Bonds at the Corporate Trust Office of the Bond Trustee.
As more fully described herein, payments will be made on each Payment Date
from Available Funds in the following order of priority: (i) to interest on the
Senior Bonds; (ii) to principal of the Senior Bonds; (iii) to interest on the
Class B-1 Bonds; (iv) to principal of the Class B-1 Bonds; (v) to interest on
the Class B-2 Bonds; (vi) to principal of the Class B-2 Bonds; (vii) to interest
on the Investor Certificate; (viii) to principal of the Investor Certificate;
and (ix) to the holder of the Investor Certificate, all remaining Available
Funds, subject to certain limitations set forth herein under "-- Principal."
"Available Funds" with respect to any Payment Date will be equal to the sum
of (i) all scheduled installments of interest (net of the related Expense Fees)
and principal due [on the Due Date in the month] in which such Payment Date
occurs and received prior to the related Determination Date, together with any
Advances in respect thereof; (ii) all proceeds of any primary mortgage guaranty
insurance policies and any other insurance policies with respect to the Pledged
Mortgages, to the extent such proceeds are not applied to the restoration of the
related Mortgaged Property or released to the Mortgagor in accordance with the
applicable Servicer's or the Master Servicer's normal servicing procedures
(collectively, "Insurance Proceeds") and all other cash amounts received and
retained in connection with the liquidation of defaulted Pledged Mortgages, by
foreclosure or otherwise ("Liquidation Proceeds"), during the [month] preceding
the month of such Payment Date (in each case, net of unreimbursed expenses
incurred in connection with a liquidation or foreclosure and unreimbursed
Advances, if any); (iii) all partial or full prepayments received during the
[month] preceding the month of such Payment Date; and (iv) amounts received with
respect to such Payment Date as the Substitution Adjustment Amount or purchase
price in respect of a Deleted Pledged Mortgage or a Pledged Mortgage purchased
by Redwood Trust [or by the Master Servicer or the Company] as of such Payment
Date, reduced by amounts in reimbursement for Advances previously made and other
amounts as to which the applicable Servicer or the Master Servicer is entitled
to be reimbursed pursuant to the Master Servicing Agreement.
INTEREST
The Bond Interest Rate for each Class of Bonds for each Payment Date (each,
a "Bond Interest Rate") is described herein or on the cover hereof. On each
Payment Date, to the extent of funds available therefor, each Class of Bonds and
the Investor Certificate will be entitled to receive an amount allocable to
interest as described below (as to each such Class or the Investor Certificate,
as applicable, the "Interest Payment
S-19
<PAGE> 21
Amount") with respect to the related Interest Accrual Period. With respect to
each Payment Date, the "Interest Accrual Period" for each Class of Bonds and the
Investor Certificate will be the [calendar month] preceding the month of such
Payment Date.
The Interest Payment Amount for the Senior Bonds (the "Senior Interest
Payment Amount") will be equal to the sum of (i) interest at the Senior Bond
Interest Rate on the Senior Class Principal Amount, and (ii) the sum of the
amounts, if any, by which the amount described in clause (i) above on each prior
Payment Date exceeded the amount actually distributed as interest on such prior
Payment Dates and not subsequently distributed. The Interest Payment Amount for
the Class B-1 Bonds (the "Class B-1 Interest Payment Amount") will be equal to
the sum of (i) interest at the Class B-1 Bond Interest Rate on the Class B-1
Principal Amount, (ii) interest at the Class B-1 Bond Interest Rate on any Class
B-1 Principal Carryover Shortfall, (iii) the sum of the amounts, if any, by
which the sum of the amounts described in clauses (i) and (ii) above on each
prior Payment Date exceeded the amount actually distributed as interest on such
prior Payment Dates and not subsequently distributed (the "Class B-1 Interest
Carryover Shortfall") and (iv) interest at the Class B-1 Bond Interest Rate on
any Class B-1 Interest Carryover Shortfall (to the extent permitted by
applicable law). The Interest Payment Amount for the Class B-2 Bonds (the "Class
B-2 Interest Payment Amount") will be equal to the sum of (i) interest at the
Class B-2 Bond Interest Rate on the Class B-2 Principal Amount, (ii) interest at
the Class B-2 Bond Interest Rate on any Class B-2 Principal Carryover Shortfall,
(iii) the sum of the amounts, if any, by which the sum of the amounts described
in clauses (i) and (ii) above on each prior Payment Date exceed the amount
actually distributed as interest on such prior Payment Dates and not
subsequently distributed (the "Class B-2 Interest Carryover Shortfall") and (iv)
interest at the Class B-2 Bond Interest Rate on any Class B-2 Interest Carryover
Shortfall (to the extent permitted by applicable law). The Interest Payment
Amount for the Investor Certificate (the "Certificate Interest Payment Amount")
will be equal to interest at the Certificate Interest Rate on the Invested
Amount. The Senior Bonds will not be entitled to interest on any Senior Interest
Payment Amount not paid when due prior to such time as the Bonds are declared
immediately due and payable upon the occurrence of an Event of Default as
described herein under "-- Priority of Payments and Allocation of Shortfalls."
The Investor Certificate will not be entitled to interest on any Certificate
Interest Payment Amount not paid when due.
The interest payable on any Payment Date as described above, but not the
entitlement thereto, for each Class of Bonds will be reduced by their respective
proportionate amounts of "Net Interest Shortfalls" for such Payment Date, if
any, based on the amount of interest each Class of Bonds would otherwise be
entitled to receive on such Payment Date before taking into account any
reduction in such amounts resulting from such Net Interest Shortfalls. With
respect to any Payment Date, the "Net Interest Shortfall" is equal to the amount
by which the sum of (i) the amount of interest which would otherwise have been
received with respect to any Pledged Mortgage that was the subject of a Relief
Act Reduction and (ii) any Prepayment Interest Shortfalls, in each case during
the calendar month preceding the month of such Payment Date, exceeds the sum of
(i) the Master Servicing Fee for such period and (ii) the amounts otherwise
payable on such Payment Date to the holder of the Investor Certificate as
described in clauses "SEVENTH", "EIGHTH" and "NINTH" under "-- Priority of
Payments and Allocation of Shortfalls" below. A "Relief Act Reduction" is a
reduction in the amount of monthly interest payment on a Pledged Mortgage
pursuant to the Soldiers' and Sailors' Civil Relief Act of 1940. See "CERTAIN
LEGAL ASPECTS OF PLEDGED MORTGAGES -- Soldiers and Sailors' Civil Relief Act" in
the Prospectus. A "Prepayment Interest Shortfall" is the amount by which
interest paid by a borrower in connection with a prepayment of principal on a
Pledged Mortgage is less than one month's interest at the related Mortgage Rate
on the Stated Principal Balance of such Pledged Mortgage.
Accrued interest to be paid on any Payment Date will be calculated, in the
case of each Class of Bonds and the Investor Certificate, on the basis of the
related Class Principal Amount or Invested Amount, as applicable, immediately
prior to such Payment Date. Interest will be calculated and payable on the basis
of a 360-day year divided into twelve 30-day months.
S-20
<PAGE> 22
PRINCIPAL
GENERAL. All payments and other amounts received in respect of principal
of the Pledged Mortgages will be allocated among the Senior Bonds, the
Subordinated Bonds and the Investor Certificate.
SENIOR PRINCIPAL PAYMENT AMOUNT. On each Payment Date, the Available Funds
remaining after payment of interest with respect to the Senior Bonds, up to the
amount of the Senior Principal Payment Amount for such Payment Date, will be
distributed as principal of the Senior Bonds. The "Senior Principal Payment
Amount" for any Payment Date will equal the Senior Percentage of the sum of (a)
the principal portion of the Scheduled Payment due on each Pledged Mortgage [on
the related Due Date], (b) the principal portion of the purchase price of each
Pledged Mortgage that was purchased by Redwood Trust or another person pursuant
to the Mortgage Loan Purchase Agreement (as defined herein) [or any optional
purchase by the Master Servicer or the Company of a defaulted Pledged Mortgage]
as of such Payment Date, (c) the Substitution Adjustment Amount in connection
with any Deleted Pledged Mortgage received with respect to such Payment Date,
(d) any Insurance Proceeds or Liquidation Proceeds allocable to recoveries of
principal of Pledged Mortgages that are not yet Liquidated Pledged Mortgages
received during the [calendar month] preceding the month of such Payment Date,
(e) with respect to each Pledged Mortgage that became a Liquidated Pledged
Mortgage during the [calendar month] preceding the month of such Payment Date,
the Stated Principal Balance of such Pledged Mortgage, and (f) all partial and
full principal prepayments by borrowers received during the [calendar month]
preceding the month of such Payment Date.
"Stated Principal Balance" means, as to any Pledged Mortgage and Due Date,
the unpaid principal balance of such Pledged Mortgage as of such Due Date, as
specified in the amortization schedule at the time relating thereto (before any
adjustment to such amortization schedule by reason of any moratorium or similar
waiver or grace period), after giving effect to any previous partial principal
prepayments and Liquidation Proceeds received and to the payment of principal
due on such Due Date and irrespective of any delinquency in payment by the
related Mortgagor. The "Pool Principal Balance" with respect to any Payment Date
equals the aggregate of the Stated Principal Balances of the Pledged Mortgages
outstanding on the Due Date in the month preceding the month of such Payment
Date.
The "Senior Percentage" for any Payment Date is the percentage equivalent
of a fraction the numerator of which is the Senior Class Principal Amount
immediately prior to such date and the denominator of which is the sum of (i)
the Senior Class Principal Amount, (ii) the Class B-1 Principal Amount, (iii)
the Class B-2 Principal Amount and (iv) the Invested Amount, in each case
immediately prior to such date. The "Class B-1 Percentage" for any Payment Date
is the percentage equivalent of a fraction the numerator of which is the Class
B-1 Principal Amount immediately prior to such date and the denominator of which
is the sum of (i) the Senior Class Principal Amount, (ii) the Class B-1
Principal Amount, (iii) the Class B-2 Principal Amount and (iv) the Invested
Amount, in each case immediately prior to such date. The "Class B-2 Percentage"
for any Payment Date is the percentage equivalent of a fraction the numerator of
which is the Class B-2 Principal Amount immediately prior to such date and the
denominator of which is the sum of (i) the Senior Class Principal Amount, (ii)
the Class B-1 Principal Amount, (iii) the Class B-2 Principal Amount and (iv)
the Invested Amount, in each case immediately prior to such date. The "Investor
Percentage" for any Payment Date will be calculated as the difference between
100% and the sum of the Senior Percentage, the Class B-1 Percentage and the
Class B-2 Percentage for such date.
SUBORDINATED PRINCIPAL PAYMENT AMOUNT. On each Payment Date, to the extent
of Available Funds therefor, the Class B-1 and Class B-2 Principal Payment
Amounts for such Payment Date will be distributed as principal of the Class B-1
and Class B-2 Bonds, respectively. The "Class B-1 Principal Payment Amount" and
the "Class B-2 Principal Payment Amount" for any Payment Date will equal the sum
of (i) the Class B-1 Percentage or the Class B-2 Percentage, as applicable, of
the sum of (a) the principal portion of the Scheduled Payment due on each
Pledged Mortgage [on the related Due Date], (b) the principal portion of the
purchase price of each Pledged Mortgage that was purchased by Redwood Trust or
another person pursuant to the Mortgage Loan Purchase Agreement [or by the
Master Servicer in connection with any optional purchase by the Master Servicer
or the Company of a defaulted Pledged Mortgage] as of such Payment Date, (c) the
Substitution Adjustment Amount in connection with any Deleted Pledged Mortgage
S-21
<PAGE> 23
received with respect to such Payment Date, (d) any Insurance Proceeds or
Liquidation Proceeds allocable to recoveries of principal of Pledged Mortgages
that are not yet Liquidated Pledged Mortgages received during the [calendar
month] preceding the month of such Payment Date, (e) with respect to each
Pledged Mortgage that became a Liquidated Pledged Mortgage during the [calendar
month] preceding the month of such Payment Date, the Stated Principal Balance of
such Pledged Mortgage and (f) all partial and full principal prepayments by
borrowers received during the [calendar month] preceding the month of such
Payment Date and (ii) any Class B-1 Principal Carryover Shortfall or Class B-2
Principal Carryover Shortfall, as the case may be. The "Class B-1 Principal
Carryover Shortfall" for any Payment Date will equal the excess of (a) the
Original Class B-1 Principal Amount reduced by all amounts previously
distributed to holders of the Class B-1 Bonds as payments of principal or Class
B-1 Principal Carryover Shortfall, over (b) the Class B-1 Principal Amount
immediately prior to such date. The "Class B-2 Principal Carryover Shortfall"
for any Payment Date will equal the excess of (a) the Original Class B-2
Principal Amount reduced by all amounts previously distributed to holders of the
Class B-2 Bonds as payments of principal or Class B-2 Principal Carryover
Shortfall, over (b) the Class B-2 Principal Amount immediately prior to such
date.
INVESTED AMOUNT PAYMENT. On each Payment Date, to the extent of Available
Funds therefor, the Invested Amount Payment for such Payment Date will be
distributed in reduction of the Invested Amount of the Investor Certificate. The
"Invested Amount Payment" for any Payment Date will equal the sum of (i) the
Investor Percentage of the sum of (a) the principal portion of the Scheduled
Payment due on each Pledged Mortgage [on the related Due Date], (b) the
principal portion of the purchase price of each Pledged Mortgage that was
purchased by Redwood Trust or another person pursuant to the Mortgage Loan
Purchase Agreement (as defined herein)[or any optional purchase by the Master
Servicer or the Company of a defaulted Pledged Mortgage] as of such Payment
Date, (c) the Substitution Adjustment Amount in connection with any Deleted
Pledged Mortgage received with respect to such Payment Date, (d) any Insurance
Proceeds or Liquidation Proceeds allocable to recoveries of principal of Pledged
Mortgages that are not yet Liquidated Pledged Mortgages received during the
[calendar month] preceding the month of such Payment Date, and (e) all partial
and full principal prepayments by borrowers received during the [calendar month]
preceding the month of such Payment Date, and (ii) with respect to each Pledged
Mortgage that became a Liquidated Pledged Mortgage during the [calendar month]
preceding the month of such Payment Date, the Liquidation Proceeds allocable to
principal received with respect to such Pledged Mortgage, after application of
such amounts pursuant to clause (e) of the definition of Senior Principal
Payment Amount, clause (e) of the definition of Class B-1 Principal Payment
Amount and clause (e) of the definition of Class B-2 Principal Payment Amount.
PRIORITY OF PAYMENTS AND ALLOCATION OF SHORTFALLS
Prior to the declaration that the Bonds are due and payable, on any Payment
Date Available Funds will be applied in the following order of priority:
first, to the Senior Interest Payment Amount;
second, to the Senior Principal Payment Amount;
third, to the Class B-1 Interest Payment Amount;
fourth, to the Class B-1 Principal Payment Amount;
fifth, to the Class B-2 Interest Payment Amount;
sixth, to the Class B-2 Principal Payment Amount;
seventh, to the Certificate Interest Payment Amount;
eighth, to the Invested Amount Payment; and
ninth, to the holder of the Investor Certificate, the balance of any
Available Funds remaining in the Bond Account.
S-22
<PAGE> 24
If a Realized Loss results in the Stated Principal Balances of the Pledged
Mortgages declining in an amount greater than the sum of (i) the payments of
principal on the Senior Bonds, (ii) the payments of principal on the Class B-1
Bonds, (iii) the payments of principal on the Class B-2 Bonds and (iv) the
payment in reduction of the Invested Amount, the Senior Percentage, the Class
B-1 Percentage, the Class B-2 Percentage and the Investor Percentage may shift
(as a result of their methods of computation as described above under
"-- Principal") such that funds available in the Distribution Account for
payments of principal on each future Payment Date may be allocated in a higher
ratio to the Offered Bonds as a result of such shortfall. This shift of the
Senior Percentage, the Class B-1 Percentage, the Class B-2 Percentage and the
Investor Percentage may cause the Offered Bonds to amortize more rapidly, and
the Class B-2 Bonds and the Investor Certificate to amortize more slowly, than
would otherwise have been the case in the absence of such shortfalls. An
investor should consider the risk that, in the case of any Offered Bond
purchased at a discount, a slower than anticipated rate of principal payments on
the Pledged Mortgages could result in an actual yield to such investor that is
lower than the anticipated yield and, in the case of any Offered Bond purchased
at a premium, a faster than anticipated rate of principal payments on the
Pledged Mortgages could result in an actual yield to such investor that is lower
than the anticipated yield. In addition, an investor in the Offered Bonds should
consider the risk that there can be no assurance that investors in the Offered
Bonds will be able to reinvest the payments thereon at yields equaling or
exceeding the yields on such Bonds. It is possible that yields on any such
reinvestments will be lower, and may be significantly lower, than the yields on
the Offered Bonds. See "RISK FACTORS -- Yield, Prepayment and Maturity Risks"
herein and "RISK FACTORS -- Prepayment and Yield Considerations" in the
Prospectus. In general, a "Realized Loss" means, with respect to a Liquidated
Pledged Mortgage, the amount by which the remaining unpaid principal balance of
the related Pledged Mortgage exceeds the amount of Liquidation Proceeds applied
to the principal balance of the related Pledged Mortgage. A "Liquidated Pledged
Mortgage" is a defaulted Pledged Mortgage as to which the Master Servicer has
determined that all recoverable liquidation and insurance proceeds have been
received.
Under the Indenture, an Event of Default will not occur solely due to the
occurrence of Shortfalls that affect only the Subordinated Bonds until all the
Senior Bonds have been paid in full and then only if Shortfalls on the
Subordinated Bonds have not been paid. In addition, an Event of Default by
reason of any Shortfalls that affect the Senior Bonds will occur on any Payment
Date only when the Pool Principal Balance is less than the principal amount of
the Senior Bonds outstanding after application of all available amounts on
deposit in the Distribution Account on such Payment Date. Nevertheless, at any
time following an Event of Default arising from a Shortfall affecting the Senior
Bonds, the holders of outstanding Bonds, whether Senior Bonds or Subordinated
Bonds, representing more than 50% in principal amount of all Bonds then
outstanding, may declare the Bonds due and payable or take any other action
pursuant to the terms of the Indenture. Until the Bonds have been declared due
and payable following an Event of Default, the holders of the Subordinated Bonds
may not request the Bond Trustee to take any action, other than the application
of available funds in the Distribution Account to pay principal and interest as
provided herein, and may not otherwise cause any action to be taken to enforce
the obligation of the Issuer to pay principal and interest on the Subordinated
Bonds. Additionally, prior to the Bonds being declared due and payable following
an Event of Default, the Senior Bonds will not accrue interest in any form on
the interest component of any Shortfall attributable to the Senior Bonds. Should
an Event of Default occur, payments will be allocated on each Payment Date in
accordance with the priorities described herein under "-- Principal", which
would otherwise be applicable on such Payment Date had an Event of Default not
occurred. See "THE INDENTURE" in the Prospectus.
STATED MATURITY
The Stated Maturity for each Class of Bonds is the date determined by the
Company which is years after the Payment Date immediately following the latest
maturity date of any Pledged Mortgage. The Stated Maturity of each Class of
Bonds is , 20 . See "DESCRIPTION OF THE BONDS -- Weighted Average
Life of the Offered Bonds" and "SECURITY FOR THE BONDS" herein and in the
Prospectus.
S-23
<PAGE> 25
STRUCTURING ASSUMPTIONS
Unless otherwise specified, the information in the tables in this
Prospectus Supplement has been prepared on the basis of the following assumed
characteristics of the Pledged Mortgages and the following additional
assumptions (collectively, the "Structuring Assumptions"): (i) the Pledged
Mortgage Pool consists of one Pledged Mortgage with the following
characteristics:
<TABLE>
<CAPTION>
ORIGINAL REMAINING
TERM TERM
IN TO
NET MATURITY MATURITY
PRINCIPAL MORTGAGE MORTGAGE (IN (IN
BALANCE RATE RATE MONTHS) MONTHS)
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
$ % %
</TABLE>
(ii) the Pledged Mortgages prepay at the specified constant Prepayment
Assumptions, (iii) no defaults in the payment by Mortgagors of principal of and
interest on the Pledged Mortgages are experienced, (iv) scheduled payments on
the Pledged Mortgages are received on the first day of each month commencing in
the calendar month following the Closing Date and are computed prior to giving
effect to prepayments received on the last day of the prior month, (v)
prepayments are allocated as described herein without giving effect to loss and
delinquency tests, (vi) there are no Net Interest Shortfalls and prepayments
represent prepayments in full of individual Pledged Mortgages and are received
on the last day of each month, commencing in the calendar month of the Closing
Date, (vii) the scheduled monthly payment for each Pledged Mortgage has been
calculated based on the assumed mortgage loan characteristics described in item
(i) above such that each such mortgage loan will amortize in amounts sufficient
to repay the principal balance of such assumed mortgage loan by its remaining
term to maturity, (viii) the initial Class Principal Amount or Invested Amount,
as applicable, of each Class of Bonds and the Investor Certificate,
respectively, is as set forth on the cover page hereof and under
"SUMMARY -- Securities other than the Offered Bonds" herein, (ix) interest
accrues on each Class of Bonds and the Investor Certificate at the applicable
interest rate described on the cover hereof or described herein, (x) payments in
respect of the Bonds and the Investor Certificate are received in cash on the
th day of each month commencing in the calendar month following the Closing
Date, (xi) the closing date of the sale of the Offered Bonds is ,
199 , (xii) Redwood Trust is not required to purchase or substitute for any
Pledged Mortgage and (xiii) [the Master Servicer or the Company does not
exercise any option to purchase any Pledged Mortgages described herein under
"-- Optional Purchase of Defaulted Loans"] and the Issuer does not exercise any
option to redeem the Bonds as described herein under " -- Redemption at the
Option of the Issuer." While it is assumed that each of the Pledged Mortgages
prepays at the specified constant Prepayment Assumptions, this is not likely to
be the case. Moreover, discrepancies exist between the characteristics of the
actual Pledged Mortgages which will be delivered to the Bond Trustee and
characteristics of the Pledged Mortgages assumed in preparing the tables herein.
Prepayments of mortgage loans commonly are measured relative to a
prepayment standard or model. The model used in this Prospectus Supplement (the
"Prepayment Assumption") represents an assumed rate of prepayment each month
relevant to the then outstanding principal balance of a pool of mortgage loans.
The Prepayment Assumption does not purport to be either an historical
description of the prepayment experience of any pool of mortgage loans or a
prediction of the anticipated rate of prepayment of any pool of mortgage loans,
including the Pledged Mortgages. A 100% Prepayment Assumption assumes a Constant
Prepayment Rate ("CPR") of % per annum of the then outstanding principal
balance of such mortgage loans in the first month of the life of the mortgage
loans and an additional % per annum in each month thereafter until the
month. Beginning in the month and in each month thereafter during the
life of such mortgage loans, a 100% Prepayment Assumption assumes a CPR of
% per annum each month. As used in the tables below, a % Prepayment
Assumption assumes a prepayment rate equal to % of the Prepayment
Assumption. Correspondingly, a % Prepayment Assumption assumes a prepayment
rate equal to % of the Prepayment Assumption, and so forth.
S-24
<PAGE> 26
OPTIONAL PURCHASE OF DEFAULTED LOANS
The Master Servicer or the Company may, at its option, purchase from the
Issuer any Pledged Mortgage which is delinquent in payment by days or more.
Any such purchase will be at a price equal to 100% of the Stated Principal
Balance of such Pledged Mortgage plus accrued interest thereon at the applicable
Mortgage Rate from the date through which interest was last paid by the related
Mortgagor or advanced to the first day of the month in which such amount is to
be distributed.
WEIGHTED AVERAGE LIVES OF THE OFFERED BONDS
The weighted average life of an Offered Bond is determined by (a)
multiplying the amount of the reduction, if any, of the Class Principal Amount
of such Bond on each Payment Date by the number of years from the date of
issuance to such Payment Date, (b) summing the results and (c) dividing the sum
by the aggregate amount of the reductions in Class Principal Amount of such Bond
referred to in clause (a).
For a discussion of the factors which may influence the rate of payments
(including prepayments) of the Pledged Mortgages, see "RISK FACTORS -- Yield,
Prepayment and Maturity Risks" herein and "RISK FACTORS -- Prepayment and Yield
Considerations" in the Prospectus.
In general, the weighted average lives of the Offered Bonds will be
shortened if the level of prepayments of principal of the Pledged Mortgages
increases. However, the weighted average lives of the Offered Bonds will depend
upon a variety of other factors, including the timing of changes in such rate of
principal payments and the priority sequence of distributions of principal of
the Classes of Bonds. See "DESCRIPTION OF THE BONDS -- Principal" herein.
The interaction of the foregoing factors may have different effects on the
Senior Bonds and the Class B-1 Bonds and the effects on any Class may vary at
different times during the life of such Class. Accordingly, no assurance can be
given as to the weighted average life of any Class of Offered Bonds. Further, to
the extent the prices of the Offered Bonds represent discounts or premiums to
their respective original Class Principal Amounts, variability in the weighted
average lives of such Classes of Bonds will result in variability in the related
yields to maturity. For an example of how the weighted average lives of the
Classes of Offered Bonds may be affected at various constant Prepayment
Assumptions, see the Decrement Tables below.
DECREMENT TABLES
The following tables indicate the percentages of the initial Class
Principal Amounts of the Classes of Offered Bonds that would be outstanding
after each of the dates shown at various constant Prepayment Assumptions and the
corresponding weighted average lives of such Classes. The tables have been
prepared on the basis of the Structuring Assumptions. It is not likely that (i)
all of the Pledged Mortgages will have the characteristics assumed, (ii) all of
the Pledged Mortgages will prepay at the constant Prepayment Assumptions
specified in the tables or at any constant Prepayment Assumption or (iii) all of
the Pledged Mortgages will prepay at the same rate. Moreover, the diverse
remaining terms to maturity of the Pledged Mortgages could produce slower or
faster principal payments than indicated in the tables at the specified constant
Prepayment Assumptions, even if the weighted average remaining term to maturity
of the Pledged Mortgages is consistent with the remaining terms to maturity of
the Pledged Mortgages specified in the Structuring Assumptions.
PERCENT OF INITIAL CLASS PRINCIPAL AMOUNTS OUTSTANDING
[Decrement Tables]
REDEMPTION AT THE OPTION OF THE ISSUER
The Bonds may be redeemed in whole, but not in part, at the Issuer's
option, on any Payment Date on or after the earlier of (a) years after the
initial issuance of the Bonds and (b) the Payment Date on which the sum of (i)
the Senior Class Principal Amount (ii) the Class B-1 Principal Amount, (iii) the
Class B-2
S-25
<PAGE> 27
Principal Amount and (iv) the Invested Amount, after giving effect to payments
to be made on such Payment Date, is or less of the aggregate of the Stated
Principal Balances of the Pledged Mortgages as of the Cut-off Date, at a
redemption price equal to 100% of the unpaid principal amount of such Bonds
(including, in the case of the Class B-1 or Class B-2 Bonds, any unpaid Class
B-1 or Class B-2 Principal Carryover Shortfall), plus accrued and unpaid
interest at the applicable Bond Interest Rate through the month preceding the
month in which such optional redemption date occurs. The Bonds are not otherwise
subject to call or redemption at the option of the Issuer nor are they subject
to special redemption. See "DESCRIPTION OF THE BONDS -- Redemption at the Option
of the Issuer" in the Prospectus.
Notice of any redemption to be made at the option of the Issuer must be
given by the Issuer to the Bond Trustee not less than 30 days prior to the
redemption date and must be mailed by the Issuer or the Bond Trustee to affected
Bondholders at least ten days prior to the redemption date.
CONTROLLING CLASS UNDER THE INDENTURE
For the purposes described in the Prospectus under the headings "The
Indenture -- Modification of Indenture," "-- Events of Default" and "Rights Upon
Event of Default," the "Controlling Class" shall be the Class A-1 Bondholders
or, if the Class A-1 Bonds are no longer outstanding, the holders of the most
senior Class of Subordinated Bonds then outstanding.
CREDIT ENHANCEMENT
Credit enhancement for the Senior Bonds will be provided by the
Subordinated Bonds and by the Investor Certificate. Credit enhancement for the
Class B-1 Bonds will be provided by the Class B-2 Bonds and by the Investor
Certificate. Credit Enhancement for the Class B-2 Bonds will be provided by the
Investor Certificate. The rights of holders of the Subordinated Bonds and the
Investor Certificate to receive payments with respect to the Pledged Mortgages
will be subordinated to such rights of the holders of the Senior Bonds, the
rights of the holders of the Class B-2 Bonds and the Investor Certificate will
be subordinated to such rights of the holders of the Class B-1 Bonds, and the
rights of the holder of the Investor Certificate will be subordinated to such
rights of the holders of the Class B-2 Bonds, in each case only to the extent
described herein.
The subordination of (i) the Subordinated Bonds and the Investor
Certificate to the Senior Bonds, (ii) the Class B-2 Bonds and the Investor
Certificate to the Class B-1 Bonds and (iii) the Investor Certificate to the
Class B-2 Bonds are each intended to increase the likelihood of timely receipt
by the holders of Bonds with higher relative payment priority of the maximum
amount to which they are entitled on any Payment Date and to provide such
holders protection against losses resulting from defaults on Pledged Mortgages
to the extent described herein. However, the amount of protection afforded by
subordination may be exhausted and Shortfalls in payments on the Offered Bonds
could result. Any losses realized on the Pledged Mortgages in excess of the
related available subordination amount will result in losses on the Offered
Bonds. See "DESCRIPTION OF THE BONDS -- Priority of Payments and Allocation of
Shortfalls" herein.
SECURITY FOR THE BONDS
GENERAL
The Bonds will be secured by assignments to the Bond Trustee of collateral
consisting of (i) the Pledged Mortgages, (ii) funds on deposit in the Bond
Account and the Distribution Account, (iii) the Issuer's rights under the Master
Servicing Agreement, (iv) [the Issuer's rights under any Servicing Agreement,]
(v) the Issuer's rights under the Mortgage Loan Purchase Agreement (as defined
herein), and (vi) the proceeds of all of the foregoing.
S-26
<PAGE> 28
THE PLEDGED MORTGAGES
The Bonds will be secured by a pool (the "Pledged Mortgage Pool") of
-year conventional mortgage loans secured by first liens on one- to
four-family residential properties (each, a "Mortgaged Property"). None of the
Pledged Mortgages will be guaranteed by any governmental agency. All of the
Pledged Mortgages will have been deposited with the Issuer by the Company which,
in turn, will have acquired them from Redwood Trust pursuant to an agreement
(the "Mortgage Loan Purchase Agreement") between the Company and Redwood Trust.
All of the Pledged Mortgages will have been acquired by Redwood Trust in the
ordinary course of its business and substantially in accordance with the
underwriting criteria specified herein.
GENERAL. Under the Mortgage Loan Purchase Agreement, Redwood Trust will
make certain representations, warranties and covenants to the Company relating
to, among other things, the due execution and enforceability of the Mortgage
Loan Purchase Agreement and certain characteristics of the Pledged Mortgages
and, subject to the limitations described below under "-- Assignment of Pledged
Mortgages," will be obligated to purchase or substitute a similar mortgage loan
for any Pledged Mortgage as to which there exists deficient documentation or an
uncured material breach of any such representation, warranty or covenant. See
"MORTGAGE LOAN PROGRAM -- Representations by Sellers; Repurchases" in the
Prospectus. Under the Deposit Trust Agreement, the Company will assign all of
its rights under the Mortgage Loan Purchase Agreement to the Issuer. Under the
Indenture, the Issuer will pledge all its right, title and interest in and to
such representations, warranties and covenants (including Redwood Trust's
purchase obligation) to the Bond Trustee for the benefit of the Bondholders. The
Issuer will make no representations or warranties with respect to the Pledged
Mortgages and will have no obligation to repurchase or substitute Pledged
Mortgages with deficient documentation or which are otherwise defective. The
obligations of Redwood Trust with respect to the Bonds are limited to Redwood
Trust's obligation to purchase or substitute Pledged Mortgages with deficient
documentation or which are otherwise defective under the Mortgage Loan Purchase
Agreement.
Certain information with respect to the Pledged Mortgage Pool is set forth
below. Prior to the Closing Date, Pledged Mortgages may be removed from the
collateral and other Pledged Mortgages may be substituted therefor. The Issuer
believes that the information set forth herein with respect to the Pledged
Mortgages as presently constituted is representative of the characteristics of
the Pledged Mortgages as they will be constituted at the Closing Date, although
certain characteristics of the Pledged Mortgages in the Pledged Mortgage Pool
may vary. Unless otherwise indicated, information presented below expressed as a
percentage (other than rates of interest) are approximate percentages based on
the Stated Principal Balances of the Pledged Mortgages as of the Cut-off Date.
As of the Cut-off Date, the aggregate of the Stated Principal Balances of
the Pledged Mortgages is expected to be approximately $ (the "Cut-off
Date Pool Principal Balance"). [The Pledged Mortgages provide for the
amortization of the amount financed over a series of substantially equal monthly
payments.] All of the Pledged Mortgages provide for payments due on the first
day of each month (the "Due Date"). At origination, substantially all of the
Pledged Mortgages had stated terms to maturity of years. Scheduled monthly
payments made by the Mortgagors on the Pledged Mortgages ("Scheduled Payments")
either earlier or later than the scheduled Due Dates thereof will not affect the
amortization schedule or the relative application of such payments to principal
and interest. [Mortgagors may prepay their Pledged Mortgages at any time without
penalty.]
Each Pledged Mortgage will bear interest at a [fixed][adjustable] Mortgage
Rate. [Each Pledged Mortgage will bear interest at a Mortgage Rate, subject to
annual adjustment on the first day of the month specified in the related
Mortgage Note (each such date, an "Adjustment Date"), equal to the sum, rounded
to the nearest of one percentage point ( %), of (i)
(the "Index") as made available by the
and most recently available as of days prior to the
Adjustment Date and (ii) a fixed percentage amount specified in the related
Mortgage Note (the "Margin") provided, however, that the Mortgage Rate will not
increase or decrease by more than percentage points ( %), except for
Pledged Mortgages, representing approximately % of the Cut-off Date
Pool Principal Balance which will not increase or decrease by more than
percentage points ( %),
S-27
<PAGE> 29
on the first Adjustment Date or more than percentage points ( %) on
any Adjustment Date thereafter (the "Periodic Rate Cap"). The Index with respect
to any Bond Interest Rate and any Payment Date shall be the Index in effect as
of the first day of the month preceding the month in which such Payment Date
occurs.]
[All of the Pledged Mortgages provide that over the life of the Pledged
Mortgage the Mortgage Rate will in no event increase by more than the Mortgage
Rate fixed at origination plus a fixed number of percentage points specified in
the related Mortgage Note (such rate, the "Maximum Rate"). None of the Pledged
Mortgages are subject to minimum Mortgage Rates. Effective with the first
payment due on a Pledged Mortgage after each related Adjustment Date, the
Scheduled Payment will be adjusted to an amount which will pay interest at the
adjusted rate and fully amortize the then-outstanding principal balance of the
Pledged Mortgage over its remaining term. If the Index ceases to be published or
is otherwise unavailable, the Master Servicer will select an alternative index
based upon comparable information.]
Each Pledged Mortgage is, by its terms, assumable in connection with a
transfer of the related Mortgaged Property if the proposed transferee submits
certain information to the Master Servicer required to enable it to evaluate the
transferee's ability to repay the Pledged Mortgage and if the Master Servicer
reasonably determines that the security for the Pledged Mortgage would not be
impaired by the assumption. See "RISK FACTORS" herein and in the Prospectus.
Each Pledged Mortgage was originated on or after , 19 .
The latest stated maturity date of any Pledged Mortgage is ,
20 . The earliest stated maturity date of any Pledged Mortgage is ,
20 .
[As of the Cut-off Date, no Pledged Mortgage was delinquent more than
days.]
[None of the Pledged Mortgages are subject to buydown agreements.] [No
Pledged Mortgage provides for deferred interest or negative amortization.]
No Pledged Mortgage had a Loan-to-Value Ratio at origination of more than
%. [Except for Pledged Mortgages, representing approximately %
of the Cut-off Date Pool Principal Balance,] each Pledged Mortgage with a
Loan-to-Value Ratio at origination of greater than 80% is covered by a primary
mortgage insurance policy (each a "Primary Mortgage Insurance Policy") issued by
a mortgage insurance company acceptable to the Federal National Mortgage
Association ("FNMA"), the Federal Home Loan Mortgage Corporation ("FHLMC") or
any nationally recognized statistical rating organization, which policy provides
coverage of a portion of the original principal balance of the related Pledged
Mortgage equal to the product of the original principal balance thereof and a
fraction, the numerator of which is the excess of the original principal balance
of the related Pledged Mortgage over 75% of the lesser of the appraised value
and selling price of the related Mortgage Property and the denominator of which
is the original principal balance of the related Pledged Mortgage, plus accrued
interest thereon and related foreclosure expenses. No such Primary Mortgage
Insurance Policy will be required with respect to any such Pledged Mortgage
after the date on which the related Loan-to-Value Ratio is 80% or less or, based
on a new appraisal, the principal balance of such Pledged Mortgage represents
80% or less of the new appraised value. See "-- Underwriting Standards" herein.
The "Loan-to-Value Ratio" of a Pledged Mortgage at any given time is a
fraction, expressed as a percentage, the numerator of which is the principal
balance of the related Pledged Mortgage at the date of determination and the
denominator of which is (a) in the case of a purchase, the lesser of the selling
price of the Mortgaged Property and its appraised value determined in an
appraisal obtained by the originator at origination of such Pledged Mortgage, or
(b) in the case of a refinance, the appraised value of the Mortgaged Property at
the time of such refinance. No assurance can be given that the value of any
Mortgaged Property has remained or will remain at the level that existed on the
appraisal or sales date. If residential real estate values generally or in a
particular geographic area decline, the Loan-to-Value Ratios might not be a
reliable indicator of the rates of delinquencies, foreclosures and losses that
could occur with respect to such Pledged Mortgages.
S-28
<PAGE> 30
The following information sets forth in tabular format certain information,
as of the Cut-off Date, as to the Pledged Mortgages. Other than with respect to
rates of interest, percentages (approximate) are stated by Stated Principal
Balance of the Pledged Mortgages as of the Cut-off Date and have been rounded in
order to total 100%.
ORIGINAL LOAN-TO-VALUE RATIOS(1)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AGGREGATE PERCENT
NUMBER OF PRINCIPAL OF
ORIGINAL LOAN-TO-VALUE PLEDGED BALANCE MORTGAGE
RATIOS(%) MORTGAGES OUTSTANDING POOL
- ------------------------------------------------------- --------- ----------- --------
<S> <C> <C> <C>
$ %
--- --- ---
Total............................................. $ %
=== === ===
</TABLE>
- ---------------
(1) The weighted average original Loan-to-Value Ratio of the Pledged Mortgages
is expected to be approximately %.
ORIGINAL TERMS TO MATURITY(1)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AGGREGATE PERCENT
NUMBER OF PRINCIPAL OF
ORIGINAL TERM TO PLEDGED BALANCE MORTGAGE
MATURITY (MONTHS) MORTGAGES OUTSTANDING POOL
- ------------------------------------------------------- --------- ----------- --------
<S> <C> <C> <C>
$ %
--- --- ---
Total............................................. $ %
=== === ===
</TABLE>
- ---------------
(1) As of the Cut-off Date, the weighted average remaining term to maturity of
the Pledged Mortgages is expected to be approximately months.
S-29
<PAGE> 31
CURRENT PLEDGED MORTGAGE PRINCIPAL BALANCES(1)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AGGREGATE PERCENT
RANGE OF CURRENT NUMBER OF PRINCIPAL OF
PLEDGED MORTGAGE PLEDGED BALANCE MORTGAGE
PRINCIPAL BALANCES MORTGAGES OUTSTANDING POOL
- ------------------------------------------------------- --------- ----------- --------
<S> <C> <C> <C>
$ %
--- --- ---
Total............................................. $ %
=== === ===
</TABLE>
- ---------------
(1) As of the Cut-off Date, the average current Pledged Mortgages principal
balance is expected to be approximately $ .
CURRENT MORTGAGE RATES(1)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AGGREGATE PERCENT
NUMBER OF PRINCIPAL OF
PLEDGED BALANCE MORTGAGE
CURRENT MORTGAGE RATES (%) MORTGAGES OUTSTANDING POOL
- ------------------------------------------------------- --------- ----------- --------
<S> <C> <C> <C>
$ %
--- --- ---
Total............................................. $ %
=== === ===
</TABLE>
- ---------------
(1) As of the Cut-off Date, the weighted average Mortgage Rate of the Pledged
Mortgages is expected to be approximately % per annum.
S-30
<PAGE> 32
PURPOSE OF PLEDGED MORTGAGES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AGGREGATE PERCENT
NUMBER OF PRINCIPAL OF
PLEDGED BALANCE MORTGAGE
LOAN PURPOSE MORTGAGES OUTSTANDING POOL
- ------------------------------------------------------- --------- ----------- --------
<S> <C> <C> <C>
Purchase............................................... $ %
Refinance (Rate or Term)...............................
Refinance (Cash-out)...................................
--- --- ---
Total............................................. $ %
=== === ===
</TABLE>
STATE DISTRIBUTION OF MORTGAGED PROPERTIES(1)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AGGREGATE PERCENT
NUMBER OF PRINCIPAL OF
PLEDGED BALANCE MORTGAGE
STATE MORTGAGES OUTSTANDING POOL
- ------------------------------------------------------- --------- ----------- --------
<S> <C> <C> <C>
$ %
Other(1)...............................................
--- --- ---
Total............................................. $ %
=== === ===
</TABLE>
- ---------------
(1) Other includes other states, and the District of Columbia, with under %
concentrations individually. No more than approximately % of the Pledged
Mortgages will be secured by Mortgaged Properties located in any one postal
zip code area.
DOCUMENTATION FOR PLEDGED MORTGAGES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AGGREGATE PERCENT
NUMBER OF PRINCIPAL OF
PLEDGED BALANCE MORTGAGE
TYPE OF PROGRAM MORTGAGES OUTSTANDING POOL
- ------------------------------------------------------- --------- ----------- --------
<S> <C> <C> <C>
Full................................................... $ %
Alternative............................................
Reduced................................................
--- --- ---
Total............................................. $ %
=== === ===
</TABLE>
S-31
<PAGE> 33
OCCUPANCY TYPES(1)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AGGREGATE PERCENT
NUMBER OF PRINCIPAL OF
PLEDGED BALANCE MORTGAGE
OCCUPANCY TYPE MORTGAGES OUTSTANDING POOL
- ------------------------------------------------------- --------- ----------- --------
<S> <C> <C> <C>
Primary Home........................................... $ %
Investor...............................................
Second Home............................................
--- --- ---
Total............................................. $ %
=== === ===
</TABLE>
- ---------------
(1) Based upon representations of the related Mortgagors at the time of
origination.
PROPERTY TYPE
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AGGREGATE PERCENT
NUMBER OF PRINCIPAL OF
PLEDGED BALANCE MORTGAGE
PROPERTY TYPE MORTGAGES OUTSTANDING POOL
- ------------------------------------------------------- --------- ----------- --------
<S> <C> <C> <C>
Single Family.......................................... $ %
Planned Unit Development Condominium...................
2-4 Units..............................................
--- --- ---
Total............................................. $ %
=== === ===
</TABLE>
MAXIMUM MORTGAGE RATES(1)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AGGREGATE PERCENT
NUMBER OF PRINCIPAL OF
PLEDGED BALANCE MORTGAGE
LIFETIME CAPS (%) MORTGAGES OUTSTANDING POOL
- ------------------------------------------------------- --------- ----------- --------
<S> <C> <C> <C>
$ %
--- --- ---
Total............................................. $ %
=== === ===
</TABLE>
- ---------------
(1) As of the Cut-off Date, the weighted average Lifetime Cap of the Pledged
Mortgages is expected to be approximately % per annum.
S-32
<PAGE> 34
MARGIN(1)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AGGREGATE PERCENT
NUMBER OF PRINCIPAL OF
PLEDGED BALANCE MORTGAGE
MARGIN MORTGAGES OUTSTANDING POOL
- ------------------------------------------------------- --------- ----------- --------
<S> <C> <C> <C>
$ %
--- --- ---
Total............................................. $ %
=== === ===
</TABLE>
- ---------------
(1) As of the Cut-off Date, the weighted average margin of the Pledged Mortgages
is expected to be approximately %.
NEXT NOTE RATE ADJUSTMENT DATES(1)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AGGREGATE PERCENT
NUMBER OF PRINCIPAL OF
PLEDGED BALANCE MORTGAGE
MONTHS MORTGAGES OUTSTANDING POOL
- ------------------------------------------------------- --------- ----------- --------
<S> <C> <C> <C>
$ %
--- --- ---
Total............................................. $ %
=== === ===
</TABLE>
- ---------------
(1) As of the Cut-off Date, the weighted average months to the next Adjustment
Date of the Pledged Mortgages was approximately months.
THE INDEX
[DESCRIPTION OF INDEX]
ASSIGNMENT OF THE PLEDGED MORTGAGES
Pursuant to the Indenture, the Issuer on the Closing Date will pledge,
transfer, assign, set over and otherwise convey without recourse to the Bond
Trustee in trust for the benefit of the Bondholders all right, title and
interest of the Issuer in and to each Pledged Mortgage and all right, title and
interest in and to all other assets included in the Collateral, including all
principal and interest received on or with respect to the Pledged Mortgages,
exclusive of principal and interest due on or prior to the Cut-off Date.
S-33
<PAGE> 35
In connection with such transfer and assignment, the Issuer will deliver or
cause to be delivered to the Bond Trustee, or a custodian for the Bond Trustee,
among other things, the original promissory note (the "Mortgage Note") (and any
modification or amendment thereto) endorsed in blank without recourse, the
original instrument creating a first lien on the related Mortgaged Property (the
"Mortgage") with evidence of recording indicated thereon, an assignment in
recordable form of the Mortgage, the title policy with respect to the related
Mortgaged Property and, if applicable, all recorded intervening assignments of
the Mortgage and any riders or modifications to such Mortgage Note and Mortgage
(except for any such document not returned from the public recording office,
which will be delivered to the Bond Trustee as soon as the same is available to
the Issuer) (collectively, the "Mortgage File"). [Assignments of the Pledged
Mortgages to the Bond Trustee (or its nominee) will be recorded in the
appropriate public office for real property records, except in states such as
California where, in the opinion of counsel, such recording is not required to
protect the Bond Trustee's interest in the Pledged Mortgages against the claim
of any subsequent transferee or any successor to or creditor of the Issuer.]
The Bond Trustee will review each Mortgage File within days of the
Closing Date (or promptly after the Bond Trustee's receipt of any document
permitted to be delivered after the Closing Date) and if any document in a
Mortgage File is found to be missing or defective in a material respect and the
Issuer does not cure such defect within days of notice thereof from the
Bond Trustee (or within such longer period not to exceed days after the
Closing Date as provided in the Mortgage Loan Purchase Agreement in the case of
missing documents not returned from the public recording office), Redwood Trust
will be obligated to purchase the related Pledged Mortgage. Rather than purchase
the Pledged Mortgage as provided above, Redwood Trust may remove such Pledged
Mortgage (a "Deleted Pledged Mortgage") from the Collateral and substitute in
its place another mortgage loan (a "Replacement Pledged Mortgage"). Any
Replacement Pledged Mortgage generally will, on the date of substitution, among
other characteristics set forth in the Mortgage Loan Purchase Agreement, (i)
have a principal balance, after deduction of all Scheduled Payments due in the
month of substitution, not in excess of, and not more than % less than, the
Stated Principal Balance of the Deleted Pledged Mortgage (the amount of any
shortfall to be deposited in the Bond Account by Redwood and held for
distribution to the Bondholders on the related Payment Date (a "Substitution
Adjustment Amount")), (ii) have a Mortgage Rate not lower than, and not more
than % per annum higher than, that of the Deleted Pledged Mortgage, (iii)
have a Loan-to-Value Ratio not higher than that of the Deleted Pledged Mortgage,
(iv) have a remaining term to maturity not greater than (and not more than
less than) that of the Deleted Pledged Mortgage, and (v) comply with all of the
representations and warranties set forth in the Mortgage Loan Purchase Agreement
as of the date of substitution. This cure, purchase or substitution obligation
constitutes the sole remedy available to Bondholders or the Bond Trustee for
omission of, or a material defect in, a Pledged Mortgage document.
UNDERWRITING STANDARDS
All of the Pledged Mortgages have been purchased by Redwood Trust in the
ordinary course of business directly from banks, savings and loan associations,
mortgage bankers and other mortgage loan originators (each, an "Originator"), or
in the secondary mortgage market. Redwood Trust approves individual institutions
as eligible Originators after an evaluation of certain criteria, including the
Originator's mortgage origination and servicing experience and financial
stability. Each Originator and/or the entity from which Redwood Trust purchased
the Pledged Mortgages will represent and warrant that all Pledged Mortgages
originated and/or sold by it will have been underwritten in accordance with
standards consistent with those utilized by mortgage lenders generally during
the period of origination.
Underwriting standards are applied by or on behalf of a lender to evaluate
the borrower's credit standing and repayment ability, and the value and adequacy
of the related Mortgaged Property as collateral. In general, a prospective
borrower applying for a loan is required to fill out a detailed application
designed to provide to the underwriting officer pertinent credit information. As
part of the description of the borrower's financial condition, the borrower
generally is required to provide a current list of assets and liabilities and a
statement of income and expense, as well as an authorization to apply for a
credit report which summarizes the borrower's credit history with local
merchants and lenders and any record of bankruptcy. In most cases, an employment
S-34
<PAGE> 36
verification is obtained from an independent source (typically the borrower's
employer) which verification reports, among other things, the length of
employment with that organization, the current salary, and whether it is
expected that the borrower will continue such employment in the future. If a
prospective borrower is self-employed, the borrower may be required to submit
copies of signed tax returns. The borrower may also be required to authorize
verification of deposits at financial institutions where the borrower has demand
or savings accounts. See "MORTGAGE LOAN PROGRAM -- Underwriting Standards" in
the Prospectus.
SERVICING OF THE PLEDGED MORTGAGES
THE MASTER SERVICER
will act as Master Servicer. The principal executive offices of
are located at .
The Master Servicer will be responsible for servicing the Pledged Mortgages
in accordance with the terms set forth in the Master Servicing Agreement. The
Master Servicer intends to perform its servicing obligations under the Master
Servicing Agreement through one or more servicers (each, a "Servicer"). On or
prior to the Closing Date, the Master Servicer will enter into or be assigned a
mortgage servicing agreement (each, a "Servicing Agreement") with each Servicer
pursuant to which such Servicer will perform certain servicing functions with
respect to the Pledged Mortgages. The Master Servicer will administer and
supervise the performance of each Servicer, who may in turn be administering and
supervising the performance of the subservicers of the Pledged Mortgages.
Notwithstanding any such servicing arrangements, the Master Servicer will remain
liable for its servicing duties and obligations under the Master Servicing
Agreement.
SERVICING AND COLLECTION PROCEDURES
On or prior to the Closing Date, the Master Servicer will enter into a
separate Servicing Agreement with each Servicer to perform, as independent
contractor, servicing functions for the Master Servicer subject to its
supervision. Such servicing functions include collection and remittance of
principal and interest payments, administration of mortgage escrow accounts,
collection of certain insurance claims and, if necessary, foreclosure. The
Master Servicer may permit Servicers to contract with subservicers to perform
some or all of the Servicer's servicing duties, but the Servicers will not
thereby be released from their obligations under the Servicing Agreement. The
Master Servicer also may enter into subservicing agreements directly with an
affiliate of a Servicer or permit a Servicer to transfer its servicing rights
and obligations to a third party. In such instances, the affiliate or third
party, as the case may be, will perform servicing functions comparable to those
normally performed by the Servicer as described above, and the Servicer will not
be obligated to perform such servicing functions. When used herein with respect
to servicing obligations, the term Servicer includes any such affiliate or third
party. The Master Servicer may perform certain supervisory functions with
respect to servicing by the Servicer directly or through an agent or independent
contractor and the Master Servicer will be responsible for administering and
servicing the Pledged Mortgages pursuant to the Master Servicing Agreement.
On or before the Closing Date, the Master Servicer will establish one or
more accounts (the "Bond Account") into which each Servicer will remit
collections on the mortgage loans serviced by it (net of its related servicing
compensation). For purposes of the Master Servicing Agreement, , as
Master Servicer, will be deemed to have received any amounts with respect to the
Pledged Mortgages that are received by a Servicer regardless of whether such
amounts are remitted by the Servicer to the Master Servicer. The Master Servicer
has reserved the right to remove the Servicer servicing any Pledged Mortgage at
any time and will exercise that right if it considers such removal to be in the
best interest of the Bondholders. In the event that the Master Servicer removes
a Servicer, the Master Servicer will continue to be responsible for servicing
the related Pledged Mortgages.
S-35
<PAGE> 37
FORECLOSURE, DELINQUENCY AND LOSS EXPERIENCE
The following table summarizes the delinquency, foreclosure and loss
experience, respectively, as of December 31, 199 , December 31, 199 and
December 31, 199 on approximately $ , $ and $ ,
respectively, in outstanding principal balance of conventional mortgage loans
master serviced by commenced master servicing
conventional mortgage loans during . The delinquency and foreclosure
percentages and the loss experience may be affected by the size and relative
lack of seasoning of the servicing portfolio because many of such mortgage loans
were not outstanding long enough to give rise to some or all of the indicated
periods of delinquency. Accordingly, the information should not be considered as
a basis for assessing the likelihood, amount or severity of delinquency or
losses on the Pledged Mortgages, and no assurances can be given that the
foreclosure, delinquency and loss experience presented in the table below will
be indicative of such experience on the Pledged Mortgages in the future:
<TABLE>
<CAPTION>
AS OF AS OF AS OF
DECEMBER 31, DECEMBER 31, DECEMBER 31,
199 199 199
------------ ------------ ------------
<S> <C> <C> <C>
Total Number of Conventional Mortgage Loans in
Portfolio...........................................
Delinquent Mortgage Loans and Pending Foreclosures at
Period End(1):......................................
30-59 days..........................................
60-89 days..........................................
90 days or more (excluding foreclosures)............
Total Delinquencies.................................
Foreclosures pending................................
Total delinquencies and foreclosures pending........
Net Loss(2).........................................
</TABLE>
- ---------------
(1) As a percentage of the total number of loans master serviced.
(2) There is no material difference between gross loss and net loss.
There can be no assurance that factors beyond the Master Servicer's
control, such as national or local economic conditions or downturns in the real
estate markets of its lending areas, will not result in increased rates of
delinquencies and foreclosure losses in the future. [For example, over the last
several years there has been a general deterioration of the real estate market
and weakening of the economy in many regions of the country, including
California. The general deterioration of the real estate market has been
reflected in increases in delinquencies of loans secured by real estate, slower
absorption rates of real estate into the market and lower sales prices for real
estate. The general weakening of the economy has been reflected in decreases in
the financial strength of borrowers and decreases in the value of collateral
serving as collateral for loans. If the real estate market and economy continue
to decline, the Master Servicer may experience an increase in delinquencies on
the loans it services and higher net losses on liquidated loans.]
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
The Expense Fees with respect to the Pledged Mortgages are payable out of
the interest payments on each Pledged Mortgage. The Expense Fees will vary from
Pledged Mortgage to Pledged Mortgage. The rate at which the Expense Fees accrue
(the "Expense Fee Rate") will range from % to % per annum, in each
case of the Stated Principal Balance of the related Pledged Mortgage. As of the
Cut-off Date, the weighted average Expense Fee Rate equaled approximately
%. The Expense Fees consist of (a) master servicing compensation payable to
the Master Servicer in respect of its master servicing activities (the "Master
Servicing Fee"), (b) servicing compensation payable to the Servicers in respect
of their servicing activities (the "Servicing Fee") and (c) fees payable to the
Bond Trustee in respect of its activities as trustee under the Indenture. The
Master Servicing Fee will be % per annum of the Stated Principal Balance of
each Pledged Mortgage. The Servicing Fee payable to each Servicer will vary from
Pledged Mortgage to Pledged Mortgage and will range from % to % per
annum, in each case of the Stated Principal
S-36
<PAGE> 38
Balance of the related Pledged Mortgage serviced by such Servicer. The Master
Servicer is obligated to pay certain ongoing expenses associated with the
Pledged Mortgages and incurred by the Master Servicer in connection with its
responsibilities under the Master Servicing Agreement and such amounts will be
paid by the Master Servicer out of the Master Servicing Fee. The amount of the
Master Servicing Fee is subject to adjustment with respect to prepaid Pledged
Mortgages, as described herein under "-- Adjustment to Master Servicing Fee and
Invested Amount in Connection with Certain Prepaid Pledged Mortgages." The
Master Servicer or the related Servicer will also be entitled to receive late
payment fees, assumption fees and other similar charges. The Master Servicer
will be entitled to receive all reinvestment income earned on amounts on deposit
in the Bond Account and the Distribution Account. The Net Mortgage Rate of a
Pledged Mortgage is the Mortgage Rate thereof minus the related Expense Fee
Rate.
ADJUSTMENT TO MASTER SERVICING FEE AND INVESTED AMOUNT IN CONNECTION WITH
CERTAIN PREPAID PLEDGED MORTGAGES
When a borrower prepays a Pledged Mortgage between Due Dates, the borrower
is required to pay interest on the amount prepaid only to the date of prepayment
and not thereafter. Principal prepayments by borrowers received during a
calendar month will be distributed to Bondholders on the Payment Date in the
month following the month of receipt. Pursuant to the Master Servicing
Agreement, the Master Servicing Fee for any month may be reduced by an amount
with respect to each such prepaid Pledged Mortgage sufficient to pay to
Bondholders the full amount of interest to which they would be entitled in
respect of such Pledged Mortgage on the related Payment Date. If shortfalls in
interest as a result of prepayments in any month exceed the sum of (i) amount of
the Master Servicing Fee for such month and (ii) the amounts otherwise payable
on such Payment Date to the holder of the Investor Certificate as described in
clauses "seventh", "eighth" and "ninth" under "DESCRIPTION OF THE
BONDS -- Priority of Payments and Allocation of Shortfalls" herein, the amount
of funds available to be paid to Bondholders in respect of interest on such
Payment Date will be reduced by the amount of such excess. See "DESCRIPTION OF
THE BONDS -- Interest" herein.
ADVANCES
Subject to the following limitations, the Master Servicer will be required
to advance prior to each Payment Date, from its own funds, funds advanced by the
related Servicer or amounts received with respect to the Pledged Mortgages that
do not constitute Available Funds for such Payment Date, an amount equal to the
aggregate of payments of principal of and interest on the Pledged Mortgages (net
of the Master Servicing Fee and the applicable Servicing Fee with respect to the
related Pledged Mortgages) which were due on the related Due Date and which were
delinquent on the related Determination Date, together with an amount equivalent
to interest on each Pledged Mortgage as to which the related Mortgaged Property
has been acquired by the Bond Trustee through foreclosure or deed-in-lieu of
foreclosure ("REO Property") (any such advance, an "Advance").
Advances are intended to maintain a regular flow of scheduled interest and
principal payments on the Bonds and the Investor Certificate rather than to
guarantee or insure against losses. The Master Servicer is obligated to make
Advances with respect to delinquent payments of principal of or interest on each
Pledged Mortgage to the extent that such Advances are, in its reasonable
judgment, recoverable from future payments and collections or insurance payments
or proceeds of liquidation of the related Pledged Mortgage. If the Master
Servicer determines on any Determination Date to make an Advance, such Advance
will be included with the payment to Bondholders and the holder of the Investor
Certificate on the related Payment Date. [Any failure by a Servicer to advance
funds as required under the related Servicing Agreement will constitute a
default thereunder, in which case the Master Servicer will be obligated to make
any such advance in accordance with the terms of the Master Servicing
Agreement.] Any failure by the Master Servicer to make an Advance as required
under the Master Servicing Agreement with respect to the Bonds and the Investor
Certificate will constitute a Servicing Default thereunder, in which case the
Bond Trustee or the successor master servicer will be obligated to make any such
Advance, in accordance with the terms of the Master Servicing Agreement.
S-37
<PAGE> 39
USE OF PROCEEDS
The Issuer intends to distribute all of the net proceeds of the issuance of
the Offered Bonds to the Company which will use such proceeds to pay certain
indebtedness incurred by Redwood Trust in connection with the acquisition of the
Pledged Mortgages. See "USE OF PROCEEDS" in the Prospectus and "UNDERWRITING"
herein.
FEDERAL INCOME TAX CONSEQUENCES
Giancarlo & Gnazzo, A Professional Corporation, has advised the Company
that, in its opinion the Bonds will be treated as debt for federal income tax
purposes, and not as an ownership interest in the Mortgage Collateral, the
Issuer or a separate association taxable as a corporation. Interest, including
original issue discount with respect to any Class of Offered Bonds issued with
original issue discount, will be taxable to non-exempt Bondholders. The Tax
Prepayment Assumption (as defined in the Prospectus under "FEDERAL INCOME TAX
CONSEQUENCES -- Original Issue Discount") for the purposes of determining the
amount and rate of accrual of original issue discount on the Bonds assumes that
the Pledged Mortgages are prepaid at a rate of % of the Prepayment
Assumption. Based upon (i) [the assumed prepayment rate] and (ii) the expected
price to the public of each Class of the Offered Bonds as of the date hereof
(including interest accrued before the issue date, if any), the Class A-1 Bonds
will not be issued with original issue discount and the Class B-1 Bonds will be
treated as issued with original issue discount. [Although it is unclear, the
Issuer intends to treat the Offered Bonds as "Variable Rate Debt Instruments"
and the stated interest on the Bonds as "qualified stated interest payments" (as
each term is defined in the Prospectus under "FEDERAL INCOME TAX
CONSEQUENCES")].
Notwithstanding the use of in pricing the Offered
Bonds, no representation is made that the Pledged Mortgages will actually prepay
at or at any other rate. The amount of original issue
discount and certain other information with respect to each Offered Bond will be
set forth on the face of such Bond as required by applicable regulations and as
described in the Prospectus. See "DESCRIPTION OF THE BONDS -- Weighted Average
Life of the Offered Bonds" herein and "FEDERAL TAX CONSEQUENCES" in the
Prospectus.
The Issuer will not elect to treat the segregated pool of assets securing
the Bonds as a real estate mortgage investment conduit ("REMIC") for federal
income tax purposes. Giancarlo & Gnazzo, A Professional Corporation, has further
advised the Company that, in its opinion, the Issuer will not be classified as a
taxable mortgage pool.
ERISA MATTERS
Fiduciaries of employee benefit plans and certain other retirement plans
and arrangements, including individual retirement accounts and annuities, Keogh
plans, and collective investment funds in which such plans, accounts, annuities
or arrangements are invested, that are subject to the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), or corresponding provisions of the
Internal Revenue Code of 1986, as amended (the "Code") (any of the foregoing a
"Plan"), persons acting on behalf of a Plan, or persons using the assets of a
Plan ("Plan Investors"), should carefully review with their legal advisors
whether the purchase or holding of the Offered Bonds could give rise to a
transaction that is prohibited under ERISA or the Code or cause the Pledged
Mortgages securing the Offered Bonds to be treated as "plan assets" for purposes
of regulations of the Department of Labor set forth in 29 C.F.R. 2510.3-101 (the
"Plan Asset Regulations"). Prospective investors should be aware that, although
certain exceptions from the application of the prohibited transaction rules and
the Plan Asset Regulations exist, there can be no assurance that any such
exception will apply with respect to the acquisition of the Offered Bonds. See
"ERISA MATTERS" in the Prospectus.
If the Offered Bonds are treated as equity for purposes of ERISA, the
purchaser of the Offered Bonds could be treated as having acquired a direct
interest in the Pledged Mortgages securing the Offered Bonds. In that event, the
purchase, holding, or resale of the Offered Bonds could result in a transaction
that is prohibited under ERISA or the Code. Furthermore, regardless of whether
the Offered Bonds are treated as equity for
S-38
<PAGE> 40
purposes of ERISA, the acquisition or holding of the Offered Bonds by or on
behalf of a Plan could still be considered to give rise to a prohibited
transaction if the Issuer, the Bond Trustee, the Master Servicer, any Servicer
or any of their respective Affiliates is or becomes a party in interest or a
disqualified person with respect to such Plan. However, one or more alternative
exemptions may be available with respect to certain prohibited transaction rules
of ERISA that might apply in connection with the initial purchase, holding and
resale of the Offered Bonds, depending in part upon the type of Plan fiduciary
making the decision to acquire the Offered Bonds and the circumstances under
which such decision is made. Those exemptions include, but are not limited to:
(i) Prohibited Transaction Class Exemption ("PTCE") 95-60, regarding investments
by insurance company general accounts; (ii) PTCE 91-38, regarding investments by
bank collective investment funds; (iii) PTCE 90-1, regarding investments by
insurance company pooled separate accounts; (iv) PTCE 84-14, regarding
transactions negotiated by qualified professional asset managers; or (v) PTCE
96-23 regarding transactions effected by an in-house asset manager. Before
purchasing the Offered Bonds, a Plan subject to the fiduciary responsibility
provisions of ERISA or described in Section 4975(e)(1) (and not exempt under
Section 4975(g)) of the Code should consult with its counsel to determine
whether the conditions of any exemption would be met. A purchaser of the Offered
Bonds should be aware, however, that even if the conditions specified in one or
more exemptions are met, the scope of the relief provided by an exemption might
not cover all acts that might be construed as prohibited transactions. See
"ERISA MATTERS" in the Prospectus.
Although not entirely free from doubt, the Issuer believes that the Offered
Bonds will be treated as debt obligations without significant equity features
for purposes of the Plan Asset Regulations. Accordingly, a Plan that acquires
the Offered Bonds should not be treated as having acquired a direct interest in
the assets of the Issuer. However, there can be no complete assurance that the
Offered Bonds will be treated as debt obligations without significant equity
features for purposes of the Plan Asset Regulations.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting Agreement
between the Company, Redwood Trust and the Underwriter, the Company has agreed
to cause the Issuer to sell to the Underwriter, and the Underwriter has agreed
to purchase from the Issuer, the Offered Bonds. Distribution of the Offered
Bonds will be made by the Underwriter from time to time in negotiated
transactions or otherwise at varying prices to be determined at the time of
sale. In connection with the sale of the Offered Bonds, the Underwriter may be
deemed to have received compensation from the Issuer in the form of underwriting
discounts.
The Underwriter intends to make a secondary market in the Offered Bonds,
but has no obligation to do so. There can be no assurance that a secondary
market for the Offered Bonds will develop or, if it does develop, that it will
continue or that it will provide Bondholders with a sufficient level of
liquidity of investment. The Offered Bonds will not be listed on any national
securities exchange.
The Company and Redwood Trust have agreed to indemnify the Underwriter
against, or make contributions to the Underwriter with respect to, certain
liabilities, including liabilities under the Securities Act of 1933, as amended.
LEGAL MATTERS
The validity of the Bonds will be passed upon for the Issuer by Tobin &
Tobin, a professional corporation, San Francisco, California. Certain tax
matters will be passed upon by for the Issuer by Giancarlo and Gnazzo, A
Professional Corporation, San Francisco, California. Brown & Wood LLP, New York,
New York will act as counsel for the Underwriter.
S-39
<PAGE> 41
RATINGS
It is a condition of the issuance of the Senior Bonds that they be rated
AAA by and AAA by ( and
, together, the "Rating Agencies"). It is a condition to the
issuance of the Class B-1 Bonds that they be rated [AA] by .
The ratings assigned by to collateralized mortgage
obligations address the likelihood of the receipt of all payments on the
mortgage loans by the related bondholders under the agreements pursuant to which
such bonds are issued. 's ratings take into consideration the
credit quality of the related mortgage pool, including any credit support
providers, structural and legal aspects associated with such bonds, and the
extent to which the payment stream on the mortgage pool is adequate to make the
payments required by such bonds. 's ratings on such bonds do not,
however, constitute a statement regarding frequency of prepayments of the
mortgage loans.
The ratings assigned by to the Senior Bonds address the
likelihood of the receipt of all payments on the mortgage loans by the related
Bondholders under the agreements pursuant to which such bonds are issued.
's ratings take into consideration the credit quality of the
related mortgage pool, including any credit support providers, structural and
legal aspects associated with such bonds, and the extent to which the payment
stream on such mortgage pool is adequate to make payments required by such
bonds. 's ratings on such bonds do not, however, constitute a
statement regarding frequency of prepayments on the related mortgage loans.
The ratings of the Rating Agencies do not address the possibility that, as
a result of principal prepayments, Bondholders may receive a lower than
anticipated yield.
The ratings assigned to the Offered Bonds should be evaluated independently
from similar ratings on other types of securities. A rating is not a
recommendation to buy, sell or hold securities and may be subject to revision or
withdrawal at any time by the Rating Agencies.
The Issuer has not requested a rating of the Offered Bonds by any rating
agency other than the Rating Agencies; there can be no assurance, however, as to
whether any other rating agency will rate the Offered Bonds or, if it does, what
rating would be assigned by such other rating agency. The rating assigned by
such other rating agency to the Offered Bonds could be lower than the respective
ratings assigned by the Rating Agencies.
S-40
<PAGE> 42
INDEX OF CERTAIN DEFINITIONS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Adjustment Date....................................................................... S-27
Advance............................................................................... S-37
Available Funds....................................................................... S-19
Belgian Cooperative................................................................... S-17
Beneficial owner...................................................................... S-15
Bond Account.......................................................................S-7, S-18
Bond Distribution Amount.............................................................. S-19
Bond Interest Rate.................................................................... S-19
Bond Owners........................................................................... S-15
Bond Trustee.......................................................................... S-3
Bonds..............................................................................S-1, S-14
Book-Entry Bonds...................................................................... S-15
CEDEL Participants.................................................................... S-16
Certificate Interest Payment Amount................................................... S-20
Certificate Interest Rate............................................................. S-3
Class B-1 Bond Interest Rate.......................................................... S-1
Class B-1 Interest Carryover Shortfall................................................ S-20
Class B-1 Interest Payment Amount..................................................... S-20
Class B-1 Percentage.................................................................. S-21
Class B-1 Principal Amount............................................................ S-14
Class B-1 Principal Carryover Shortfall............................................... S-22
Class B-1 Principal Payment Amount.................................................... S-21
Class B-2 Interest Carryover Shortfall................................................ S-20
Class B-2 Interest Payment Amount..................................................... S-20
Class B-2 Bond Interest Rate.......................................................... S-3
Class B-2 Percentage.................................................................. S-21
Class B-2 Principal Amount............................................................ S-15
Class B-2 Principal Carryover Shortfall............................................... S-22
Class B-2 Principal Payment Amount.................................................... S-22
Class Principal Amount................................................................ S-14
Code...............................................................................S-8, S-38
Company.............................................................................S-2, S-3
Controlling Class..................................................................... S-26
CPR................................................................................... S-24
Cut-off Date Pool Principal Balance................................................... S-27
Definitive Bond....................................................................... S-15
Deleted Pledged Mortgage.............................................................. S-34
Deposit Trust Agreement............................................................... S-4
Distribution Account...............................................................S-7, S-19
DTC................................................................................... S-15
Due Date.............................................................................. S-27
ERISA..............................................................................S-8, S-38
Euroclear Operator.................................................................... S-17
Euroclear Participants................................................................ S-17
European Depositaries................................................................. S-15
FHLMC................................................................................. S-28
</TABLE>
S-41
<PAGE> 43
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Financial Intermediary................................................................ S-15
FNMA.................................................................................. S-28
Index................................................................................. S-7
Insurance Proceeds.................................................................... S-19
Interest Accrual Period............................................................S-5, S-20
Interest Payment Amount............................................................... S-19
Invested Amount....................................................................... S-15
Invested Amount Payment............................................................... S-22
Investor.............................................................................. S-1
Investor Certificate...............................................................S-1, S-15
Investor Percentage................................................................... S-22
Issuer................................................................................ S-2
Liquidation Proceeds.................................................................. S-19
Loan-to-Value Ratio................................................................... S-28
Management Agreement.................................................................. S-3
Margin................................................................................ S-27
Master Servicing Agreement............................................................ S-4
Maximum Rate.......................................................................... S-28
Morgan................................................................................ S-17
Mortgage.............................................................................. S-34
Mortgage File......................................................................... S-34
Mortgage Loan Purchase Agreement...................................................... S-27
Mortgage Note......................................................................... S-34
Mortgaged Property.................................................................... S-27
Net Interest Shortfall................................................................ S-20
Net Interest Shortfalls............................................................... S-20
Offered Bonds.................................................................S-1, S-3, S-14
Original Class B-1 Principal Amount................................................... S-15
Original Class B-2 Principal Amount................................................... S-15
Original Invested Amount.............................................................. S-15
Original Senior Class Principal Amount................................................ S-15
Originator............................................................................ S-34
Owner Trustee......................................................................... S-3
Payment Date..................................................................S-1, S-4, S-19
Periodic Rate Cap..................................................................... S-28
Plan...............................................................................S-8, S-39
Plan Asset Regulations.............................................................S-8, S-38
Plan Investors.....................................................................S-8, S-38
Pledged Mortgage Pool..............................................................S-7, S-27
Pledged Mortgages..................................................................... S-2
Pool Principal Balance................................................................ S-21
Prepayment Assumption................................................................. S-24
Prepayment Interest Shortfall......................................................... S-20
Primary Mortgage Insurance Policy..................................................... S-28
PTCE.................................................................................. S-39
Rating Agencies....................................................................S-9, S-40
Record Date........................................................................... S-19
Redwood Trust.................................................................S-2, S-3, S-14
</TABLE>
S-42
<PAGE> 44
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
REMIC................................................................................. S-38
REO Property.......................................................................... S-37
Replacement Pledged Mortgage.......................................................... S-34
Rules................................................................................. S-15
Scheduled Payments.................................................................... S-27
Senior Bond Interest Rate............................................................. S-1
Senior Bonds.......................................................................S-1, S-14
Senior Class Principal Amount......................................................... S-14
Senior Interest Payment Amount........................................................ S-20
Senior Percentage..................................................................... S-21
Shortfalls............................................................................ S-11
SMMEA................................................................................. S-8
Stated Principal Balance.............................................................. S-21
Structuring Assumptions............................................................... S-24
Subordinated Bonds.................................................................S-1, S-14
Substitution Adjustment Amount........................................................ S-34
Terms and Conditions.................................................................. S-17
Underwriter........................................................................... S-1
Variable Rate Debt Instruments........................................................ S-7
</TABLE>
S-43
<PAGE> 45
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered Sequoia
Mortgage Trust , Collateralized Mortgage Bonds (the "Global Bonds")
will be available only in book-entry form. Investors in the Global Bonds may
hold such Global Bonds through any of The Depository Trust Company ("DTC"),
CEDEL or Euroclear. The Global Bonds will be tradeable as home market
instruments in both the European and U.S. domestic markets. Initial settlement
and all secondary trades will settle in same-day funds.
Secondary market trading between investors holding Global Bonds through
CEDEL and Euroclear will be conducted in the ordinary way in accordance with
their normal rules and operating procedures and in accordance with conventional
Eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors holding Global Bonds through DTC
will be conducted according to the rules and procedures applicable to U.S.
corporate debt obligations and prior collateralized mortgage bond issues.
Secondary cross-market trading between CEDEL or Euroclear and DTC
Participants holding Global Bonds will be effected on a delivery-against-payment
basis through the respective Depositaries of CEDEL and Euroclear (in such
capacity) and as DTC Participants.
Non-U.S. holders (as described below) of Global Bonds will be subject to
U.S. withholding taxes unless such holders meet certain requirements and deliver
appropriate U.S. tax documents to the securities clearing organizations or their
participants.
INITIAL SETTLEMENT
All Global Bonds will be held in book-entry form by DTC in the name of Cede
& Co. as nominee of DTC. Investors' interests in the Global Bonds will be
represented through financial institutions acting on their behalf as direct and
indirect participants in DTC (each, a "DTC Participant"). As a result, CEDEL and
Euroclear will hold positions on behalf of their participants through their
respective Depositaries, which in turn will hold such positions in accounts as
DTC Participants.
Investors electing to hold their Global Bonds through DTC will follow the
settlement practices' applicable to other collateralized mortgage bond issues.
Investor securities custody accounts will be credited with their holdings
against payment in same-day funds on the settlement date.
Investors electing to hold their Global Bonds through CEDEL or Euroclear
accounts will follow the settlement procedures applicable to conventional
Eurobonds, except that there will be no temporary global security and no
"lock-up" or restricted period. Global Bonds will be credited to the securities
custody accounts on the settlement date against payment in same-day funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
TRADING BETWEEN DTC PARTICIPANTS. Secondary market trading between DTC
Participants will be settled using the procedures applicable to prior
collateralized mortgage bond issues in same-day funds.
TRADING BETWEEN CEDEL AND/OR EUROCLEAR PARTICIPANTS. Secondary market
trading between CEDEL Participants or Euroclear Participants will be settled
using the procedures applicable to conventional Eurobonds in same-day funds.
TRADING BETWEEN DTC SELLER AND CEDEL OR EUROCLEAR PURCHASER. When Global
Bonds are to be transferred from the account of a DTC Participant to the account
of a CEDEL Participant or a Euroclear Participant, the purchaser will send
instructions to CEDEL or Euroclear through a CEDEL Participant or Euroclear
Participant at least one business day prior to settlement. CEDEL or Euroclear
will instruct the
A-1
<PAGE> 46
respective Depositary, as the case may be, to receive the Global Bonds against
payment. Payment will include interest accrued on the Global Bonds from and
including the last coupon payment date to and excluding the settlement date, on
the basis of the actual number of days in such accrual period and a year assumed
to consist of 360 days. For transactions settling on the 31st of the month,
payment will include interest accrued to and excluding the first day of the
following month. Payment will then be made by the respective Depositary of the
DTC Participant's account against delivery of the Global Bonds. After settlement
has been completed, the Global Bonds will be credited to the respective clearing
system and by the clearing system, in accordance with its usual procedures, to
the CEDEL Participant's or Euroclear Participant's account. The securities
credit will appear the next day (European time) and the cash debt will be
back-valued to, and the interest on the Global Bonds will accrue from, the value
date (which would be the preceding day when settlement occurred in New York). If
settlement is not completed on the intended value date (i.e., the trade fails),
the CEDEL or Euroclear cash debt will be valued instead as of the actual
settlement date.
CEDEL Participants and Euroclear Participants will need to make available
to the respective clearing systems the funds necessary to process same-day funds
settlement. The most direct means of doing so is to preposition funds for
settlement, either from cash on hand or existing lines of credit, as they would
for any settlement occurring within CEDEL or Euroclear. Under this approach,
they may take on credit exposure to CEDEL or Euroclear until the Global Bonds
are credited to their accounts one day later.
As an alternative, if CEDEL or Euroclear has extended a line of credit to
them, CEDEL Participants or Euroclear Participants can elect not to preposition
funds and allow that credit line to be drawn upon the finance settlement. Under
this procedure, CEDEL Participants or Euroclear Participants purchasing Global
Bonds would incur overdraft charges for one day, assuming they cleared the
overdraft when the Global Bonds were credited to their accounts. However,
interest on the Global Bonds would accrue from the value date. Therefore, in
many cases the investment income on the Global Bonds earned during that one-day
period may substantially reduce or offset the amount of such overdraft charges,
although this result will depend on each CEDEL Participant's or Euroclear
Participant's particular cost of funds.
Since the settlement is taking place during New York business hours, DTC
Participants can employ their usual procedures for sending Global Bonds to the
respective European Depository for the benefit of CEDEL Participants or
Euroclear Participants. The sale proceeds will be available to the DTC seller on
the settlement date. Thus, to the DTC Participants a cross-market transaction
will settle no differently than a trade between two DTC Participants.
TRADING BETWEEN CEDEL OR EUROCLEAR SELLER AND DTC PURCHASER. Due to time
zone differences in their favor, CEDEL Participants and Euroclear Participants
may employ their customary procedures for transactions in which Global Bonds are
to be transferred by the respective clearing system, through the respective
Depositary, to a DTC Participant. The seller will send instructions to CEDEL or
Euroclear through a CEDEL Participant or Euroclear Participant at least one
business day prior to settlement. In these cases CEDEL or Euroclear will
instruct the respective Depositary, as appropriate, to deliver the Global Bonds
to the DTC Participant's account against payment. Payment will include interest
accrued on the Global Bonds from and including the last coupon payment to and
excluding the settlement date on the basis of the actual number of days in such
accrual period and a year assumed to consist of 360 days. For transactions
settling on the 31st of the month, payment will include interest accrued to and
excluding the first day of the following month. The payment will then be
reflected in the account of the CEDEL Participant or Euroclear Participant the
following day, and receipt of the cash proceeds in the CEDEL Participant's or
Euroclear Participant's account would be back-valued to the value date (which
would be the preceding day, when settlement occurred in New York). Should the
CEDEL Participant or Euroclear Participant have a line of credit with its
respective clearing system and elect to be in debt in anticipation of receipt of
the sale proceeds in its account, the back-valuation will extinguish any
overdraft incurred over that one-day period. If settlement is not completed on
the intended valued date (i.e., the trade fails), receipt of the cash proceeds
in the CEDEL Participant's or Euroclear Participant's account would instead be
valued as of the actual settlement date.
Finally, day traders that use CEDEL or Euroclear and that purchase Global
Bonds from DTC Participants for delivery to CEDEL Participants or Euroclear
Participants should note that these trades would
A-2
<PAGE> 47
automatically fail on the sale side unless affirmative action were taken. At
least three techniques should be readily available to eliminate this potential
problem:
(a) borrowing through CEDEL or Euroclear for one day (until the
purchase side of the day trade is reflected in their CEDEL or Euroclear
accounts) in accordance with the clearing system's customary procedures;
(b) borrowing the Global Bonds in the U.S. from a DTC Participant no
later than one day prior to settlement, which would give the Global Bonds
sufficient time to be reflected in their CEDEL or Euroclear account in
order to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the trade
so that the value date for the purchase from the DTC Participant is at
least one day prior to the value date for the sale to the CEDEL Participant
or Euroclear Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of the Global Bonds holding securities through CEDEL or
Euroclear (or through DTC if the holder has an address outside the U.S.) will be
subject to the 30% U.S. withholding tax that generally applies to payments of
interest (including original issue discount) on registered debt issued by U.S.
Persons, unless (i) each clearing system, bank or other financial institution
that holds customers' securities in the ordinary course of its trade or business
in the chain of intermediaries between such beneficial owner and the U.S. entity
required to withhold tax complies with applicable certification requirements and
(ii) such beneficial owner takes one of the following steps to obtain an
exemption or reduced tax rate:
EXEMPTION FOR NON-U.S. PERSONS (FORM W-8). Beneficial owners of the Global
Bonds that are non-U.S. Persons can obtain a complete exemption from the
withholding tax by filing a signed Form W-8 (Certificate of Foreign Status). If
the information shown on Form W-8 changes, a new Form W-8 must be filed within
30 days of such change.
EXEMPTION FOR NON-U.S. PERSONS WITH EFFECTIVELY CONNECTED INCOME (FORM
4224). A non-U.S. Person, including a non-U.S. corporation or bank with a U.S.
branch, for which the interest income is effectively connected with its conduct
of a trade or business in the United States, can obtain an exemption from the
withholding tax by filing Form 4224 (Exemption from Withholding of Tax on Income
Effectively Connected with the Conduct of a Trade or Business in the United
States).
EXEMPTION OR REDUCED RATE FOR NON-U.S. PERSONS RESIDENT IN TREATY COUNTRIES
(FORM 1001). Non-U.S. Persons that are Bond Owners residing in a country that
has a tax treaty with the United States can obtain an exemption or reduced tax
rate (depending on the treaty terms) by filing Form 1001 (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 Bond Owner or his agent.
EXEMPTION FOR U.S. PERSONS (FORM W-9). U.S. Persons can obtain a complete
exemption from the withholding tax by filing Form W-9 (Payer's Request for
Taxpayer Identification Number and Certification).
U.S. FEDERAL INCOME TAX REPORTING PROCEDURE. The Bond Owner of a Global
Bond or, in the case of a Form 1001 or a Form 4224 filer, his agent, files by
submitting the appropriate form to the person through whom it holds (the
clearing agency, in the case of persons holding directly on the books of the
clearing agency). Form W-8 and Form 1001 are effective for three calendar years
and Form 4224 is effective for one calendar year.
The term "U.S. Person" means a citizen or resident of the United States, a
corporation, partnership or other entity created or organized in or under the
laws of the United States or any political subdivision thereof, or an estate
whose income is subject to U.S. federal income tax regardless of its source of
income, or a trust if a court within the United States is able to exercise
primary supervision of the administration of the trust and one or more United
States fiduciaries have the authority to control all substantial decisions of
the trust. This summary does not deal with all aspects of U.S. federal income
tax withholding that may be relevant to foreign holders of the Global Bonds.
Investors are advised to consult their own tax advisors for specific tax advice
concerning their holding and disposing of the Global Bonds.
A-3
<PAGE> 48
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED MAY 14, 1997
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED , 199 )
$
SEQUOIA MORTGAGE TRUST ________,
COLLATERALIZED MORTGAGE BONDS
------------------------
The Sequoia Mortgage Trust , Collateralized Mortgage Bonds, in the
aggregate principal amount of $ , consist of Class A-1 and Class B-1
Bonds (the "Bonds"). The Issuer will also issue an Investor Certificate (the
"Investor Certificate") as described herein. Only the Bonds are offered hereby.
Interest on the Bonds will be payable [monthly on the th day of each month],
or if such day is not a business day, the next succeeding business day (each, a
"Payment Date"), commencing on , 199 . Interest on the Bonds will be
payable in an amount equal to the interest accrued during each Interest Accrual
Period (as defined herein). Interest accrued on the Bonds during any Interest
Accrual Period will be calculated on the basis of the related Class Principal
Amount (as defined herein) immediately prior to the related Payment Date. See
"DESCRIPTION OF THE BONDS -- Interest" herein. Payments of principal of the
Bonds on each Payment Date will be made in the manner described herein under
"DESCRIPTION OF THE BONDS -- Principal." The Bonds are redeemable only under the
circumstances described herein. See "INDEX OF CERTAIN DEFINITIONS" on page S-42
of this Prospectus Supplement and on page 85 of the Prospectus for the location
of the definitions of certain defined terms.
The Class A-1 Bonds are referred to herein as the "Senior Bonds" and the
Class B-1 Bonds are referred to herein as the "Subordinated Bonds." The rights
of the holders of the Subordinated Bonds to receive payments of principal and
interest will be subject to the priorities described herein. See "DESCRIPTION OF
THE BONDS -- Priority of Payments and Allocation of Shortfalls" herein.
The Senior Bonds will be unconditionally and irrevocably guaranteed as to
payment of Insured Payments (as defined herein) pursuant to the terms of the
financial guaranty insurance policy (the "Bond Insurance Policy") to be issued
by .
[Insurer Logo]
------------------------
FOR A DISCUSSION OF CERTAIN RISK FACTORS RELATING TO INVESTMENTS IN THE
BONDS, SEE "RISK FACTORS" COMMENCING ON PAGE S-12 OF THIS PROSPECTUS SUPPLEMENT
AND ON PAGE 19 OF THE PROSPECTUS.
(Cover continued on next page)
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
===========================================================================================================
ORIGINAL CLASS BOND INTEREST
PRINCIPAL AMOUNT RATE STATED MATURITY(1)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Class A-1............................. $ (2)
- -----------------------------------------------------------------------------------------------------------
Class B-1............................. $ (3)
===========================================================================================================
</TABLE>
(1) Calculated as described herein under "DESCRIPTION OF THE BONDS -- Stated
Maturity."
(2) The Bond Interest Rate for the Senior Bonds (the "Senior Bond Interest
Rate") and any Interest Accrual Period will equal .
(3) The Bond Interest Rate for the Subordinated Bonds (the "Subordinated Bond
Interest Rate") and any Interest Accrual Period will equal .
The Bonds will be purchased by (the "Underwriter")
from the Issuer and will be offered by the Underwriter from time to time in
negotiated transactions or otherwise at varying prices to be determined at the
time of sale. Proceeds to the Issuer from the sale of the Bonds are expected to
be approximately % of the aggregate principal amount of the Bonds plus
accrued interest, before deducting issuance expenses payable by the Issuer.
The Bonds are offered by the Underwriter, subject to prior sale, when, as
and if delivered to and accepted by the Underwriter and subject to its right to
reject orders in whole or in part. It is expected that delivery of the Bonds
will be made in book-entry form only through the facilities of The Depository
Trust Company on or about , 199 .
[UNDERWRITER]
, 199
<PAGE> 49
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
(Cover continued from previous page)
The Bonds will be issued by Sequoia Mortgage Trust (the "Issuer"), a
Delaware business trust established by Sequoia Mortgage Funding Corporation (the
"Company"), a wholly owned subsidiary of Redwood Trust, Inc., a Maryland
corporation ("Redwood Trust"). Prior to their sale to the Issuer by the Company,
the Pledged Mortgages will be held by Redwood Trust. The Bonds represent
obligations solely of the Issuer and are not insured or guaranteed by any
government agency or instrumentality, the Company, Redwood Trust, [Name of
Insurer] (except as set forth herein) or any other person or entity. Payments on
the Subordinated Bonds will be payable solely from the Collateral pledged to
secure the Bonds and the payments on the Senior Bonds will be payable solely
from the Collateral pledged to secure the Bonds and the Bond Insurance Policy.
None of the Company, Redwood Trust or the Master Servicer has guaranteed or is
otherwise obligated with respect to payment of the Bonds and no person or entity
other than the Issuer is obligated to pay the Bonds, except as specifically set
forth herein with regard to the Bond Insurance Policy. The Issuer is not
expected to have any significant assets other than those pledged as collateral
to secure the Bonds.
The Bonds will be collateralized by -year conventional mortgage loans
secured by first liens on one- to four-family residential properties (the
"Pledged Mortgages"). The Pledged Mortgages have been sold to the Company by
Redwood Trust. All of the Pledged Mortgages bear interest at [fixed] rates [that
adjust [annually] based on changes in the level of the Index (as defined
herein)]. The Bonds also will be secured by the Bond Account and the
Distribution Account described herein. Scheduled net payments on the Pledged
Mortgages will be sufficient, irrespective of the rate of prepayments on the
Pledged Mortgages, to make timely payments of interest on the Bonds and to
retire each Class of Bonds not later than its Stated Maturity.
THE YIELD TO INVESTORS ON EACH CLASS OF BONDS WILL BE SENSITIVE IN VARYING
DEGREES TO, AMONG OTHER THINGS, THE RATE AND TIMING OF PRINCIPAL PAYMENTS
(INCLUDING PREPAYMENTS) OF THE PLEDGED MORTGAGES [AND THE LEVEL OF THE INDEX,
EACH OF] WHICH MAY VARY SIGNIFICANTLY OVER TIME. [THE BOND INTEREST RATE FOR A
CLASS OF BONDS MAY ALSO CHANGE FROM PAYMENT DATE TO PAYMENT DATE BASED ON THE
NET MORTGAGE RATES (AS DEFINED HEREIN) AND THE OUTSTANDING PRINCIPAL BALANCES OF
THE PLEDGED MORTGAGES]. THE YIELD TO MATURITY OF A CLASS OF BONDS PURCHASED AT A
DISCOUNT OR PREMIUM WILL BE MORE SENSITIVE TO THE RATE AND TIMING OF PAYMENTS
THEREON. HOLDERS OF THE BONDS SHOULD CONSIDER, IN THE CASE OF ANY SUCH BONDS
PURCHASED AT A DISCOUNT, THE RISK THAT A SLOWER THAN ANTICIPATED RATE OF
PRINCIPAL PAYMENTS COULD RESULT IN AN ACTUAL YIELD THAT IS LOWER THAN THE
ANTICIPATED YIELD AND, IN THE CASE OF ANY BONDS PURCHASED AT A PREMIUM, THE RISK
THAT A FASTER THAN ANTICIPATED RATE OF PRINCIPAL PAYMENTS COULD RESULT IN AN
ACTUAL YIELD THAT IS LOWER THAN THE ANTICIPATED YIELD. THE YIELD TO INVESTORS IN
THE BONDS ALSO MAY BE ADVERSELY AFFECTED BY NET INTEREST SHORTFALLS (AS DEFINED
HEREIN) AND, PARTICULARLY IN THE CASE OF THE SUBORDINATED BONDS, REALIZED LOSSES
(AS DEFINED HEREIN). NO REPRESENTATION IS MADE AS TO THE ANTICIPATED RATE OF
PREPAYMENTS ON THE PLEDGED MORTGAGES, THE AMOUNT AND TIMING OF NET INTEREST
SHORTFALLS OR REALIZED LOSSES, OR AS TO THE RESULTING YIELD TO MATURITY OF ANY
CLASS OF BONDS.
The Underwriter intends to make a secondary market in the Bonds, but has no
obligation to do so. There is currently no secondary market for the Bonds and
there can be no assurance that such a market will develop or, if it does
develop, that it will continue or that it will provide Bondholders with a
sufficient level of liquidity of investment. The Bonds will not be listed on any
national securities exchange.
------------------------
This Prospectus Supplement does not contain complete information about the
offering of the Bonds. Additional information is contained in the Prospectus of
the Company dated , 199 and purchasers are urged to read both this
Prospectus Supplement and the Prospectus in full. Sales of the Bonds may not be
consummated unless the purchaser has received both this Prospectus Supplement
and the Prospectus.
UNTIL 90 DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE BONDS, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS
SUPPLEMENT AND PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
<PAGE> 50
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
In addition to the documents described under "INCORPORATION OF CERTAIN
DOCUMENTS BY REFERENCE" in the Prospectus, the financial statements included in,
or as exhibits to the following documents which have been filed with the
Securities and Exchange Commission by the Insurer, are hereby incorporated by
reference in this Prospectus Supplement:
(a) The Annual Report on Form 10-K for the year ended ,
19 ; and
(b) The Quarterly Report on Form 10-Q for the period ended
, 19 .
All financial statements included in documents filed by the Insurer
pursuant to Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), subsequent to the date of this Prospectus
Supplement and prior to the termination of the offering of the Bonds shall be
deemed to be incorporated by reference into this Prospectus Supplement and to be
a part hereof from the respective dates of filing such documents.
The Company hereby undertakes that, for purposes of determining any
liability under the Securities Act of 1933, as amended, each filing of the
financial statements included in or as an exhibit to the documents of the
Insurer referred to above and filed pursuant to Section 13(a) or Section 15(d)
of the 1934 Act that is incorporated by reference in the Registration Statement
of which this Prospectus Supplement and the accompanying Prospectus is a part
shall be deemed to be a new registration statement relating to the Bonds offered
hereby, and the offering of such Bonds at that time shall be deemed to be the
initial bona fide offering thereof.
The Bond Trustee will provide without charge to each person to whom this
Prospectus Supplement is delivered, on the written or oral request of such
person, a copy of any or all of the documents referred to above and in the
Prospectus under "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE" that have
been or may be incorporated by reference in the Prospectus (not including
exhibits to the information that is incorporated by reference unless such
exhibits are specifically incorporated by reference into the information that
the Prospectus incorporates). Such requests should be directed to the Bond
Trustee at , telephone:
, facsimile number: .
S-3
<PAGE> 51
SUMMARY
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus Supplement and in
the accompanying Prospectus. Certain capitalized terms used in this Summary are
defined elsewhere in this Prospectus Supplement or in the Prospectus. See "INDEX
OF CERTAIN DEFINITIONS" on page S-42 of this Prospectus Supplement and page 85
of the Prospectus for the location of the definitions of certain capitalized
terms.
Bonds...................... Sequoia Mortgage Trust , Collateralized
Mortgage Bonds, Class A-1 and Class B-1 Bonds
(collectively, the "Bonds"). Only the Bonds are
offered hereby.
Securities Other than
the Bonds................ In addition to the Bonds, the Investor Certificate
will be issued in the initial amount and will bear
interest at the interest rate indicated below, but
is not offered hereby:
<TABLE>
<CAPTION>
INITIAL CERTIFICATE
INVESTED INTEREST
AMOUNT RATE
---------- -----------
<S> <C> <C>
Investor Certificate(1)................ $ (2)
</TABLE>
--------------------------------------------
(1) The Investor Certificate will provide limited
credit support for the Bonds as described
herein.
(2) The interest rate for the Investor Certificate
(the "Certificate Interest Rate") and any
Interest Accrual Period will equal.
Any information contained herein with respect to
the Investor Certificate is provided only to permit
a better understanding of the Bonds.
Designations
Senior Bonds............. Class A-1 Bonds.
Subordinated Bonds....... Class B-1 Bonds.
Bonds.................... The Senior Bonds and the Subordinated Bonds.
Book-Entry Bonds......... All Classes of Bonds.
Issuer..................... The Issuer, Sequoia Mortgage Trust , is
a statutory business trust established under the
laws of the State of Delaware by the Deposit Trust
Agreement (as defined herein) for the sole purpose
of issuing the Bonds and the Investor Certificate.
The settlor and sole beneficiary of the Issuer is
Sequoia Mortgage Funding Corporation, a Delaware
corporation (the "Company"), and a wholly owned
subsidiary of Redwood Trust, Inc., a Maryland
corporation ("Redwood Trust"). The Owner Trustee of
the Issuer is . Redwood Trust will be
the manager of the Issuer pursuant to a management
agreement (the "Management Agreement") entered into
with the Issuer. None of the Company, Redwood Trust
or the Master Servicer (as defined herein) has
guaranteed or is otherwise obligated with respect
to payment of the Bonds, and no person or entity
other than the Issuer is obligated to pay the
Bonds, except as specifically set forth herein with
regard to the Bond Insurance Policy. See "THE
ISSUER" herein and in the Prospectus.
Bond Trustee............... , a banking corporation organized under
the laws of (the "Bond Trustee").
Owner Trustee.............. , a banking corporation organized under
the laws of the State of Delaware (the "Owner
Trustee").
S-4
<PAGE> 52
Master Servicing
Agreement.................. The Pledged Mortgages will be serviced pursuant to
a master servicing agreement dated as of
1, 199 (the "Master Servicing
Agreement") among the Issuer, the Bond Trustee and
the Master Servicer.
Master Servicer............ will act as Master Servicer for the
Pledged Mortgages (the "Master Servicer"). On or
prior to the Closing Date, the Master Servicer will
enter into mortgage servicing agreements (each, a
"Servicing Agreement") with certain servicers
(each, a "Servicer") pursuant to which each
Servicer will perform certain servicing functions
with respect to the Pledged Mortgages. See
"SERVICING OF THE PLEDGED MORTGAGES -- The Master
Servicer" herein. The Master Servicer will
administer and supervise the performance of each
Servicer, who may in turn be administering and
supervising the performance of one or more
subservicers of the Pledged Mortgages. The Master
Servicer will receive the Master Servicing Fee, and
each Servicer will receive the related Servicing
Fee, from interest collected on the Pledged
Mortgages. The Master Servicer will be obligated to
perform the obligations of a terminated Servicer or
appoint a successor Servicer. See "SERVICING OF THE
PLEDGED MORTGAGES -- Servicing Compensation and
Payment of Expenses" herein.
Deposit Trust Agreement.... The Issuer will be established and the Investor
Certificate will be issued pursuant to an amended
and restated deposit trust agreement dated as of
, 199 (the "Deposit Trust
Agreement") among the Company and the Owner
Trustee.
Cut-off Date............... 1, 199 .
Closing Date............... On or about , 199 .
Determination Date......... The th day of each [month] or, if such day is not
a business day, the first business day thereafter.
Payment Date............... The th day of each [month] or, if such day is not
a business day, the first business day thereafter,
commencing in 199 (each, a "Payment
Date"). Payments on each Payment Date will be made
to Bondholders of record as of the related Record
Date, except that the final payment on the Bonds
will be made only upon presentment and surrender of
the Bonds at the Corporate Trust Office of the Bond
Trustee.
Record Date................ The Record Date for any Payment Date will be the
last business day of the month preceding the month
of such Payment Date.
Priority of Payments....... Payments will be made on each Payment Date from
Available Funds in the following order of priority:
(i) to interest on the Senior Bonds; (ii) to
principal of the Senior Bonds; (iii) to interest on
the Subordinated Bonds; (iv) to principal of the
Subordinated Bonds; (v) to interest on the Investor
Certificate; (vi) to principal of the Investor
Certificate; and (vii) to the holder of the
Investor Certificate, all remaining Available
Funds. Under certain circumstances described
herein, payments from Available Funds for a Payment
Date that would otherwise be made on the
Subordinated Bonds may be made instead on the
Senior Bonds. In addition, under certain
circumstances described herein, payments from
Available Funds for a Payment Date that would
otherwise be made on the Investor Certificate may
be made instead on the Senior Bonds and
S-5
<PAGE> 53
the Subordinated Bonds. See "DESCRIPTION OF THE
BONDS -- Priority of Payments and Allocation of
Shortfalls" herein.
Payments of Interest....... To the extent funds are available therefor, each
Class of Bonds will be entitled to receive interest
in the amount of the Interest Payment Amount for
such Class. See "DESCRIPTION OF THE BONDS --
Interest" herein and in the Prospectus.
A. Interest Payment
Amount................ For each Class of Bonds, the amount of interest
accrued during the related Interest Accrual Period
at the applicable Bond Interest Rate. With respect
to each Payment Date, the "Interest Accrual Period"
for each Class of Bonds will be the calendar
[month] preceding the month of such Payment Date.
B. Bond Interest Rate.... The Bond Interest Rate for each Class of Bonds for
each Payment Date will be as described on the cover
page hereof.
Payments of Principal...... On each Payment Date, to the extent funds are
available therefor, principal payments in reduction
of the Senior Class Principal Amount and the
Subordinated Class Principal Amount will be made in
the order and subject to the priorities set forth
herein under "DESCRIPTION OF THE
BONDS -- Principal" in an amount equal to the
Senior Principal Payment Amount and the
Subordinated Principal Payment Amount,
respectively.
Stated Maturity............ The Stated Maturity for each Class of Bonds is the
date determined by the Company which is years
after the Payment Date immediately following the
latest maturity date of any Pledged Mortgage. The
Stated Maturity for each Class of Bonds is
, 20 . See "DESCRIPTION OF THE
BONDS -- Stated Maturity" and
" -- Weighted Average Lives of the Bonds" herein.
Optional Redemption of
Bonds...................... The Bonds may be redeemed in whole, but not in
part, at the Issuer's option, on any Payment Date
on or after the earlier of (a) years after the
initial issuance of the Bonds and (b) the Payment
Date on which the sum of (i) the Senior Class
Principal Amount, (ii) the Subordinated Class
Principal Amount, and (iii) the Invested Amount, in
each case after giving effect to payments to be
made on such Payment Date, is % or less of the
aggregate of the Stated Principal Balances of the
Pledged Mortgages as of the Cut-off Date, at a
redemption price equal to 100% of the unpaid
principal amount of such Bonds (including, in the
case of the Subordinated Bonds, any unpaid
Subordinated Principal Carryover Shortfall relating
thereto), plus accrued and unpaid interest thereon
at the applicable Bond Interest Rate through the
month preceding the month in which such optional
redemption date occurs. The Bonds are not otherwise
subject to redemption or call at the option of the
Issuer nor are they subject to special redemption.
See "DESCRIPTION OF THE BONDS -- Redemption at the
Option of the Issuer" herein and in the Prospectus.
Credit Enhancement
A. Subordination......... Credit enhancement for the Senior Bonds will be
provided by the Subordinated Bonds and by the
Investor Certificate. Credit enhancement for the
Subordinated Bonds will be provided by the Investor
Certificate.
S-6
<PAGE> 54
The rights of holders of the Subordinated Bonds and
the Investor Certificate to receive payments with
respect to the Pledged Mortgages will be
subordinated to such rights of the holders of the
Senior Bonds, and the rights of the holder of the
Investor Certificate will be further subordinated
to such rights of the holders of the Subordinated
Bonds, in each case to the extent described herein.
See "DESCRIPTION OF THE BONDS -- Priority of
Payments and Allocation of Shortfalls" and "CREDIT
ENHANCEMENT" herein.
B. Bond Insurance
Policy..................... In addition to the other credit support described
herein, (the "Insurer") will issue a
financial guaranty insurance policy (the "Bond
Insurance Policy") pursuant to which it will
irrevocably and unconditionally guarantee payment
of the Insured Payments, as described herein.
If prior to a Payment Date the Bond Trustee
determines that the Available Funds (as defined
herein) for a Payment Date are less than the Senior
Interest Payment Amount and Senior Principal
Payment Amount (as each such term is defined
herein) due on such Payment Date, the Bond Trustee
will, subject to the terms of the Bond Insurance
Policy, draw an amount under the Bond Insurance
Policy equal to such shortfall and deposit such
amount (the "Insured Payment") into the
Distribution Account for payment to the Senior
Bondholders.
Pursuant to the Indenture, the Insurer will be
subrogated to the rights of the Senior Bondholders
to receive any payments on such Senior Bonds to the
extent of payments under the Bond Insurance Policy
that remain unreimbursed. In addition, under the
Indenture, absent the existence of a default by the
Insurer under the Bond Insurance Policy, the
Insurer will be entitled to exercise certain voting
rights of the Bondholders without the consent of
such Bondholders, and the Bondholders may exercise
such rights only with the prior written consent of
the Insurer. In addition, unless the Insurer
defaults on its payment obligations under the Bond
Insurance Policy, the Insurer, rather than the Bond
Trustee or the Bondholders, will have the right to
direct all matters relating to the Bonds in any
proceeding in a bankruptcy of the Issuer. See
"CREDIT ENHANCEMENT -- The Bond Insurance Policy"
herein.
[Description of the Insurer.] The Insurer's
claims-paying ability is rated by
. See "CREDIT ENHANCEMENT -- The
Insurer" herein.
Advances................... The Master Servicer is obligated to make cash
advances ("Advances") with respect to delinquent
payments of principal and interest on any Pledged
Mortgage to the extent described herein. The Bond
Trustee will be obligated to make any such Advance
if the Master Servicer fails in its obligation to
do so, to the extent provided in the Master
Servicing Agreement. See "SERVICING OF THE PLEDGED
MORTGAGES" herein.
Certain Prepayment and
Yield Considerations and
Risks;
Reinvestment Risk........ The effective yields to the holders of the Bonds
will be lower than the yields otherwise produced by
the applicable rate at which interest is paid to
such holders and the purchase price of such Bonds
because [monthly]
S-7
<PAGE> 55
distributions will not be payable to such holders
until the th day (or, if such day is not a
business day, the following business day) of the
month following the [ month] in which interest
accrues on the Pledged Mortgages (without any
additional payment of interest or earnings thereon
in respect of such delay). The rate of principal
payments on the Bonds, the aggregate amount of
payments on the Bonds and the yields to maturity of
the Bonds will be related to the rate and timing of
payments of principal on the Pledged Mortgages [and
the level of the Index].
Since the rate of payment of principal on the
Pledged Mortgages will depend on future events, no
assurance can be given as to such rate or the rate
of principal prepayments. The extent to which the
yield to maturity of a Class of Bonds may vary from
the anticipated yield may depend upon the degree to
which it is purchased at a discount or premium, and
the degree to which the timing of payments thereon
is sensitive to prepayments, liquidations and
purchases of the Pledged Mortgages. Further, an
investor should consider the risk that, in the case
of any Bond purchased at a discount, a slower than
anticipated rate of principal payments (including
prepayments) on the Pledged Mortgages could result
in an actual yield to such investor that is lower
than the anticipated yield and, in the case of any
Bond purchased at a premium, a faster than
anticipated rate of principal payments on the
Pledged Mortgages could result in an actual yield
to such investor that is lower than the anticipated
yield.
Because the Pledged Mortgages may be prepaid at any
time, it is not possible to predict the rate at
which payments of principal of the Bonds will be
received. Since prevailing interest rates are
subject to fluctuation, there can be no assurance
that investors in the Bonds will be able to
reinvest the payments thereon at yields equaling or
exceeding the yields on such Bonds. It is possible
that yields on any such reinvestments will be
lower, and may be significantly lower, than the
yields on the Bonds. See "RISK FACTORS -- Yield,
Prepayment and Maturity Risks" herein and "RISK
FACTORS -- Prepayment and Yield Considerations" in
the Prospectus.
Security for the Bonds..... The Bonds will be secured by collateral consisting
of the items set forth below:
A. Pledged Mortgages..... The Pledged Mortgages will consist primarily of a
pool (the "Pledged Mortgage Pool") of -year
conventional mortgage loans secured by first liens
on one-to four-family residential properties. Such
Pledged Mortgages will bear interest at [fixed]
rates [that adjust [annually] based on changes in
the level of the Index (as defined herein)].
Payments of principal and interest on the Bonds
will be based on payments received on the Pledged
Mortgages, as described herein. See "SECURITY FOR
THE BONDS -- The Pledged Mortgages" and
"DESCRIPTION OF THE BONDS -- Interest" and
" -- Principal" herein and in the Prospectus.
[The Mortgage Rate for each Pledged Mortgage will
adjust [annually] based on (the
"Index"). See "SECURITY FOR THE BONDS -- The
Pledged Mortgages -- General", and "-- The Index"
herein.]
S-8
<PAGE> 56
B. Bond Account.......... On or prior to the Closing Date, the Master
Servicer will establish and maintain or cause to be
established and maintained a separate account or
accounts for the collection of payments on the
Pledged Mortgages (the "Bond Account"). See
"DESCRIPTION OF THE BONDS -- Payments on Pledged
Mortgages; Accounts" herein and "SERVICING OF THE
PLEDGED MORTGAGES" herein and in the Prospectus.
C. Distribution
Account.................... On or prior to the Closing Date, the Bond Trustee
will establish an account (the "Distribution
Account") which will be maintained with the Bond
Trustee for the benefit of the Bondholders. On or
prior to the business day immediately preceding
each Payment Date, the Master Servicer will
withdraw from the Bond Account the Bond
Distribution Amount (as defined herein) for such
Payment Date, to the extent of Available Funds on
deposit therein, and will deposit such amount in
the Distribution Account. See "DESCRIPTION OF THE
BONDS -- Payments on Pledged Mortgages; Accounts"
herein and "SERVICING OF THE PLEDGED MORTGAGES"
herein and in the Prospectus.
Federal Income Tax
Consequences............. The Bonds will be treated as debt for federal
income tax purposes, and interest, including
original issue discount with respect to any Class
of Bonds issued with original issue discount, will
be taxable to non-exempt Bondholders. The
prepayment rate used by the Issuer for purposes of
determining the amount and rate of accrual of
original issue discount on the Bonds assumes that
the Pledged Mortgages are prepaid at a rate of
% of the Prepayment Assumption. Based upon the
assumed prepayment rate and the expected price to
the public of each Class of Bonds as of the date
hereof (including interest accrued before the
Closing Date, if any), the Senior Bonds will not be
issued with original issue discount and the
Subordinated Bonds will be treated as issued with
original issue discount. [Although it is unclear,
the Issuer intends to treat the Bonds as "Variable
Rate Debt Instruments" and the stated interest on
the Bonds as "qualified stated interest payments"
(as each such term is defined in the Prospectus
under "FEDERAL INCOME TAX CONSEQUENCES").]
Notwithstanding the use of the Prepayment
Assumption in pricing the Bonds, no representation
is made that the Pledged Mortgages will actually
prepay at such assumed prepayment rate or at any
other rate. The amount of original issue discount,
if any, and certain other information with respect
to each Bond will be set forth on the face of such
Bond as required by applicable regulations.
Payments on Bonds held by foreign persons will
generally be exempt from United States withholding
tax, subject to compliance with applicable
certification procedures. Counsel to the Issuer has
advised the Issuer that in its opinion the Bonds
will be treated as debt for federal income tax
purposes. The Issuer will not elect to treat the
segregated pool of assets securing the Bonds as a
"real estate mortgage investment conduit" for
federal income tax purposes. See "FEDERAL INCOME
TAX CONSEQUENCES" in the Prospectus.
Bonds owned by a real estate investment trust will
not be treated as "real estate assets" or
"Government securities" and interest on the Bonds
will not be considered "interest on obligations
secured by mortgages on real property or on
interests in real property." Similarly, the Bonds
will not constitute "qualifying real property
loans" for mutual savings banks or
S-9
<PAGE> 57
domestic building and loan associations and will
not constitute "loans secured by an interest in
real property" or "obligations of the United
States" for domestic building and loan
associations. In addition, Bonds held by a
regulated investment company will not constitute
"Government securities." See "FEDERAL INCOME TAX
CONSEQUENCES" in the Prospectus.
ERISA Matters.............. Fiduciaries of employee benefit plans and certain
other retirement plans and arrangements that are
subject to the Employee Retirement Income Security
Act of 1974, as amended ("ERISA"), or corresponding
provisions of the Internal Revenue Code of 1986, as
amended (the "Code"), including individual
retirement accounts and annuities, Keogh plans and
collective investment funds in which such plans,
accounts, annuities or arrangements are invested
(any of the foregoing a "Plan"), persons acting on
behalf of a Plan, or persons using the assets of a
Plan ("Plan Investors"), should review carefully
with their legal advisors whether the purchase or
holding of the Bonds could either give rise to a
transaction that is prohibited under ERISA or the
Code or cause the Pledged Mortgages securing the
Bonds to be treated as plan assets for purposes of
regulations of the Department of Labor set forth in
29 C.F.R. 2510.3-101 (the "Plan Asset
Regulations"). Although certain exceptions from the
application of the prohibited transaction rules and
the Plan Asset Regulations exist, there can be no
assurance that any such exception will apply with
respect to the acquisition of the Bonds. See "ERISA
MATTERS" herein and in the Prospectus. Although not
entirely free from doubt, the Issuer believes that
the Bonds will be treated as debt obligations
without significant equity features for purposes of
the Plan Asset Regulations. Accordingly, a Plan
that acquires the Bonds should not be treated as
having acquired a direct interest in the assets of
the Issuer. See "ERISA MATTERS" herein and in the
Prospectus. However, there can be no complete
assurance that the Bonds will be treated as debt
obligations without significant equity features for
purposes of the Plan Asset Regulations.
Legal Investment........... The Bonds will constitute "mortgage related
securities" for purposes of the Secondary Mortgage
Market Enhancement Act of 1984 ("SMMEA") so long as
they are rated in one of the two highest rating
categories by at least one nationally recognized
statistical rating organization and, as such, are
legal investments for certain entities to the
extent provided for in SMMEA. Institutions whose
investment activities are subject to review by
federal or state regulatory authorities should
consult with their counsel or the applicable
authorities to determine whether an investment in
the Bonds complies with applicable guidelines,
policy statements or restrictions. See "LEGAL
INVESTMENT" in the Prospectus.
Ratings.................... It is a condition of the issuance of the Senior
Bonds that they be rated AAA by
(" ") and AAA by
(" " and, together with ,
the "Rating Agencies"). It is a condition to the
issuance of the Subordinated Bonds that they be
rated [AA] by . The ratings of the
Bonds of any Class should be evaluated
independently from similar ratings on other types
of securities. A rating is not a recommendation to
buy, sell or hold
S-10
<PAGE> 58
securities and may be subject to revision or
withdrawal at any time by the Rating Agencies. See
"RATINGS" herein.
The Issuer has not requested a rating of the Bonds
by any rating agency other than the Rating
Agencies; there can be no assurance, however, as to
whether any other rating agency will rate the Bonds
or, if it does, what rating would be assigned by
such other rating agency. The rating assigned by
such other rating agency to the Bonds could be
lower than the respective ratings assigned by the
Rating Agencies.
Use of Proceeds............ The Issuer intends to distribute all of the net
proceeds of the issuance of the Bonds to the
Company which will apply such proceeds to the
purchase of the Pledged Mortgages. The Pledged
Mortgages were purchased by the Company from
[Redwood Trust] and sold to the Issuer by the
Company. See "USE OF PROCEEDS" herein and in the
Prospectus and "METHOD OF DISTRIBUTION" herein.
Risk Factors............... For a discussion of certain risks associated with
an investment in the Bonds, see "RISK FACTORS"
commencing on page S-12 herein and on page 19 in
the Prospectus.
S-11
<PAGE> 59
RISK FACTORS
YIELD, PREPAYMENT AND MATURITY RISKS
EFFECT OF DELAYS IN PAYMENT ON THE BONDS. The effective yields to the
holders of the Bonds will be lower than the yields otherwise produced by the
applicable rate at which interest is paid to such holders and the purchase price
of such Bonds because [monthly] payments will not be payable to such holders
until the th day (or, if such day is not a business day, the following
business day) of the month following the [month] in which interest accrues on
the Pledged Mortgages (without any additional payment of interest or earnings
thereon in respect of such delay).
EFFECT OF DELINQUENCIES ON THE PLEDGED MORTGAGES. Delinquencies on the
Pledged Mortgages which are not advanced by or on behalf of the Master Servicer
(because amounts, if advanced, would be nonrecoverable), may adversely affect
the yield on the Bonds. Because of the priority of distributions, shortfalls
resulting from delinquencies not so advanced will be borne first by the Investor
Certificate and then by the Subordinated Bonds. If, as a result of such
shortfalls, the sum of (i) the Senior Class Principal Amount, (ii) the
Subordinated Principal Amount and (iii) the Invested Amount exceeds the Pool
Principal Balance, the Invested Amount will be reduced by the amount of such
excess until the Invested Amount is reduced to zero, and thereafter, the
Subordinated Class Principal Amount will be reduced by the remaining amount of
such excess, if any.
[EFFECT OF PERIODIC RATE CAP AND MINIMUM RATE. The Mortgage Rate of each
Pledged Mortgage will be subject to a Periodic Rate Cap and a Maximum Rate. If
the Index changes substantially between Adjustment Dates, the adjusted Mortgage
Rate on a related Pledged Mortgage may not equal the applicable Index plus the
related Margin due to the constraint of such caps. In such event, the related
Net Mortgage Rate and consequently, each Bond Interest Rate, will be less than
would have been the case in the absence of such caps.]
[EFFECT OF DISPROPORTIONATE PREPAYMENTS. The Bond Interest Rate for each
Class of Bonds will be based upon the weighted average of the Net Mortgage Rates
for the Pledged Mortgages. Any disproportionate prepayment of Pledged Mortgages
with higher Net Mortgage Rates may adversely affect the yield on the Bonds. The
Bond Interest Rates for each Class of Bonds will vary from Payment Date to
Payment Date due to (i) the timing of the Mortgage Rate readjustments of the
Pledged Mortgages and (ii) different rates of payment of principal of such
Pledged Mortgages bearing different Mortgage Rates.]
EFFECT OF NET INTEREST SHORTFALLS AND REALIZED LOSSES. Net Interest
Shortfalls allocated to the Subordinated Bonds, if any, will reduce the amount
of interest payable on the Subordinated Bonds which will adversely affect the
yields on the Subordinated Bonds. In addition, although all losses initially
will be borne by the Investor Certificate, the yields on the Subordinated Bonds
will depend on the rate and timing of Realized Losses. Realized Losses could
occur at a time when the Investor Certificate no longer outstanding and
available to absorb Realized Losses. Realized Losses in excess of the Invested
Amount will reduce the funds available to make payments to the holders of the
Subordinated Bonds on the related Payment Date. As a result, holders of the
Subordinated Bonds may not receive the full amount of interest and principal on
a Payment Date that they would have received in the absence of such Realized
Losses. In the event that holders of Subordinated Bonds do not receive the full
amount of accrued interest for any Payment Date, the amount which is not paid
will be carried forward and will be payable on future Payment Dates to the
extent funds are available therefor. Any amount of interest so carried forward
will not (except in the case of the Subordinated Bonds) accrue interest until
the Bonds are declared due and payable upon the occurrence of an Event of
Default, as described herein under "DESCRIPTION OF THE BONDS -- Priority of
Payments and Allocation of Shortfalls." Any shortfall in amounts otherwise
payable as principal of the Subordinated Bonds will be paid on future Payment
Dates to the extent funds are available therefor. So long as the Senior Bonds
are outstanding, any shortfall in amounts available for payments of principal
of, or interest on, the Subordinated Bonds will not constitute an Event of
Default.
Under the Indenture, shortfalls in amounts required to be distributed to
Bondholders ("Shortfalls") that affect only the Subordinated Bonds will not
constitute an Event of Default until all the Senior Bonds have
S-12
<PAGE> 60
been paid in full and then only if Shortfalls on the Subordinated Bonds have not
been paid. In addition, an Event of Default by reason of any Shortfalls that
affect the Senior Bonds will occur on any Payment Date only when the Pool
Principal Balance is less than the principal amount of the Senior Bonds
outstanding after application of all available amounts on deposit in the
Distribution Account on such Payment Date. As described herein, on any Payment
Date on which a Shortfall occurs, payments of accrued interest on the
Subordinated Bonds will be subject to the availability of funds in the
Distribution Account after payment of accrued interest on and principal then due
on all outstanding Senior Bonds. Also, upon the occurrence of each Shortfall,
the Senior Percentage, the Subordinated Percentage and the Investor Percentage
will shift in the manner described herein under "DESCRIPTION OF THE
BONDS -- Priority of Payments and Allocation of Shortfalls." Therefore,
following the occurrence of any Shortfall allocable to the Subordinated Bonds,
such Subordinated Bonds will amortize more slowly than would otherwise have been
the case in the absence of such Shortfall. As a result of these factors, the
yield on the Subordinated Bonds will be more sensitive than the yield on the
Senior Bonds to the occurrence of Shortfalls.
The weighted average life of, and the yield to maturity on, the
Subordinated Bonds will be sensitive to the rate and timing of mortgagor
defaults and the severity of ensuing losses on the Pledged Mortgages. If the
actual rate and severity of losses on the Pledged Mortgages is higher than those
assumed by a holder of a Subordinated Bond, the actual yield to maturity of such
Bond may be lower than the yield expected by such holder based on such
assumption. The timing of losses on the Pledged Mortgages will also affect an
investor's actual yield to maturity, even if the rate of defaults and severity
of losses over the life of the Pledged Mortgage Pool are consistent with an
investor's expectations. In general, the earlier a loss occurs, the greater the
effect on an investor's yield to maturity. The yield to maturity of the
Subordinated Bonds will also be affected by Net Interest Shortfalls allocated to
the Subordinated Bonds, if any, and other cash shortfalls in Available Funds.
See "DESCRIPTION OF THE BONDS -- Priority of Payments and Allocation of
Shortfalls" herein.
EFFECT OF RATE AND TIMING OF PRINCIPAL PAYMENTS. The rate of principal
payments on the Bonds, the aggregate amount of payments on the Bonds and the
yields to maturity of the Bonds will be related to the rate and timing of
payments of principal on the Pledged Mortgages. The rate of principal payments
on the Pledged Mortgages will in turn be affected by the amortization schedules
of the Pledged Mortgages and by the rate of principal prepayments (including for
this purpose prepayments resulting from refinancing, liquidations of the Pledged
Mortgages due to defaults, casualties, condemnations and purchases by Redwood
Trust [or any optional purchase by the Master Servicer or the Company of a
defaulted Pledged Mortgage]). [The Pledged Mortgages may be prepaid by the
Mortgagors at any time without a prepayment penalty.] [The Pledged Mortgages are
subject to the "due-on-sale" provisions included therein.] See "SECURITY FOR THE
BONDS -- The Pledged Mortgages" herein.
Prepayments, liquidations and purchases of the Pledged Mortgages (including
[any optional purchase by the Master Servicer or the Company of a defaulted
Pledged Mortgage] and any optional repurchase by the Issuer of the remaining
Pledged Mortgages in connection with the optional redemption of the Bonds, in
each case as described herein) will result in payments on the Bonds of principal
amounts which would otherwise be distributed over the remaining terms of the
Pledged Mortgages. Since the rate of payment of principal on the Pledged
Mortgages will depend on future events, no assurance can be given as to such
rate or the rate of principal prepayments. The extent to which the yield to
maturity of a Class of Bonds may vary from the anticipated yield will depend
upon the degree to which such Bond is purchased at a discount or premium, and
the degree to which the timing of payments thereon is sensitive to prepayments,
liquidations and purchases of the Pledged Mortgages. Further, an investor should
consider the risk that, in the case of any Bond purchased at a discount, a
slower than anticipated rate of principal payments (including prepayments) on
the Pledged Mortgages could result in an actual yield to such investor that is
lower than the anticipated yield and, in the case of any Bond purchased at a
premium, a faster than anticipated rate of principal payments on the Pledged
Mortgages could result in an actual yield to such investor that is lower than
the anticipated yield.
The rate of principal payments (including prepayments) on pools of mortgage
loans may vary significantly over time and may be influenced by a variety of
economic, geographic, social and other factors, including changes in mortgagors'
housing needs, job transfers, unemployment, mortgagors' net equity in the
mortgaged properties and servicing decisions. In general, if prevailing interest
rates were to fall significantly
S-13
<PAGE> 61
below the Mortgage Rates on the Pledged Mortgages, the Pledged Mortgages could
be subject to higher prepayment rates than if prevailing interest rates were to
remain at or above the Mortgage Rates on the Pledged Mortgages. Conversely, if
prevailing interest rates were to rise significantly, the rate of prepayments on
the Pledged Mortgages would generally be expected to decrease. No assurances can
be given as to the rate of prepayments on the Pledged Mortgages in stable or
changing interest rate environments.
The timing of changes in the rate of prepayments on the Pledged Mortgages
may significantly affect an investor's actual yield to maturity, even if the
average rate of principal payments is consistent with an investor's expectation.
In general, the earlier a prepayment of principal on the Pledged Mortgages, the
greater the effect on an investor's yield to maturity. The effect on an
investor's yield as a result 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 Bonds may not be offset by a
subsequent like decrease (or increase) in the rate of principal payments.
NO REPRESENTATION IS MADE AS TO THE RATE OF PRINCIPAL PAYMENTS ON THE
PLEDGED MORTGAGES OR AS TO THE YIELD TO MATURITY OF ANY CLASS OF BONDS.
INVESTORS ARE URGED TO MAKE AN INVESTMENT DECISION WITH RESPECT TO THE BONDS
BASED ON THE ANTICIPATED YIELD TO MATURITY OF SUCH BONDS RESULTING FROM THEIR
RESPECTIVE PRICES AND EACH INVESTOR'S OWN DETERMINATION AS TO ANTICIPATED
PLEDGED MORTGAGE PREPAYMENT RATES.
CASH FLOW CONSIDERATIONS AND RISKS
Minimum monthly payments on the Pledged Mortgages will at least equal and
may exceed accrued interest thereon. Even assuming that the Mortgaged Properties
provide adequate security for the Pledged Mortgages, substantial delays could be
encountered in connection with the liquidation of Pledged Mortgages that are
delinquent, which could result in shortfalls in payments on Subordinated Bonds
and if the Insurer were unable to perform its obligations under the Bond
Insurance Policy, on the Senior Bonds. Further, liquidation expenses (such as
legal fees, real estate taxes, and maintenance and preservation expenses) will
reduce the security for the related Pledged Mortgages and could thereby reduce
the proceeds payable to holders of the Bonds. In the event any of the Mortgaged
Properties fail to provide adequate security for the related Pledged Mortgages,
holders of the Subordinated Bonds could experience a loss to the extent that any
applicable credit enhancement has been exhausted and, in the case of the Senior
Bonds, if the Insurer was unable to perform its obligations under the Bond
Insurance Policy.
LIMITED RECOURSE
The Bonds represent obligations solely of the Issuer and are not insured by
any governmental agency or instrumentality, the Company, Redwood Trust, the
Master Servicer, any Servicer, or, except as set forth herein, the Insurer or
any other person or entity.
DELINQUENCIES MAY ADVERSELY AFFECT INVESTMENT
As of the Cut-off Date, (i) not more than % of the Pledged Mortgages
(by Cut-off Date Stated Principal Balance) were delinquent by one or more
Scheduled Payments and (ii) not more than % of the Pledged Mortgages (by
Cut-off Date Stated Principal Balance) were delinquent by two or more Scheduled
Payments. Investors should consider the risk that the inclusion of such loans in
the Pledged Mortgages may effect the rates of defaults and prepayments on such
Pledged Mortgages and the yields on the Bonds. See "SECURITY FOR THE
BONDS -- The Pledged Mortgages" herein.
PLEDGED MORTGAGE CONCENTRATION
Approximately % and % of the Pledged Mortgages (by Cut-off Date Stated
Principal Balance) are expected to be secured by Mortgaged Properties located in
and , respectively. Consequently, losses and
prepayments on the Pledged Mortgages and the resultant payments on the Bonds may
be affected significantly by changes in the housing markets and the regional
economies in these areas, and also by the occurrence of natural disasters (such
as earthquakes, fires and floods) in these areas.
S-14
<PAGE> 62
LIMITED LIQUIDITY OF INVESTMENT
There can be no assurance that a secondary market will develop for the
Bonds, or, if one does develop, that it will provide the holders of the Bonds
with liquidity of investment or that it will continue to exist for the term of
the Bonds.
BANKRUPTCY AND INSOLVENCY RISKS
Redwood Trust and the Company will treat the transfer of the Pledged
Mortgages by Redwood Trust to the Company as a sale. Nevertheless, in the event
of a bankruptcy of Redwood Trust the trustee in bankruptcy could attempt to
recharacterize the sale of the Pledged Mortgages as a borrowing secured by a
pledge of mortgage loans. The Company and the Issuer will treat the transfer of
the Pledged Mortgages by the Company to the Issuer as a sale. Nevertheless, in
the event of a bankruptcy of the Company, the trustee in bankruptcy could
attempt to recharacterize the sale of the Pledged Mortgages as a borrowing
secured by a pledge of mortgage loans.
In either case, if such an attempt to recharacterize the transfer of the
loans were successful, a trustee in bankruptcy could elect to accelerate payment
of the Bonds and liquidate the Pledged Mortgages, with the holders of the Bonds
entitled to no more than the then outstanding Class Principal Amount, if any, of
such Bonds together with interest at the applicable Bond Interest Rates to the
date of payment. In the event of an acceleration of the Bonds, the holders of
the Bonds would lose the right to future payments of interest, might suffer
reinvestment losses in a lower interest rate environment and may fail to recover
their initial investment.
BOOK-ENTRY BONDS
LIMITED LIQUIDITY. Issuance of the Bonds in book-entry form may reduce the
liquidity of such Bonds in the secondary trading market since investors may be
unwilling to purchase Bonds for which they cannot obtain physical certificates.
See "DESCRIPTION OF THE BONDS -- Book-Entry Bonds" herein and in the Prospectus
and "RISK FACTORS -- Book-Entry Registration" in the Prospectus.
DIFFICULTY IN PLEDGING. Since transactions in the Bonds can be effected
only through DTC, CEDEL, Euroclear, participating organizations, indirect
participants and certain banks, the ability of a Bond Owner to pledge a Bond to
persons or entities that do not participate in the DTC, CEDEL or Euroclear
system may be limited due to lack of a physical certificate representing the
Bonds. See "DESCRIPTION OF THE BONDS -- Book-Entry Bonds" herein and in the
Prospectus and "RISK FACTORS -- Book-Entry Registration" in the Prospectus.
POTENTIAL DELAYS IN PAYMENT. Bond Owners may experience some delay in
their receipt of payments of interest and principal on the Bonds since such
payments will be forwarded by the Bond Trustee to DTC and DTC will credit such
payments to the accounts of its Participants (as defined herein) which will
thereafter credit them to the accounts of Bond Owners either directly or
indirectly through indirect participants. Bond Owners will not be recognized as
Bondholders as such term is used in the Indenture, and Bond Owners will be
permitted to exercise the rights of Bondholders only indirectly through DTC and
its Participants. See "DESCRIPTION OF THE BONDS -- Book-Entry Bonds" herein and
in the Prospectus and "RISK FACTORS -- Book-Entry Registration" in the
Prospectus.
RATINGS
The ratings of the Classes of Bonds will depend primarily on an assessment
by the Rating Agencies of the Pledged Mortgages and, in the case of the Senior
Bonds, upon the claims-paying ability of the Insurer. Any reduction in the
rating assigned to the claims-paying ability of the Insurer below the rating
initially given to the Senior Bonds may result in a reduction in the rating of
the Senior Bonds. The rating by the Rating Agencies of the Classes of Bonds is
not a recommendation to purchase, hold or sell the Bonds, inasmuch as such
rating does not comment as to the market price or suitability for a particular
investor. There is no assurance that the ratings will remain in place for any
given period of time or that the ratings will not be
S-15
<PAGE> 63
lowered or withdrawn by the Rating Agencies. In general, ratings assess credit
risk and do not address likelihood of prepayments.
FOR A DISCUSSION OF CERTAIN ADDITIONAL RISK FACTORS RELATING TO INVESTMENTS
IN THE BONDS, SEE "RISK FACTORS" IN THE PROSPECTUS.
THE ISSUER
The Issuer is a statutory business trust established under the laws of the
State of Delaware by an amended and restated deposit trust agreement, dated as
of , 199 . The Issuer was formed for the sole purpose of
issuing the Bonds and the Investor Certificate. The Company is the settlor and
sole beneficiary of the Issuer and is the Owner Trustee of
the Issuer. The Company is a limited purpose finance corporation the capital
stock of which is wholly owned by Redwood Trust, Inc., a Maryland corporation
("Redwood Trust"). Redwood Trust will be the manager of the Issuer pursuant to a
management agreement entered into with the Issuer. None of the Company, Redwood
Trust, or any of their respective affiliates has guaranteed
or is otherwise obligated with respect to payment of the Bonds and no person or
entity other than the Issuer is obligated to pay the Bonds, except as
specifically set forth herein with regard to the Bond Insurance Policy. See
"CREDIT ENHANCEMENT -- The Bond Insurance Policy" herein.
The Issuer's assets will consist almost entirely of the Pledged Mortgages
which will be pledged to secure the Bonds. If the Pledged Mortgages and other
collateral securing the Bonds are insufficient for payment of the Bonds, it is
unlikely that significant other assets of the Issuer will be available for
payment of the Bonds. The amount of funds available to pay the Bonds may be
affected by, among other things, Realized Losses incurred on defaulted Pledged
Mortgages. See "RISK FACTORS" herein and in the Prospectus and "THE ISSUER" in
the Prospectus.
The Indenture prohibits the Issuer from incurring any indebtedness other
than the Bonds, or assuming or guaranteeing the indebtedness of any other
person.
DESCRIPTION OF THE BONDS
GENERAL
The Bonds will be issued pursuant to the Indenture. Set forth below are
summaries of the specific terms and provisions pursuant to which the Bonds will
be issued. The following summaries are subject to, and are qualified in their
entirety by reference to, the provisions of the Indenture. When particular
provisions or terms used in the Indenture are referred to, the actual provisions
(including definitions of terms) are incorporated by reference.
The Sequoia Mortgage Trust , Collateralized Mortgage Bonds
(the "Bonds"), will consist of the Class A-1 Bonds (the "Senior Bonds") and the
Class B-1 Bonds (the "Subordinated Bonds"). The Issuer will also issue the
Investor Certificate (the "Investor Certificate") as described herein. The
Senior Bonds and the Subordinated Bonds are collectively referred to herein as
the "Offered Bonds." Only the Bonds are offered hereby. The Classes of Bonds
will have the respective Bond Interest Rates described on the cover hereof. The
Investor Certificate will bear interest at the Certificate Interest Rate
described herein.
The "Class Principal Amount" of (a) the Senior Bonds (the "Senior Class
Principal Amount") as of any Payment Date is the Original Senior Class Principal
Amount reduced by all amounts previously distributed to holders of the Senior
Bonds as payments of principal, (b) the Subordinated Bonds (the "Subordinated
Class Principal Amount") as of any Payment Date is the lesser of (i) the
aggregate of the Stated Principal Balances of the Pledged Mortgages, less the
Senior Class Principal Amount immediately prior to such date, and (ii) the
Original Subordinated Class Principal Amount reduced by all amounts previously
distributed to holders of the Subordinated Bonds as payments of principal. The
Senior Bonds will have an original Senior Class Principal Amount of
$ (the "Original Senior Class Principal Amount") and the
Subordinated Bonds will
S-16
<PAGE> 64
have an original Subordinated Class Principal Amount of $ (the
"Original Subordinated Class Principal Amount"). The "Invested Amount" of the
Investor Certificate as of any Payment Date is the lesser of (i) the aggregate
of the Stated Principal Balances of the Pledged Mortgages, less the sum of (x)
the Senior Class Principal Amount and (y) the Subordinated Class Principal
Amount, in each case immediately prior to such date, and (ii) the Original
Invested Amount reduced by all amounts previously distributed to the holder of
the Investor Certificate in reduction of the Invested Amount. The Investor
Certificate will have an original Invested Amount of approximately
$ (the "Original Invested Amount").
BOOK-ENTRY BONDS
The Bonds will be book-entry Bonds (each, a Class of "Book-Entry Bonds").
Persons acquiring beneficial ownership interests in the Bonds ("Bond Owners")
may elect to hold their Bonds through the Depository Trust Company ("DTC") in
the United States, or CEDEL or Euroclear (in Europe) if they are participants of
such systems, or indirectly through organizations which are participants in such
systems. The Book-Entry Bonds will be issued in one or more certificates which
equal the aggregate principal amount of the Bonds and will initially be
registered in the name of Cede & Co., the nominee of DTC. CEDEL and Euroclear
will hold omnibus positions on behalf of their participants through customers'
securities accounts in CEDEL's and Euroclear's names on the books of their
respective depositaries which in turn will hold such positions in customers'
securities accounts in the depositaries' names on the books of DTC. Citibank,
N.A., will act as depositary for CEDEL and The Chase Manhattan Bank will act as
depositary for Euroclear (in such capacities, individually the "Relevant
Depositary" and collectively the "European Depositaries"). Investors may hold
such beneficial interests in the Book-Entry Bonds in minimum denominations
representing Class Principal Amounts of $ and in multiples of
$1,000 in excess thereof. Except as described below, no person acquiring a
Book-Entry Bond (each, a "beneficial owner") will be entitled to receive a
physical certificate representing such Bond (a "Definitive Bond"). Unless and
until Definitive Bonds are issued, it is anticipated that the only "Bondholders"
of the Bonds will be Cede & Co., as nominee of DTC. Bond Owners will not be
Bondholders as that term is used in the Indenture. Bond Owners are only
permitted to exercise their rights indirectly through the participating
organizations that utilize the services of DTC, including securities brokers and
dealers, banks and trust companies and clearing corporations and certain other
organizations ("Participants") and DTC.
The beneficial owner's ownership of a Book-Entry Bond will be recorded on
the records of the brokerage firm, bank, thrift institution or other financial
intermediary (each, a "Financial Intermediary") that maintains the beneficial
owner's account for such purpose. In turn, the Financial Intermediary's
ownership of such Book-Entry Bond will be recorded on the records of DTC (or of
a participating firm that acts as agent for the Financial Intermediary, whose
interest will in turn be recorded on the records of DTC, if the beneficial
owner's Financial Intermediary is not a DTC participant, and on the records of
CEDEL or Euroclear, as appropriate).
Bond Owners will receive all payments of principal of, and interest on, the
Bonds from the Bond Trustee through DTC and DTC participants. While the Bonds
are outstanding (except under the circumstances described below), under the
rules, regulations and procedures creating and affecting DTC and its operations
(the "Rules"), DTC is required to make book-entry transfers among Participants
on whose behalf it acts with respect to the Bonds and is required to receive and
transmit payments of principal of, and interest on, the Bonds. Participants and
indirect participants which have indirect access to the DTC system, such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a Participant, either directly or indirectly
("Indirect Participants"), with whom Bond Owners have accounts with respect to
Bonds are similarly required to make book-entry transfers and receive and
transmit such payments on behalf of their respective Bond Owners. Accordingly,
although Bond Owners will not possess certificates, the Rules provide a
mechanism by which Bond Owners will receive payments and will be able to
transfer their interest.
Bond Owners will not receive or be entitled to receive certificates
representing their respective interests in the Bonds, except under the limited
circumstances described below. Unless and until Definitive Bonds are issued,
Bond Owners who are not Participants may transfer ownership of Bonds only
through Participants and Indirect Participants by instructing such Participants
and Indirect Participants to transfer Bonds, by book-entry transfer, through DTC
for the account of the purchasers of such Bonds, which account is maintained
S-17
<PAGE> 65
with their respective Participants. Under the Rules and in accordance with DTC's
normal procedures, transfers of ownership of Bonds will be executed through DTC
and the accounts of the respective Participants at DTC will be debited and
credited. Similarly, the Participants and Indirect Participants will make debits
or credits, as the case may be, on their records on behalf of the selling and
purchasing Bond Owners.
Because of time zone differences, credits of securities received in CEDEL
or Euroclear as a result of a transaction with a Participant will be made during
subsequent securities settlement processing and dated the business day following
the DTC settlement date. Such credits or any transactions in such securities
settled during such processing will be reported to the relevant Euroclear or
CEDEL Participants on such business day. Cash received in CEDEL or Euroclear as
a result of sales of securities by or through a CEDEL Participant (as defined
herein) or Euroclear Participant (as defined herein) to a DTC Participant will
be received with value on the DTC settlement date but will be available in the
relevant CEDEL or Euroclear cash account only as of the business day following
settlement in DTC. For information relating to tax documentation procedures
relating to the Bonds, see "FEDERAL INCOME TAX CONSEQUENCES -- Foreign
Investors" and "-- Backup Withholding" in the Prospectus and "GLOBAL CLEARANCE,
SETTLEMENT AND TAX DOCUMENTATION PROCEDURES -- Certain U.S. Federal Income Tax
Documentation Requirements" in Annex I hereto.
Transfers between Participants will occur in accordance with DTC Rules.
Transfers between CEDEL Participants and Euroclear Participants will occur in
accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through CEDEL
Participants or Euroclear Participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by the Relevant Depositary; however, such cross-market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in accordance
with its rules and procedures and within its established deadlines (European
time). The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to the
Relevant Depositary to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving payment in
accordance with normal procedures for same day fund settlement applicable to
DTC. CEDEL Participants and Euroclear Participants may not deliver instructions
directly to the European Depositaries.
DTC, which is a New York-chartered limited purpose trust company, performs
services for its participants, some of which (and/or their representatives) own
DTC. In accordance with its normal procedures, DTC is expected to record the
positions held by each DTC participant in the Book-Entry Bonds, whether held for
its own account or as nominee for another person. In general, beneficial
ownership of Book-Entry Bonds will be subject to the rules, regulations and
procedures governing DTC and DTC participants as in effect from time to time.
CEDEL is incorporated under the laws of Luxembourg as a professional
depository. CEDEL holds securities for its participating organizations ("CEDEL
Participants") and facilitates the clearance and settlement of securities
transactions between CEDEL Participants through electronic book-entry changes in
accounts of CEDEL Participants, thereby eliminating the need for physical
movement of certificates. Transactions may be settled in CEDEL in any of 28
currencies, including United States dollars. CEDEL provides to its CEDEL
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. CEDEL interfaces with domestic markets in several
countries. As a professional depository, CEDEL is subject to regulation by the
Luxembourg Monetary Institute. CEDEL participants are recognized financial
institutions around the world, including underwriters, securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations. Indirect access to CEDEL is also available to others, such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a CEDEL Participant, either directly or indirectly.
S-18
<PAGE> 66
Euroclear was created in 1968 to hold securities for its participants
("Euroclear Participants") and to clear and settle transactions between
Euroclear Participants through simultaneous electronic book-entry delivery
against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Transactions may be settled in any of 32 currencies, including United
States dollars. Euroclear includes various other services, including securities
lending and borrowing and interfaces with domestic markets in several countries
generally similar to the arrangements for cross-market transfers with DTC
described above. Euroclear is operated by the Brussels, Belgium office of Morgan
Guaranty Trust Company of New York ("Morgan" and in such capacity, the
"Euroclear Operator"), under contract with Euroclear Clearance Systems S.C., a
Belgian cooperative corporation (the "Cooperative"). All operations are
conducted by Morgan, and all Euroclear securities clearance accounts and
Euroclear cash accounts are accounts with the Euroclear Operator, not the
Belgian Cooperative. The Belgian Cooperative establishes policy for Euroclear on
behalf of Euroclear Participants. Euroclear Participants include banks
(including central banks), securities brokers and dealers and other professional
financial intermediaries. Indirect access to Euroclear is also available to
other firms that clear through or maintain a custodial relationship with a
Euroclear Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with Morgan are governed by
the Terms and Conditions Governing Use of Euroclear and the related Operating
Procedures of the Euroclear System and applicable Belgian law (collectively, the
"Terms and Conditions"). The Terms and Conditions govern transfers of securities
and cash within Euroclear, withdrawals of securities and cash from Euroclear,
and receipts of payments with respect to securities in Euroclear. All securities
in Euroclear are held on a fungible basis without attribution of specific
certificates to specific securities clearance accounts. The Euroclear Operator
acts under the Terms and Conditions only on behalf of Euroclear Participants,
and has no record of or relationship with persons holding through Euroclear
Participants.
Payments on the Book-Entry Bonds will be made on each Distribution Date by
the Bond Trustee to DTC. DTC will be responsible for crediting the amount of
such payments to the accounts of the applicable DTC participants in accordance
with DTC's normal procedures. Each DTC participant will be responsible for
disbursing such payments to the beneficial owners of the Book-Entry Bonds that
it represents and to each Financial Intermediary for which it acts as agent.
Each such Financial Intermediary will be responsible for disbursing funds to the
beneficial owners of the Book-Entry Bonds that it represents.
Under a book-entry format, beneficial owners of the Book-Entry Bonds may
experience some delay in their receipt of payments, since such payments will be
forwarded by the Bond Trustee to Cede & Co., as nominee of DTC. Payments with
respect to Bonds held through CEDEL or Euroclear will be credited to the cash
accounts of CEDEL Participants or Euroclear Participants in accordance with the
relevant system's rules and procedures, to the extent received by the Relevant
Depositary. Such payments will be subject to tax reporting in accordance with
relevant United States tax laws and regulations. See "FEDERAL INCOME TAX
CONSEQUENCES -- Withholding with Respect to Certain Foreign Investors" and
"-- Backup Withholding" in the Prospectus. Because DTC can only act on behalf of
Financial Intermediaries, the ability of a beneficial owner to pledge Book-Entry
Bonds to persons or entities that do not participate in the depository system,
or otherwise take actions in respect of such Book-Entry Bond, may be limited due
to the lack of physical certificates for such Book-Entry Bonds. In addition,
issuance of the Book-Entry Bonds in book-entry form may reduce the liquidity of
such Bonds in the secondary market since certain potential investors may be
unwilling to purchase Bonds for which they cannot obtain physical certificates.
Monthly and annual reports on the Issuer will be provided to Cede & Co., as
nominee of DTC, and may be made available by Cede & Co. to beneficial owners
upon request, in accordance with the rules, regulations and procedures creating
and affecting DTC or the Relevant Depositary, and to the Financial
Intermediaries to whose DTC accounts the Book-Entry Bonds of such beneficial
owners are credited.
S-19
<PAGE> 67
DTC has advised the Issuer and the Bond Trustee that, unless and until
Definitive Bonds are issued, DTC will take any action permitted to be taken by
the holders of the Book-Entry Bonds under the Indenture only at the direction of
one or more Financial Intermediaries to whose DTC accounts the Book-Entry Bonds
are credited, to the extent that such actions are taken on behalf of Financial
Intermediaries whose holdings include such Book-Entry Bonds. CEDEL or the
Euroclear Operator, as the case may be, will take any other action permitted to
be taken by a Bondholder under the Indenture on behalf of a CEDEL Participant or
Euroclear Participant only in accordance with its relevant rules and procedures
and subject to the ability of the Relevant Depositary to effect such actions on
its behalf through DTC. DTC may take actions, at the direction of the related
Participants, with respect to some Bonds which conflict with actions taken with
respect to other Bonds.
Definitive Bonds will be issued to beneficial owners of the Book-Entry
Bonds, or their nominees rather than to DTC, only if (a) DTC or the Issuer
advises the Bond Trustee in writing that DTC is no longer willing, qualified or
able to discharge properly its responsibilities as nominee and depositary with
respect to the Book-Entry Bonds and the Issuer or the Bond Trustee is unable to
locate a qualified successor or (b) the Issuer, at its sole option, elects to
terminate a book-entry system through DTC.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Bond Trustee will be required to notify all beneficial
owners of the occurrence of such event and the availability through DTC of the
Definitive Bonds. Upon surrender by DTC of the global certificate or
certificates representing the Book-Entry Bonds and instructions for
re-registration, the Bond Trustee will issue Definitive Bonds, and thereafter
the Bond Trustee will recognize the holders of such Definitive Bonds as
Bondholders under the Indenture.
Although DTC, CEDEL and Euroclear have agreed to the foregoing procedures
in order to facilitate transfers of Bonds among participants of DTC, CEDEL and
Euroclear, they are under no obligation to perform or continue to perform such
procedures and such procedures may be discontinued at any time.
None of the Master Servicer, the Company, the Issuer or the Bond Trustee
will have any responsibility for any aspect of the records relating to or
payments made on account of beneficial ownership interests of the Book-Entry
Bonds held by Cede & Co., as nominee of DTC, or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interests.
For a description of the procedures generally applicable to the Book-Entry
Bonds, see "DESCRIPTION OF THE BONDS -- Book-Entry Bonds" in the Prospectus.
PAYMENTS ON PLEDGED MORTGAGES; ACCOUNTS
On or prior to the Closing Date, the Master Servicer will establish and
maintain or cause to be established and maintained a separate account or
accounts for the collection of payments on the Pledged Mortgages (the "Bond
Account"). On or prior to the Closing Date, the Bond Trustee will establish an
account (the "Distribution Account"), which will be maintained with the Bond
Trustee in trust for the benefit of the Bondholders. On or prior to the business
day immediately preceding each Payment Date, the Master Servicer will withdraw
from the Bond Account the Bond Distribution Amount for such Payment Date, to the
extent of Available Funds on deposit therein, and will deposit such amount in
the Distribution Account. The "Bond Distribution Amount" for any Payment Date
will equal the sum of (i) the Senior Interest Payment Amount, (ii) the Senior
Principal Payment Amount, (iii) the Subordinated Interest Payment Amount and
(iv) the Subordinated Principal Payment Amount (as each such term is defined
herein). Funds credited to the Bond Account or the Distribution Account may be
invested at the direction of the Company for the benefit and at the risk of the
Company in Permitted Investments, as defined in the Master Servicing Agreement,
that are scheduled to mature on or prior to the business day preceding the next
Payment Date.
PAYMENTS
Payments on the Bonds will be made by the Bond Trustee on [the th day of
each month], or if such day is not a business day, on the first business day
thereafter, commencing in 199 (each, a
S-20
<PAGE> 68
"Payment Date"), to the persons in whose names such Bonds are registered at the
close of business on the last business day of the month preceding the month of
such Payment Date (the "Record Date").
Payments on each Payment Date will be made by check mailed to the address
of the person entitled thereto as it appears on the applicable bond register or,
in the case of a Bondholder who holds 100% of a Class of Bonds or who holds
Bonds with an aggregate initial Class Principal Amount of $1,000,000 or more and
who has so notified the Bond Trustee in writing in accordance with the
Indenture, by wire transfer in immediately available funds to the account of
such Bondholder at a bank or other depository institution having appropriate
wire transfer facilities; provided, however, that the final payment in
retirement of the Bonds will be made only upon presentment and surrender of such
Bonds at the Corporate Trust Office of the Bond Trustee.
As more fully described herein, payments will be made on each Payment Date
from Available Funds in the following order of priority: (i) to interest on the
Senior Bonds; (ii) to principal of the Senior Bonds; (iii) to interest on the
Subordinated Bonds; (iv) to principal of the Subordinated Bonds; (v) to interest
on the Investor Certificate; (vi) to principal of the Investor Certificate; and
(vii) to the holder of the Investor Certificate, all remaining Available Funds,
subject to certain limitations set forth herein under " -- Principal."
"Available Funds" with respect to any Payment Date will be equal to the sum
of (i) all scheduled installments of interest (net of the related Expense Fees)
and principal due [on the Due Date in the month] in which such Payment Date
occurs and received prior to the related Determination Date, together with any
Advances in respect thereof; (ii) all proceeds of any primary mortgage guaranty
insurance policies and any other insurance policies with respect to the Pledged
Mortgages, to the extent such proceeds are not applied to the restoration of the
related Mortgaged Property or released to the Mortgagor in accordance with the
applicable Servicer's or the Master Servicer's normal servicing procedures
(collectively, "Insurance Proceeds") and all other cash amounts received and
retained in connection with the liquidation of defaulted Pledged Mortgages, by
foreclosure or otherwise ("Liquidation Proceeds"), during the [month] preceding
the month of such Payment Date (in each case, net of unreimbursed expenses
incurred in connection with a liquidation or foreclosure and unreimbursed
Advances, if any); (iii) all partial or full prepayments received during the
[month] preceding the month of such Payment Date; and (iv) amounts received with
respect to such Payment Date as the Substitution Adjustment Amount or purchase
price in respect of a Deleted Pledged Mortgage or a Pledged Mortgage purchased
by Redwood Trust [or by the Master Servicer or the Company] as of such Payment
Date, reduced by amounts in reimbursement for Advances previously made and other
amounts as to which the applicable Servicer or the Master Servicer is entitled
to be reimbursed pursuant to the Master Servicing Agreement.
On each Payment Date after the Subordinated Class Principal Amount and the
Invested Amount have been reduced to zero, the amount, if any, by which the
Senior Interest Payment Amount and the Senior Principal Payment Amount exceed
the Available Funds, shall be paid by the Insurer to the Senior Bondholders
pursuant to the Bond Insurance Policy. See "CREDIT ENHANCEMENT -- The Insurer"
and "-- The Bond Insurance Policy" herein.
INTEREST
The Bond Interest Rate for each Class of Bonds for each Payment Date (each,
a "Bond Interest Rate") is described on the cover hereof. On each Payment Date,
to the extent of funds available therefor, each Class of Bonds and the Investor
Certificate will be entitled to receive an amount allocable to interest as
described below (as to each such Class or the Investor Certificate, as
applicable, the "Interest Payment Amount") with respect to the related Interest
Accrual Period. With respect to each Payment Date, the "Interest Accrual Period"
for each Class of Bonds and the Investor Certificate will be the [calendar
month] preceding the month of such Payment Date.
The Interest Payment Amount for the Senior Bonds (the "Senior Interest
Payment Amount") will be equal to the sum of (i) interest at the Senior Bond
Interest Rate on the Senior Class Principal Amount, and (ii) the sum of the
amounts, if any, by which the amount described in clause (i) above on each prior
Payment Date exceeded the amount actually distributed as interest on such prior
Payment Dates and not subsequently distributed. The Interest Payment Amount for
the Subordinated Bonds (the "Subordinated Interest Payment
S-21
<PAGE> 69
Amount") will be equal to the sum of (i) interest at the Subordinated Bond
Interest Rate on the Subordinated Class Principal Amount, (ii) interest at the
Subordinated Bond Interest Rate on any Subordinated Principal Carryover
Shortfall, (iii) the sum of the amounts, if any, by which the sum of the amounts
described in clauses (i) and (ii) above on each prior Payment Date exceeded the
amount actually distributed as interest on such prior Payment Dates and not
subsequently distributed (the "Subordinated Interest Carryover Shortfall") and
(iv) interest at the Subordinated Bond Interest Rate on any Subordinated
Interest Carryover Shortfall (to the extent permitted by applicable law). The
Interest Payment Amount for the Investor Certificate (the "Certificate Interest
Payment Amount") will be equal to interest at the Certificate Interest Rate on
the Invested Amount. The Senior Bonds will not be entitled to interest on any
Senior Interest Payment Amount not paid when due prior to such time as the Bonds
are declared immediately due and payable upon the occurrence of an Event of
Default as described herein under " -- Priority of Payments and Allocation of
Shortfalls." The Investor Certificate will not be entitled to interest on any
Certificate Interest Payment Amount not paid when due.
The interest payable on any Payment Date as described above, but not the
entitlement thereto, for the Subordinated Bonds, and in the event of a default
of the Insurer under the Bond Insurance Policy, the Senior Bonds, will be
reduced by their respective proportionate amounts of "Net Interest Shortfalls"
for such Payment Date, if any, based on the amount of interest each Class of
Bonds would otherwise be entitled to receive on such Payment Date before taking
into account any reduction in such amounts resulting from such Net Interest
Shortfalls. With respect to any Payment Date, the "Net Interest Shortfall" is
equal to the amount by which the sum of (i) the amount of interest which would
otherwise have been received with respect to any Pledged Mortgage that was the
subject of a Relief Act Reduction and (ii) any Prepayment Interest Shortfalls,
in each case during the calendar month preceding the month of such Payment Date,
exceeds the sum of (i) the Master Servicing Fee for such period and (ii) the
amounts otherwise payable on such Payment Date to the holder of the Investor
Certificate as described in clauses "fifth", "sixth" and "seventh" under
" -- Priority of Payments and Allocation of Shortfalls" below. A "Relief Act
Reduction" is a reduction in the amount of monthly interest payment on a Pledged
Mortgage pursuant to the Soldiers' and Sailors' Civil Relief Act of 1940. See
"CERTAIN LEGAL ASPECTS OF PLEDGED MORTGAGES -- Soldiers and Sailors' Civil
Relief Act" in the Prospectus. A "Prepayment Interest Shortfall" is the amount
by which interest paid by a borrower in connection with a prepayment of
principal on a Pledged Mortgage is less than one month's interest at the related
Mortgage Rate on the Stated Principal Balance of such Pledged Mortgage.
Accrued interest to be paid on any Payment Date will be calculated, in the
case of each Class of Bonds and the Investor Certificate, on the basis of the
related Class Principal Amount or Invested Amount, as applicable, immediately
prior to such Payment Date. Interest will be calculated and payable on the basis
of a 360-day year divided into twelve 30-day months.
PRINCIPAL
GENERAL. All payments and other amounts received in respect of principal
of the Pledged Mortgages will be allocated among the Senior Bonds, the
Subordinated Bonds and the Investor Certificate.
SENIOR PRINCIPAL PAYMENT AMOUNT. On each Payment Date, the Available Funds
remaining after payment of interest with respect to the Senior Bonds, up to the
amount of the Senior Principal Payment Amount for such Payment Date, will be
distributed as principal of the Senior Bonds. The "Senior Principal Payment
Amount" for any Payment Date will equal the Senior Percentage of the sum of (a)
the principal portion of the Scheduled Payment due on each Pledged Mortgage [on
the related Due Date], (b) the principal portion of the purchase price of each
Pledged Mortgage that was purchased by Redwood Trust or another person pursuant
to the Mortgage Loan Purchase Agreement (as defined herein) [or any optional
purchase by the Master Servicer or the Company of a default Pledged Mortgage] as
of such Payment Date, (c) the Substitution Adjustment Amount in connection with
any Deleted Pledged Mortgage received with respect to such Payment Date, (d) any
Insurance Proceeds or Liquidation Proceeds allocable to recoveries of principal
of Pledged Mortgages that are not yet Liquidated Pledged Mortgages received
during the [calendar month] preceding the month of such Payment Date, (e) with
respect to each Pledged Mortgage that became
S-22
<PAGE> 70
a Liquidated Pledged Mortgage during the [calendar month] preceding the month of
such Payment Date, the Stated Principal Balance of such Pledged Mortgage, and
(f) all partial and full principal prepayments by borrowers received during the
[calendar month] preceding the month of such Payment Date.
"Stated Principal Balance" means, as to any Pledged Mortgage and Due Date,
the unpaid principal balance of such Pledged Mortgage as of such Due Date, as
specified in the amortization schedule at the time relating thereto (before any
adjustment to such amortization schedule by reason of any moratorium or similar
waiver or grace period), after giving effect to any previous partial principal
prepayments and Liquidation Proceeds received and to the payment of principal
due on such Due Date and irrespective of any delinquency in payment by the
related Mortgagor. The "Pool Principal Balance" with respect to any Payment Date
equals the aggregate of the Stated Principal Balances of the Pledged Mortgages
outstanding on the Due Date in the month preceding the month of such Payment
Date.
The "Senior Percentage" for any Payment Date is the percentage equivalent
of a fraction the numerator of which is the Senior Class Principal Amount
immediately prior to such date and the denominator of which is the sum of (i)
the Senior Class Principal Amount, (ii) the Subordinated Class Principal Amount
and (iii) the Invested Amount, in each case immediately prior to such date. The
"Subordinated Percentage" for any Payment Date is the percentage equivalent of a
fraction the numerator of which is the Subordinated Class Principal Amount
immediately prior to such date and the denominator of which is the sum of (i)
the Senior Class Principal Amount, (ii) the Subordinated Class Principal Amount
and (iii) the Invested Amount, in each case immediately prior to such date. The
"Investor Percentage" for any Payment Date will be calculated as the difference
between 100% and the sum of the Senior Percentage and the Subordinated
Percentage for such date.
SUBORDINATED PRINCIPAL PAYMENT AMOUNT. On each Payment Date, to the extent
of Available Funds therefor, the Subordinated Principal Payment Amount for such
Payment Date will be distributed as principal of the Subordinated Bonds. The
"Subordinated Principal Payment Amount" for any Payment Date will equal the sum
of (i) the Subordinated Percentage of the sum of (a) the principal portion of
the Scheduled Payment due on each Pledged Mortgage [on the related Due Date],
(b) the principal portion of the purchase price of each Pledged Mortgage that
was purchased by Redwood Trust or another person pursuant to the Mortgage Loan
Purchase Agreement [or by the Master Servicer or the Company in connection with
any optional purchase by the Master Servicer of a defaulted Pledged Mortgage] as
of such Payment Date, (c) the Substitution Adjustment Amount in connection with
any Deleted Pledged Mortgage received with respect to such Payment Date, (d) any
Insurance Proceeds or Liquidation Proceeds allocable to recoveries of principal
of Pledged Mortgages that are not yet Liquidated Pledged Mortgages received
during the [calendar month] preceding the month of such Payment Date, (e) with
respect to each Pledged Mortgage that became a Liquidated Pledged Mortgage
during the [calendar month] preceding the month of such Payment Date, the Stated
Principal Balance of such Pledged Mortgage and (f) all partial and full
principal prepayments by borrowers received during the [calendar month]
preceding the month of such Payment Date and (ii) any Subordinated Principal
Carryover Shortfall. The "Subordinated Principal Carryover Shortfall" for any
Payment Date will equal the excess of (a) the Original Subordinated Class
Principal Amount reduced by all amounts previously distributed to holders of the
Subordinated Bonds as payments of principal or Subordinated Principal Carryover
Shortfall, over (b) the Subordinated Class Principal Amount immediately prior to
such date.
INVESTED AMOUNT PAYMENT. On each Payment Date, to the extent of Available
Funds therefor, the Invested Amount Payment for such Payment Date will be
distributed in reduction of the Invested Amount of the Investor Certificate. The
"Invested Amount Payment" for any Payment Date will equal the sum of (i) the
Investor Percentage of the sum of (a) the principal portion of the Scheduled
Payment due on each Pledged Mortgage [on the related Due Date], (b) the
principal portion of the purchase price of each Pledged Mortgage that was
purchased by Redwood Trust or another person pursuant to the Mortgage Loan
Purchase Agreement (as defined herein) [or any optional purchase by the Master
Servicer or the Company of a defaulted Pledged Mortgage] as of such Payment
Date, (c) the Substitution Adjustment Amount in connection with any Deleted
Pledged Mortgage received with respect to such Payment Date, (d) any Insurance
Proceeds or Liquidation Proceeds allocable to recoveries of principal of Pledged
Mortgages that are
S-23
<PAGE> 71
not yet Liquidated Pledged Mortgages received during the [calendar month]
preceding the month of such Payment Date, and (e) all partial and full principal
prepayments by borrowers received during the [calendar month] preceding the
month of such Payment Date and (ii) with respect to each Pledged Mortgage that
became a Liquidated Pledged Mortgage during the [calendar month] preceding the
month of such Payment Date, the Liquidation Proceeds allocable to principal
received with respect to such Pledged Mortgage, after application of such
amounts pursuant to clause (e) of the definition of Senior Principal Payment
Amount and clause (e) of the definition of Subordinated Principal Payment
Amount.
PRIORITY OF PAYMENTS AND ALLOCATION OF SHORTFALLS
Prior to the declaration that the Bonds are due and payable, on any Payment
Date Available Funds will be applied in the following order of priority:
first, to the Senior Interest Payment Amount;
second, to the Senior Principal Payment Amount;
third, to the Subordinated Interest Payment Amount;
fourth, to the Subordinated Principal Payment Amount;
fifth, to the Certificate Interest Payment Amount;
sixth, to the Invested Amount Payment; and
seventh, to the holder of the Investor Certificate, the balance of any
Available Funds remaining in the Bond Account.
If a Realized Loss results in the Stated Principal Balances of the Pledged
Mortgages declining in an amount greater than the sum of (i) the payments of
principal on the Senior Bonds, (ii) the payments of principal on the
Subordinated Bonds and (iii) the payment in reduction of the Invested Amount,
the Senior Percentage, the Subordinated Percentage and the Investor Percentage
may shift (as a result of their methods of computation as described above under
" -- Principal") such that funds available in the Distribution Account for
payments of principal on each future Payment Date may be allocated in a higher
ratio to the Senior Bonds as a result of such shortfall. This shift of the
Senior Percentage, the Subordinated Percentage and the Investor Percentage may
cause the Senior Bonds to amortize more rapidly, and the Subordinated Bonds and
the Investor Certificate to amortize more slowly, than would otherwise have been
the case in the absence of such shortfalls. An investor should consider the risk
that, in the case of any Bond purchased at a discount, a slower than anticipated
rate of principal payments on the Pledged Mortgages could result in an actual
yield to such investor that is lower than the anticipated yield and, in the case
of any Bond purchased at a premium, a faster than anticipated rate of principal
payments on the Pledged Mortgages could result in an actual yield to such
investor that is lower than the anticipated yield. In addition, an investor in
the Bonds should consider the risk that there can be no assurance that investors
in the Bonds will be able to reinvest the payments thereon at yields equaling or
exceeding the yields on such Bonds. It is possible that yields on any such
reinvestments will be lower, and may be significantly lower, than the yields on
the Bonds. See "RISK FACTORS -- Yield, Prepayment and Maturity Risks" herein and
"RISK FACTORS -- Prepayment and Yield Considerations" in the Prospectus. In
general, a "Realized Loss" means, with respect to a Liquidated Pledged Mortgage,
the amount by which the remaining unpaid principal balance of the related
Pledged Mortgage exceeds the amount of Liquidation Proceeds applied to the
principal balance of the related Pledged Mortgage. A "Liquidated Pledged
Mortgage" is a defaulted Pledged Mortgage as to which the Master Servicer has
determined that all recoverable liquidation and insurance proceeds have been
received.
Under the Indenture, an Event of Default will not occur solely due to the
occurrence of Shortfalls that affect only the Subordinated Bonds until all the
Senior Bonds have been paid in full and then only if Shortfalls on the
Subordinated Bonds have not been paid. In addition, an Event of Default by
reason of any Shortfalls that affect the Senior Bonds will occur on any Payment
Date only when the Pool Principal Balance is less than the principal amount of
the Senior Bonds outstanding after application of all available amounts on
deposit in the Distribution Account on such Payment Date. Nevertheless, at any
time following an Event of Default
S-24
<PAGE> 72
arising from a Shortfall affecting the Senior Bonds, the holders of outstanding
Bonds, whether Senior Bonds or Subordinated Bonds, representing more than 50% in
principal amount of all Bonds then outstanding, may declare the Bonds due and
payable or take any other action pursuant to the terms of the Indenture. Until
the Bonds have been declared due and payable following an Event of Default, the
holders of the Subordinated Bonds may not request the Bond Trustee to take any
action, other than the application of available funds in the Distribution
Account to pay principal and interest as provided herein, and may not otherwise
cause any action to be taken to enforce the obligation of the Issuer to pay
principal and interest on the Subordinated Bonds. Additionally, prior to the
Bonds being declared due and payable following an Event of Default, the Senior
Bonds will not accrue interest in any form on the interest component of any
Shortfall attributable to the Senior Bonds. Should an Event of Default occur,
payments will be allocated on each Payment Date in accordance with the
priorities described herein under " -- Principal", which would otherwise be
applicable on such Payment Date had an Event of Default not occurred. See "THE
INDENTURE" in the Prospectus.
If Available Funds are insufficient to make payments on the Senior Bonds,
Senior Bondholders will be dependent upon the ability of the Insurer to meet its
obligations under the Bond Insurance Policy. For any Payment Date, the amount of
Available Funds will be dependent in part upon whether any Realized Losses have
been incurred on the Pledged Mortgages during the most recent Prepayment Period.
Realized Losses on the Pledged Mortgages will be allocated first to the Investor
Certificate, second to the Subordinated Bonds and third, in the event the
Insurer defaults on its obligations under the Bond Insurance Policy, to the
Senior Bonds.
STATED MATURITY
The Stated Maturity for each Class of Bonds is the date determined by the
Company which is years after the Payment Date immediately following the latest
maturity date of any Pledged Mortgage. The Stated Maturity of each Class of
Bonds is , 20 . See "DESCRIPTION OF THE BONDS -- Weighted Average
Life of the Bonds" and "SECURITY FOR THE BONDS" herein and in the Prospectus.
STRUCTURING ASSUMPTIONS
Unless otherwise specified, the information in the tables in this
Prospectus Supplement has been prepared on the basis of the following assumed
characteristics of the Pledged Mortgages and the following additional
assumptions (collectively, the "Structuring Assumptions"): (i) the Pledged
Mortgage Pool consists of one Pledged Mortgage with the following
characteristics:
<TABLE>
<CAPTION>
ORIGINAL TERM REMAINING TERM
PRINCIPAL NET MORTGAGE IN MATURITY TO MATURITY
BALANCE MORTGAGE RATE RATE (IN MONTHS) (IN MONTHS)
- ----------------- ------------- ------------ ------------- --------------
<S> <C> <C> <C> <C>
$ % %
</TABLE>
(ii) the Pledged Mortgages prepay at the specified constant Prepayment
Assumptions, (iii) no defaults in the payment by Mortgagors of principal of and
interest on the Pledged Mortgages are experienced, (iv) scheduled payments on
the Pledged Mortgages are received on the first day of each month commencing in
the calendar month following the Closing Date and are computed prior to giving
effect to prepayments received on the last day of the prior month, (v)
prepayments are allocated as described herein without giving effect to loss and
delinquency tests, (vi) there are no Net Interest Shortfalls and prepayments
represent prepayments in full of individual Pledged Mortgages and are received
on the last day of each month, commencing in the calendar month of the Closing
Date, (vii) the scheduled monthly payment for each Pledged Mortgage has been
calculated based on the assumed mortgage loan characteristics described in item
(i) above such that each such mortgage loan will amortize in amounts sufficient
to repay the principal balance of such assumed mortgage loan by its remaining
term to maturity, (viii) the initial Class Principal Amount or Invested Amount,
as applicable, of each Class of Bonds and the Investor Certificate,
respectively, is as set forth on the cover page hereof and under "SUMMARY --
Securities Other than the Bonds" herein, (ix) interest accrues on each Class of
Bonds and the Investor Certificate at the applicable interest rate described on
the cover hereof or described herein, (x) payments in respect of the Bonds and
the Investor Certificate are received in cash on the th day of each month
commencing in the calendar month following the Closing Date, (xi) the
S-25
<PAGE> 73
closing date of the sale of the Bonds is , 199 , (xii) Redwood Trust
is not required to purchase or substitute for any Pledged Mortgage and (xiii)
[the Master Servicer or the Company does not exercise any option to purchase any
Pledged Mortgages described herein under "--Optional Purchase of Defaulted
Loans"] and the Issuer does not exercise any option to redeem the Bonds as
described herein under
"-- Redemption at the Option of the Issuer." While it is assumed that each of
the Pledged Mortgages prepays at the specified constant Prepayment Assumptions,
this is not likely to be the case. Moreover, discrepancies exist between the
characteristics of the actual Pledged Mortgages which will be delivered to the
Bond Trustee and characteristics of the Pledged Mortgages assumed in preparing
the tables herein.
Prepayments of mortgage loans commonly are measured relative to a
prepayment standard or model. The model used in this Prospectus Supplement (the
"Prepayment Assumption") represents an assumed rate of prepayment each month
relevant to the then outstanding principal balance of a pool of mortgage loans.
The Prepayment Assumption does not purport to be either an historical
description of the prepayment experience of any pool of mortgage loans or a
prediction of the anticipated rate of prepayment of any pool of mortgage loans,
including the Pledged Mortgages. A 100% Prepayment Assumption assumes a Constant
Prepayment Rate ("CPR") of % per annum of the then outstanding principal
balance of such mortgage loans in the first month of the life of the mortgage
loans and an additional % per annum in each month thereafter until the
month. Beginning in the month and in each month thereafter during the life of
such mortgage loans, a 100% Prepayment Assumption assumes a CPR of % per
annum each month. As used in the tables below, a % Prepayment Assumption
assumes a prepayment rate equal to % of the Prepayment Assumption.
Correspondingly, a % Prepayment Assumption assumes a prepayment rate equal
to % of the Prepayment Assumption, and so forth.
OPTIONAL PURCHASE OF DEFAULTED LOANS
The Master Servicer or the Company may, at its option, purchase from the
Issuer any Pledged Mortgage which is delinquent in payment by days or more.
Any such purchase will be at a price equal to 100% of the Stated Principal
Balance of such Pledged Mortgage plus accrued interest thereon at the applicable
Mortgage Rate from the date through which interest was last paid by the related
Mortgagor or advanced to the first day of the month in which such amount is to
be distributed.
WEIGHTED AVERAGE LIVES OF THE BONDS
The weighted average life of a Bond is determined by (a) multiplying the
amount of the reduction, if any, of the Class Principal Amount of such Bond on
each Payment Date by the number of years from the date of issuance to such
Payment Date, (b) summing the results and (c) dividing the sum by the aggregate
amount of the reductions in Class Principal Amount of such Bond referred to in
clause (a).
For a discussion of the factors which may influence the rate of payments
(including prepayments) of the Pledged Mortgages, see "RISK FACTORS -- Yield,
Prepayment and Maturity Risks" herein and "RISK FACTORS -- Prepayment and Yield
Considerations" in the Prospectus.
In general, the weighted average lives of the Bonds will be shortened if
the level of prepayments of principal of the Pledged Mortgages increases.
However, the weighted average lives of the Bonds will depend upon a variety of
other factors, including the timing of changes in such rate of principal
payments and the priority sequence of distributions of principal of the Classes
of Bonds. See "DESCRIPTION OF THE BONDS -- Principal" herein.
The interaction of the foregoing factors may have different effects on the
Senior Bonds and the Subordinated Bonds and the effects on any Class may vary at
different times during the life of such Class. Accordingly, no assurance can be
given as to the weighted average life of any Class of Bonds. Further, to the
extent the prices of the Bonds represent discounts or premiums to their
respective original Class Principal Amounts, variability in the weighted average
lives of such Classes of Bonds will result in variability in the related yields
to maturity. For an example of how the weighted average lives of the Classes of
Bonds may be affected at various constant Prepayment Assumptions, see the
Decrement Tables below.
S-26
<PAGE> 74
DECREMENT TABLES
The following tables indicate the percentages of the initial Class
Principal Amounts of the Classes of Bonds that would be outstanding after each
of the dates shown at various constant Prepayment Assumptions and the
corresponding weighted average lives of such Classes. The tables have been
prepared on the basis of the Structuring Assumptions. It is not likely that (i)
all of the Pledged Mortgages will have the characteristics assumed, (ii) all of
the Pledged Mortgages will prepay at the constant Prepayment Assumptions
specified in the tables or at any constant Prepayment Assumption or (iii) all of
the Pledged Mortgages will prepay at the same rate. Moreover, the diverse
remaining terms to maturity of the Pledged Mortgages could produce slower or
faster principal payments than indicated in the tables at the specified constant
Prepayment Assumptions, even if the weighted average remaining term to maturity
of the Pledged Mortgages is consistent with the remaining terms to maturity of
the Pledged Mortgages specified in the Structuring Assumptions.
PERCENT OF INITIAL CLASS PRINCIPAL AMOUNTS OUTSTANDING
[DECREMENT TABLES]
REDEMPTION AT THE OPTION OF THE ISSUER
The Bonds may be redeemed in whole, but not in part, at the Issuer's
option, on any Payment Date on or after the earlier of (a) years after the
initial issuance of the Bonds and (b) the Payment Date on which the sum of (i)
the Senior Class Principal Amount (ii) the Subordinated Class Principal Amount
and (iii) the Invested Amount, after giving effect to payments to be made on
such Payment Date, is % or less of the aggregate of the Stated Principal
Balances of the Pledged Mortgages as of the Cut-off Date, at a redemption price
equal to 100% of the unpaid principal amount of such Bonds (including, in the
case of the Subordinated Bonds, any unpaid Subordinated Principal Carryover
Shortfall), plus accrued and unpaid interest at the applicable Bond Interest
Rate through the month preceding the month in which such optional redemption
date occurs. The Bonds are not otherwise subject to call or redemption at the
option of the Issuer nor are they subject to special redemption. See
"DESCRIPTION OF THE BONDS -- Redemption at the Option of the Issuer" in the
Prospectus.
Notice of any redemption to be made at the option of the Issuer must be
given by the Issuer to the Bond Trustee not less than 30 days prior to the
redemption date and must be mailed by the Issuer or the Bond Trustee to affected
Bondholders at least ten days prior to the redemption date.
CONTROLLING CLASS UNDER THE INDENTURE
For the purposes described in the Prospectus under the headings "The
Indenture -- Modification of Indenture," "-- Events of Default" and "Rights Upon
Event of Default," the "Controlling Class" shall be the Class A-1 Bondholders
or, if the Class A-1 Bonds are no longer outstanding, the Class B-1 Bondholders.
CREDIT ENHANCEMENT
Credit enhancement for the Senior Bonds will be provided by the
Subordinated Bonds, by the Investor Certificate and by the Bond Insurance Policy
(as defined herein). Credit enhancement for the Subordinated Bonds will be
provided by the Investor Certificate.
SUBORDINATION
The rights of holders of the Subordinated Bonds and the Investor
Certificate to receive payments with respect to the Pledged Mortgages will be
subordinated to such rights of the holders of the Senior Bonds and the rights of
the holders of the Investor Certificate will be subordinated to such rights of
the holders of the Subordinated Bonds, in each case only to the extent described
herein.
S-27
<PAGE> 75
The subordination of the Subordinated Bonds and the Investor Certificate to
the Senior Bonds and the further subordination of the Investor Certificate to
the Subordinated Bonds are each intended to increase the likelihood of timely
receipt by the holders of Bonds with higher relative payment priority of the
maximum amount to which they are entitled on any Payment Date and to provide
such holders protection against losses resulting from defaults on Pledged
Mortgages to the extent described herein. However, the amount of protection
afforded the Subordinated Bondholders by subordination of the Investor
Certificate may be exhausted and Shortfalls in payments on the Subordinated
Bonds could result. Any losses realized on the Pledged Mortgages in excess of
the protection afforded by the Investor Certificate will result in losses on the
Subordinated Bonds. See "DESCRIPTION OF THE BONDS -- Priority of Payments and
Allocation of Shortfalls" herein.
THE BOND INSURANCE POLICY
[DESCRIPTION OF THE BOND INSURANCE POLICY]
THE INSURER
[DESCRIPTION OF THE INSURER]
SECURITY FOR THE BONDS
GENERAL
The Bonds will be secured by assignments to the Bond Trustee of collateral
consisting of (i) the Pledged Mortgages, (ii) funds on deposit in the Bond
Account and the Distribution Account, (iii) the Issuer's rights under the Master
Servicing Agreement, (iv) [the Issuer's rights under any Servicing Agreement,]
(v) the Issuer's rights under the Mortgage Loan Purchase Agreement (as defined
herein), and (vi) the proceeds of all of the foregoing.
THE PLEDGED MORTGAGES
The Bonds will be secured by a pool (the "Pledged Mortgage Pool") of
-year conventional mortgage loans secured by first liens on one- to
four-family residential properties (each, a "Mortgaged Property"). None of the
Pledged Mortgages will be guaranteed by any governmental agency. All of the
Pledged Mortgages will have been deposited with the Issuer by the Company which,
in turn, will have acquired them from Redwood Trust pursuant to an agreement
(the "Mortgage Loan Purchase Agreement") between the Company and Redwood Trust.
All of the Pledged Mortgages will have been acquired by Redwood Trust in the
ordinary course of its business and substantially in accordance with the
underwriting criteria specified herein.
GENERAL. Under the Mortgage Loan Purchase Agreement, Redwood Trust will
make certain representations, warranties and covenants to the Company relating
to, among other things, the due execution and enforceability of the Mortgage
Loan Purchase Agreement and certain characteristics of the Pledged Mortgages
and, subject to the limitations described below under " -- Assignment of Pledged
Mortgages," will be obligated to purchase or substitute a similar mortgage loan
for any Pledged Mortgage as to which there exists deficient documentation or an
uncured material breach of any such representation, warranty or covenant. See
"MORTGAGE LOAN PROGRAM -- Representations by Sellers; Repurchases" in the
Prospectus. Under the Deposit Trust Agreement, the Company will assign all of
its rights under the Mortgage Loan Purchase Agreement to the Issuer. Under the
Indenture, the Issuer will pledge all its right, title and interest in and to
such representations, warranties and covenants (including Redwood Trust's
purchase obligation) to the Bond Trustee for the benefit of the Bondholders. The
Issuer will make no representations or warranties with respect to the Pledged
Mortgages and will have no obligation to repurchase or substitute Pledged
Mortgages with deficient documentation or which are otherwise defective. The
obligations of Redwood Trust with respect to the Bonds are limited to Redwood
Trust's obligation to purchase or substitute Pledged Mortgages with deficient
documentation or which are otherwise defective under the Mortgage Loan Purchase
Agreement.
S-28
<PAGE> 76
Certain information with respect to the Pledged Mortgage Pool is set forth
below. Prior to the Closing Date, Pledged Mortgages may be removed from the
collateral and other Pledged Mortgages may be substituted therefor. The Issuer
believes that the information set forth herein with respect to the Pledged
Mortgages as presently constituted is representative of the characteristics of
the Pledged Mortgages as they will be constituted at the Closing Date, although
certain characteristics of the Pledged Mortgages in the Pledged Mortgage Pool
may vary. Unless otherwise indicated, information presented below expressed as a
percentage (other than rates of interest) are approximate percentages based on
the Stated Principal Balances of the Pledged Mortgages as of the Cut-off Date.
As of the Cut-off Date, the aggregate of the Stated Principal Balances of
the Pledged Mortgages is expected to be approximately $ (the "Cut-off
Date Pool Principal Balance"). [The Pledged Mortgages provide for the
amortization of the amount financed over a series of substantially equal monthly
payments.] All of the Pledged Mortgages provide for payments due on the first
day of each month (the "Due Date"). At origination, substantially all of the
Pledged Mortgages had stated terms to maturity of years. Scheduled monthly
payments made by the Mortgagors on the Pledged Mortgages ("Scheduled Payments")
either earlier or later than the scheduled Due Dates thereof will not affect the
amortization schedule or the relative application of such payments to principal
and interest. [Mortgagors may prepay their Pledged Mortgages at any time without
penalty.]
Each Pledged Mortgage will bear interest at a [fixed][adjustable] Mortgage
Rate. [Each Pledged Mortgage will bear interest at a Mortgage Rate, subject to
annual adjustment on the first day of the month specified in the related
Mortgage Note (each such date, an "Adjustment Date"), equal to the sum, rounded
to the nearest of one percentage point ( %), of (i)
(the "Index") as made available by the and most recently available
as of days prior to the Adjustment Date and (ii) a fixed percentage amount
specified in the related Mortgage Note (the "Margin") provided, however, that
the Mortgage Rate will not increase or decrease by more than percentage points
( %), except for
Pledged Mortgages, representing approximately % of the Cut-off Date Pool
Principal Balance which will not increase or decrease by more than
percentage points ( %), on the first Adjustment Date or more than
percentage points ( %) on any Adjustment Date thereafter (the "Periodic Rate
Cap"). The Index with respect to any Bond Interest Rate and any Payment Date
shall be the Index in effect as of the first day of the month preceding the
month in which such Payment Date occurs.]
[All of the Pledged Mortgages provide that over the life of the Pledged
Mortgage the Mortgage Rate will in no event increase by more than the Mortgage
Rate fixed at origination plus a fixed number of percentage points specified in
the related Mortgage Note (such rate, the "Maximum Rate"). None of the Pledged
Mortgages are subject to minimum Mortgage Rates. Effective with the first
payment due on a Pledged Mortgage after each related Adjustment Date, the
Scheduled Payment will be adjusted to an amount which will pay interest at the
adjusted rate and fully amortize the then-outstanding principal balance of the
Pledged Mortgage over its remaining term. If the Index ceases to be published or
is otherwise unavailable, the Master Servicer will select an alternative index
based upon comparable information.]
Each Pledged Mortgage is, by its terms, assumable in connection with a
transfer of the related Mortgaged Property if the proposed transferee submits
certain information to the Master Servicer required to enable it to evaluate the
transferee's ability to repay the Pledged Mortgage and if the Master Servicer
reasonably determines that the security for the Pledged Mortgage would not be
impaired by the assumption. See "RISK FACTORS" herein and in the Prospectus.
Each Pledged Mortgage was originated on or after , 19 .
The latest stated maturity date of any Pledged Mortgage is ,
20 . The earliest stated maturity date of any Pledged Mortgage is ,
20 .
[As of the Cut-off Date, no Pledged Mortgage was delinquent more than
days.]
[None of the Pledged Mortgages are subject to buydown agreements.] [No
Pledged Mortgage provides for deferred interest or negative amortization.]
S-29
<PAGE> 77
No Pledged Mortgage had a Loan-to-Value Ratio at origination of more than
%. [Except for
Pledged Mortgages, representing approximately % of the Cut-off Date Pool
Principal Balance,] each Pledged Mortgage with a Loan-to-Value Ratio at
origination of greater than 80% is covered by a primary mortgage insurance
policy (each a "Primary Mortgage Insurance Policy") issued by a mortgage
insurance company acceptable to the Federal National Mortgage Association
("FNMA"), the Federal Home Loan Mortgage Corporation ("FHLMC") or any nationally
recognized statistical rating organization, which policy provides coverage of a
portion of the original principal balance of the related Pledged Mortgage equal
to the product of the original principal balance thereof and a fraction, the
numerator of which is the excess of the original principal balance of the
related Pledged Mortgage over 75% of the lesser of the appraised value and
selling price of the related Mortgage Property and the denominator of which is
the original principal balance of the related Pledged Mortgage, plus accrued
interest thereon and related foreclosure expenses. No such Primary Mortgage
Insurance Policy will be required with respect to any such Pledged Mortgage
after the date on which the related Loan-to-Value Ratio is 80% or less or, based
on a new appraisal, the principal balance of such Pledged Mortgage represents
80% or less of the new appraised value. See " -- Underwriting Standards" herein.
The "Loan-to-Value Ratio" of a Pledged Mortgage at any given time is a
fraction, expressed as a percentage, the numerator of which is the principal
balance of the related Pledged Mortgage at the date of determination and the
denominator of which is (a) in the case of a purchase, the lesser of the selling
price of the Mortgaged Property and its appraised value determined in an
appraisal obtained by the originator at origination of such Pledged Mortgage, or
(b) in the case of a refinance, the appraised value of the Mortgaged Property at
the time of such refinance. No assurance can be given that the value of any
Mortgaged Property has remained or will remain at the level that existed on the
appraisal or sales date. If residential real estate values generally or in a
particular geographic area decline, the Loan-to-Value Ratios might not be a
reliable indicator of the rates of delinquencies, foreclosures and losses that
could occur with respect to such Pledged Mortgages.
The following information sets forth in tabular format certain information,
as of the Cut-off Date, as to the Pledged Mortgages. Other than with respect to
rates of interest, percentages (approximate) are stated by Stated Principal
Balance of the Pledged Mortgages as of the Cut-off Date and have been rounded in
order to total 100%.
<TABLE>
<CAPTION>
ORIGINAL LOAN-TO-VALUE RATIOS(1)
- -----------------------------------------------------------------------------------------------
AGGREGATE PERCENT
NUMBER OF PRINCIPAL OF
PLEDGED BALANCE MORTGAGE
ORIGINAL LOAN-TO-VALUE RATIOS(%) MORTGAGES OUTSTANDING POOL
- ------------------------------------------------------- --------- ----------- --------
<S> <C> <C> <C>
$ %
--- --- ---
Total............................................. $ %
=== === ===
</TABLE>
- ---------------
(1) The weighted average original Loan-to-Value Ratio of the Pledged Mortgages
is expected to be approximately %.
S-30
<PAGE> 78
<TABLE>
<CAPTION>
ORIGINAL TERMS TO MATURITY(1)
- -----------------------------------------------------------------------------------------------
AGGREGATE PERCENT
NUMBER OF PRINCIPAL OF
PLEDGED BALANCE MORTGAGE
ORIGINAL TERM TO MATURITY (MONTHS) MORTGAGES OUTSTANDING POOL
- ------------------------------------------------------- --------- ----------- --------
<S> <C> <C> <C>
$ %
--- --- ---
Total............................................. $ %
=== === ===
</TABLE>
- ---------------
(1) As of the Cut-off Date, the weighted average remaining term to maturity of
the Pledged Mortgages is expected to be approximately months.
<TABLE>
<CAPTION>
CURRENT PLEDGED MORTGAGE PRINCIPAL BALANCE(1)
- -----------------------------------------------------------------------------------------------
AGGREGATE PERCENT
NUMBER OF PRINCIPAL OF
PLEDGED BALANCE MORTGAGE
RANGE OF CURRENT PLEDGED MORTGAGE PRINCIPAL BALANCES MORTGAGES OUTSTANDING POOL
- ------------------------------------------------------- --------- ----------- --------
<S> <C> <C> <C>
$ %
--- --- ---
Total............................................. $ %
=== === ===
</TABLE>
- ---------------
(1) As of the Cut-off Date, the average current Pledged Mortgages principal
balance is expected to be approximately $ .
S-31
<PAGE> 79
<TABLE>
<CAPTION>
CURRENT MORTGAGE RATES(1)
- -----------------------------------------------------------------------------------------------
AGGREGATE PERCENT
NUMBER OF PRINCIPAL OF
PLEDGED BALANCE MORTGAGE
CURRENT MORTGAGE RATES(%) MORTGAGES OUTSTANDING POOL
- ------------------------------------------------------- --------- ----------- --------
<S> <C> <C> <C>
$ %
--- --- ---
Total............................................. $ %
=== === ===
</TABLE>
- ---------------
(1) As of the Cut-off Date, the weighted average Mortgage Rate of the Pledged
Mortgages is expected to be approximately % per annum.
<TABLE>
<CAPTION>
PURPOSE OF PLEDGED MORTGAGES
- -----------------------------------------------------------------------------------------------
AGGREGATE PERCENT
NUMBER OF PRINCIPAL OF
PLEDGED BALANCE MORTGAGE
LOAN PURPOSE MORTGAGES OUTSTANDING POOL
- ------------------------------------------------------- --------- ----------- --------
<S> <C> <C> <C>
Purpose................................................ $ %
Refinance (Rate or Term)...............................
Refinance (Cash-out)...................................
--- --- ---
Total............................................. $ %
=== === ===
</TABLE>
<TABLE>
<CAPTION>
STATE DISTRIBUTION OF MORTGAGED PROPERTIES(1)
- -----------------------------------------------------------------------------------------------
AGGREGATE PERCENT
NUMBER OF PRINCIPAL OF
PLEDGED BALANCE MORTGAGE
STATE MORTGAGES OUTSTANDING POOL
- ------------------------------------------------------- --------- ----------- --------
<S> <C> <C> <C>
$ %
Other(1)...............................................
--- --- ---
Total............................................. $ %
=== === ===
</TABLE>
- ---------------
(1) Other includes other states, and the District of Columbia, with under %
concentrations individually. No more than approximately % of the Pledged
Mortgages will be secured by Mortgaged Properties located in any one postal
zip code area.
S-32
<PAGE> 80
<TABLE>
<CAPTION>
DOCUMENTATION FOR PLEDGED MORTGAGES
- -----------------------------------------------------------------------------------------------
AGGREGATE PERCENT
NUMBER OF PRINCIPAL OF
PLEDGED BALANCE MORTGAGE
TYPE OF PROGRAM MORTGAGES OUTSTANDING POOL
- ------------------------------------------------------- --------- ----------- --------
<S> <C> <C> <C>
Full................................................... $ %
Alternative............................................
Reduced................................................
--- --- ---
Total............................................. $ %
=== === ===
</TABLE>
<TABLE>
<CAPTION>
OCCUPANCY TYPES(1)
- -----------------------------------------------------------------------------------------------
AGGREGATE PERCENT
NUMBER OF PRINCIPAL OF
PLEDGED BALANCE MORTGAGE
OCCUPANCY TYPE MORTGAGES OUTSTANDING POOL
- ------------------------------------------------------- --------- ----------- --------
<S> <C> <C> <C>
Primary Home........................................... $ %
Investor...............................................
Second Home............................................
--- --- ---
Total............................................. $ %
=== === ===
</TABLE>
- ---------------
(1) Based upon representations of the related Mortgagors at the time of
origination.
<TABLE>
<CAPTION>
PROPERTY TYPE
- -----------------------------------------------------------------------------------------------
AGGREGATE PERCENT
NUMBER OF PRINCIPAL OF
PLEDGED BALANCE MORTGAGE
PROPERTY TYPE MORTGAGES OUTSTANDING POOL
- ------------------------------------------------------- --------- ----------- --------
<S> <C> <C> <C>
Single Family.......................................... $ %
Planned Unit Development
Condominium............................................
2-4 Units..............................................
--- --- ---
Total............................................. $ %
=== === ===
</TABLE>
<TABLE>
<CAPTION>
MAXIMUM MORTGAGE RATES(1)
- -----------------------------------------------------------------------------------------------
AGGREGATE PERCENT
NUMBER OF PRINCIPAL OF
PLEDGED BALANCE MORTGAGE
LIFETIME CAPS(%) MORTGAGES OUTSTANDING POOL
- ------------------------------------------------------- --------- ----------- --------
<S> <C> <C> <C>
$ %
--- --- ---
Total............................................. $ %
=== === ===
</TABLE>
- ---------------
(1) As of the Cut-off Date, the weighted average Lifetime Cap of the Pledged
Mortgages is expected to be approximately % per annum.
S-33
<PAGE> 81
<TABLE>
<CAPTION>
MARGIN(1)
- -----------------------------------------------------------------------------------------------
AGGREGATE PERCENT
NUMBER OF PRINCIPAL OF
PLEDGED BALANCE MORTGAGE
MARGIN MORTGAGES OUTSTANDING POOL
- ------------------------------------------------------- --------- ----------- --------
<S> <C> <C> <C>
$ %
--- --- ---
Total............................................. $ %
=== === ===
</TABLE>
- ---------------
(1) As of the Cut-off Date, the weighted average margin of the Pledged Mortgages
is expected to be approximately %.
<TABLE>
<CAPTION>
NEXT NOTE RATE ADJUSTMENT DATES(1)
- -----------------------------------------------------------------------------------------------
AGGREGATE PERCENT
NUMBER OF PRINCIPAL OF
PLEDGED BALANCE MORTGAGE
MONTHS MORTGAGES OUTSTANDING POOL
- ------------------------------------------------------- --------- ----------- --------
<S> <C> <C> <C>
$ %
--- --- ---
Total............................................. $ %
=== === ===
</TABLE>
- ---------------
(1) As of the Cut-off Date, the weighted average months to the next Adjustment
Date of the Pledged Mortgages was approximately months.
THE INDEX
[DESCRIPTION OF INDEX]
ASSIGNMENT OF THE PLEDGED MORTGAGES
Pursuant to the Indenture, the Issuer on the Closing Date will pledge,
transfer, assign, set over and otherwise convey without recourse to the Bond
Trustee in trust for the benefit of the Bondholders all right, title and
interest of the Issuer in and to each Pledged Mortgage and all right, title and
interest in and to all other assets included in the Collateral, including all
principal and interest received on or with respect to the Pledged Mortgages,
exclusive of principal and interest due on or prior to the Cut-off Date.
S-34
<PAGE> 82
In connection with such transfer and assignment, the Issuer will deliver or
cause to be delivered to the Bond Trustee, or a custodian for the Bond Trustee,
among other things, the original promissory note (the "Mortgage Note") (and any
modification or amendment thereto) endorsed in blank without recourse, the
original instrument creating a first lien on the related Mortgaged Property (the
"Mortgage") with evidence of recording indicated thereon, an assignment in
recordable form of the Mortgage, the title policy with respect to the related
Mortgaged Property and, if applicable, all recorded intervening assignments of
the Mortgage and any riders or modifications to such Mortgage Note and Mortgage
(except for any such document not returned from the public recording office,
which will be delivered to the Bond Trustee as soon as the same is available to
the Issuer) (collectively, the "Mortgage File"). [Assignments of the Pledged
Mortgages to the Bond Trustee (or its nominee) will be recorded in the
appropriate public office for real property records, except in states such as
California where, in the opinion of counsel, such recording is not required to
protect the Bond Trustee's interest in the Pledged Mortgages against the claim
of any subsequent transferee or any successor to or creditor of the Issuer.]
The Bond Trustee will review each Mortgage File within days of the
Closing Date (or promptly after the Bond Trustee's receipt of any document
permitted to be delivered after the Closing Date) and if any document in a
Mortgage File is found to be missing or defective in a material respect and the
Issuer does not cure such defect within days of notice thereof from the
Bond Trustee (or within such longer period not to exceed days after the
Closing Date as provided in the Mortgage Loan Purchase Agreement in the case of
missing documents not returned from the public recording office), Redwood Trust
will be obligated to purchase the related Pledged Mortgage. Rather than purchase
the Pledged Mortgage as provided above, Redwood Trust may remove such Pledged
Mortgage (a "Deleted Pledged Mortgage") from the Collateral and substitute in
its place another mortgage loan (a "Replacement Pledged Mortgage"). Any
Replacement Pledged Mortgage generally will, on the date of substitution, among
other characteristics set forth in the Mortgage Loan Purchase Agreement, (i)
have a principal balance, after deduction of all Scheduled Payments due in the
month of substitution, not in excess of, and not more than % less than, the
Stated Principal Balance of the Deleted Pledged Mortgage (the amount of any
shortfall to be deposited in the Bond Account by Redwood and held for
distribution to the Bondholders on the related Payment Date (a "Substitution
Adjustment Amount")), (ii) have a Mortgage Rate not lower than, and not more
than % per annum higher than, that of the Deleted Pledged Mortgage, (iii)
have a Loan-to-Value Ratio not higher than that of the Deleted Pledged Mortgage,
(iv) have a remaining term to maturity not greater than (and not more than
less than) that of the Deleted Pledged Mortgage, and (v) comply with
all of the representations and warranties set forth in the Mortgage Loan
Purchase Agreement as of the date of substitution. This cure, purchase or
substitution obligation constitutes the sole remedy available to Bondholders or
the Bond Trustee for omission of, or a material defect in, a Pledged Mortgage
document.
UNDERWRITING STANDARDS
All of the Pledged Mortgages have been purchased by Redwood Trust in the
ordinary course of business directly from banks, savings and loan associations,
mortgage bankers and other mortgage loan originators (each, an "Originator") or
in the secondary market. Redwood Trust approves individual institutions as
eligible Originators after an evaluation of certain criteria, including the
Originator's mortgage origination and servicing experience and financial
stability. Each Originator and/or the entity from which Redwood Trust purchased
the Pledged Mortgages will represent and warrant that all Pledged Mortgages
originated and/or sold by it will have been underwritten in accordance with
standards consistent with those utilized by mortgage lenders generally during
the period of origination.
Underwriting standards are applied by or on behalf of a lender to evaluate
the borrower's credit standing and repayment ability, and the value and adequacy
of the related Mortgaged Property as collateral. In general, a prospective
borrower applying for a loan is required to fill out a detailed application
designed to provide to the underwriting officer pertinent credit information. As
part of the description of the borrower's financial condition, the borrower
generally is required to provide a current list of assets and liabilities and a
statement of income and expense, as well as an authorization to apply for a
credit report which summarizes the borrower's credit history with local
merchants and lenders and any record of bankruptcy. In most cases, an employment
S-35
<PAGE> 83
verification is obtained from an independent source (typically the borrower's
employer) which verification reports, among other things, the length of
employment with that organization, the current salary, and whether it is
expected that the borrower will continue such employment in the future. If a
prospective borrower is self-employed, the borrower may be required to submit
copies of signed tax returns. The borrower may also be required to authorize
verification of deposits at financial institutions where the borrower has demand
or savings accounts. See "MORTGAGE LOAN PROGRAM -- Underwriting Standards" in
the Prospectus.
SERVICING OF THE PLEDGED MORTGAGES
THE MASTER SERVICER
will act as Master Servicer. The principal executive offices of
are located at .
The Master Servicer will be responsible for servicing the Pledged Mortgages
in accordance with the terms set forth in the Master Servicing Agreement. The
Master Servicer intends to perform its servicing obligations under the Master
Servicing Agreement through one or more servicers each, a "Servicer"). On or
prior to the Closing Date, the Master Servicer will enter into or be assigned a
mortgage servicing agreement (each, a "Servicing Agreement") with each Servicer
pursuant to which such Servicer will perform certain servicing functions with
respect to the Pledged Mortgages. The Master Servicer will administer and
supervise the performance of each Servicer, who may in turn be administering and
supervising the performance of the subservicers of the Pledged Mortgages.
Notwithstanding any such servicing arrangements, the Master Servicer will remain
liable for its servicing duties and obligations under the Master Servicing
Agreement.
SERVICING AND COLLECTION PROCEDURES
On or prior to the Closing Date, the Master Servicer will enter into a
separate Servicing Agreement with each Servicer to perform, as independent
contractor, servicing functions for the Master Servicer subject to its
supervision. Such servicing functions include collection and remittance of
principal and interest payments, administration of mortgage escrow accounts,
collection of certain insurance claims and, if necessary, foreclosure. The
Master Servicer may permit Servicers to contract with subservicers to perform
some or all of the Servicer's servicing duties, but the Servicers will not
thereby be released from their obligations under the Servicing Agreement. The
Master Servicer also may enter into sub-servicing agreements directly with an
affiliate of a Servicer or permit a Servicer to transfer its servicing rights
and obligations to a third party. In such instances, the affiliate or third
party, as the case may be, will perform servicing functions comparable to those
normally performed by the Servicer as described above, and the Servicer will not
be obligated to perform such servicing functions. When used herein with respect
to servicing obligations, the term Servicer includes any such affiliate or third
party. The Master Servicer may perform certain supervisory functions with
respect to servicing by the Servicer directly or through an agent or independent
contractor and the Master Servicer will be responsible for administering and
servicing the Pledged Mortgages pursuant to the Master Servicing Agreement.
On or before the Closing Date, the Master Servicer will establish one or
more accounts (the "Bond Account") into which each Servicer will remit
collections on the mortgage loans serviced by it (net of its related servicing
compensation). For purposes of the Master Servicing Agreement, , as
Master Servicer, will be deemed to have received any amounts with respect to the
Pledged Mortgages that are received by a Servicer regardless of whether such
amounts are remitted by the Servicer to the Master Servicer. The Master Servicer
has reserved the right to remove the Servicer servicing any Pledged Mortgage at
any time and will exercise that right if it considers such removal to be in the
best interest of the Bondholders. In the event that the Master Servicer removes
a Servicer, the Master Servicer will continue to be responsible for servicing
the related Pledged Mortgages.
S-36
<PAGE> 84
FORECLOSURE, DELINQUENCY AND LOSS EXPERIENCE
The following table summarizes the delinquency, foreclosure and loss
experience, respectively, as of December 31, 199 , December 31, 199 and
December 31, 199 on approximately $ , $ and $ ,
respectively, in outstanding principal balance of conventional mortgage loans
master serviced by . commenced master servicing
conventional mortgage loans during . The delinquency and foreclosure
percentages and the loss experience may be affected by the size and relative
lack of seasoning of the servicing portfolio because many of such mortgage loans
were not outstanding long enough to give rise to some or all of the indicated
periods of delinquency. Accordingly, the information should not be considered as
a basis for assessing the likelihood, amount or severity of delinquency or
losses on the Pledged Mortgages, and no assurances can be given that the
foreclosure, delinquency and loss experience presented in the table below will
be indicative of such experience on the Pledged Mortgages in the future:
<TABLE>
<CAPTION>
AS OF AS OF AS OF
DECEMBER 31, DECEMBER 31, DECEMBER 31,
199 199 199
------------ ------------ ------------
<S> <C> <C> <C>
Total Number of Conventional Mortgage Loans in
Portfolio...........................................
Delinquent Mortgage Loans and Pending Foreclosures at
Period End (1):.....................................
30-59 days.......................................
60-89............................................
90 days or more (excluding foreclosures).........
Total Delinquencies..............................
Foreclosures pending
Total delinquencies and foreclosures pending........
Net Loss(2)...........................................
</TABLE>
- ---------------
(1) As a percentage of the total number of loans master serviced.
(2) There is no material difference between gross loss and net loss.
There can be no assurance that factors beyond the Master Servicer's
control, such as national or local economic conditions or downturns in the real
estate markets of its lending areas, will not result in increased rates of
delinquencies and foreclosure losses in the future. [For example, over the last
several years there has been a general deterioration of the real estate market
and weakening of the economy in many regions of the of the country, including
California. The general deterioration of the real estate market has been
reflected in increases in delinquencies of loans secured by real estate, slower
absorption rates of real estate into the market and lower sales prices for real
estate. The general weakening of the economy has been reflected in decreases in
the financial strength of borrowers and decreases in the value of collateral
serving as collateral for loans. If the real estate market and economy continue
to decline, the Master Servicer may experience an increase in delinquencies on
the loans it services and higher net loss on liquidated loans.]
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
The Expense Fees with respect to the Pledged Mortgages are payable out of
the interest payments on each Pledged Mortgage. The Expenses Fees will vary from
Pledged Mortgage to Pledged Mortgage. The rate at which the Expense Fees accrue
(the "Expense Fee Rate") will range from % to % per annum, in each
case of the Stated Principal Balance of the related Pledged Mortgage. As of the
Cut-off Date, the weighted average Expense Fee Rate equaled approximately
%. The Expense Fees consist of (a) master servicing compensation payable to
the Master Servicer in respect of its master servicing activities (the "Master
Servicing Fee"), (b) servicing compensation payable to the Servicers in respect
of their servicing activities (the "Servicing Fee") and (c) fees payable to the
Bond Trustee in respect of its activities as trustee under the Indenture. The
Master Servicing Fee will be % per annum of the Stated Principal Balance of
each Pledged Mortgage. The Servicing Fee payable to each Servicer will vary from
Pledged Mortgage to Pledged Mortgage and will range from % to % per
annum, in each case of the Stated Principal
S-37
<PAGE> 85
Balance of the related Pledged Mortgage serviced by such Servicer. The Master
Servicer is obligated to pay certain ongoing expenses associated with the
Pledged Mortgages and incurred by the Master Servicer in connection with its
responsibilities under the Master Servicing Agreement and such amounts will be
paid by the Master Servicer out of the Master Servicing Fee. The amount of the
Master Servicing Fee is subject to adjustment with respect to prepaid Pledged
Mortgages, as described herein under "-- Adjustment to Master Servicing Fee and
Invested Amount in Connection with Certain Prepaid Pledged Mortgages." The
Master Servicer or the related Servicer will also be entitled to receive late
payment fees, assumption fees and other similar charges. The Master Servicer
will be entitled to receive all reinvestment income earned on amounts on
deposited in the Bond Account and the Distribution Account. The Net Mortgage
Rate of a Pledged Mortgage is the Mortgage Rate thereof minus the related
Expense Fee Rate.
ADJUSTMENT TO MASTER SERVICING FEE AND INVESTED AMOUNT IN CONNECTION WITH
CERTAIN PREPAID PLEDGED MORTGAGES
When a borrower prepays a Pledged Mortgage between Due Dates, the borrower
is required to pay interest on the amount prepaid only to the date of prepayment
and not thereafter. Principal prepayments by borrowers received during a
calendar month will be distributed to Bondholders on the Payment Date in the
month following the month of receipt. Pursuant to the Master Servicing
Agreement, the Master Servicing Fee for any month may be reduced by an amount
with respect to each such prepaid Pledged Mortgage sufficient to pay to
Bondholders the full amount of interest to which they would be entitled in
respect of such Pledged Mortgage on the related Payment Date. If shortfalls in
interest as a result of prepayments in any month exceed the sum of (i) amount of
the Master Servicing Fee for such month and (ii) the amounts otherwise payable
on such Payment Date to the holder of the Investor Certificate as described in
clauses "fifth", "sixth" and "seventh" under "DESCRIPTION OF THE
BONDS -- Priority of Payments and Allocation of Shortfalls" herein, the amount
of funds available to be paid to Bondholders in respect of interest on such
Payment Date will be reduced by the amount of such excess. See "DESCRIPTION OF
THE BONDS -- Interest" herein.
ADVANCES
Subject to the following limitations, the Master Servicer will be required
to advance prior to each Payment Date, from its own funds, funds advanced by the
related Servicer or amounts received with respect to the Pledged Mortgages that
do not constitute Available Funds for such Payment Date, an amount equal to the
aggregate of payments of principal of and interest on the Pledged Mortgages (net
of the Master Servicing Fee and the applicable Servicing Fee with respect to the
related Pledged Mortgages) which were due on the related Due Date and which were
delinquent on the related Determination Date, together with an amount equivalent
to interest on each Pledged Mortgage as to which the related Mortgaged Property
has been acquired by the Bond Trustee through foreclosure or deed-in-lieu of
foreclosure ("REO Property") (any such advance, an "Advance").
Advances are intended to maintain a regular flow of scheduled interest and
principal payments on the Bonds and the Investor Certificate rather than to
guarantee or insure against losses. The Master Servicer is obligated to make
Advances with respect to delinquent payments of principal of or interest on each
Pledged Mortgage to the extent that such Advances are, in its reasonable
judgment, recoverable from future payments and collections or insurance payments
or proceeds of liquidation of the related Pledged Mortgage. If the Master
Servicer determines on any Determination Date to make an Advance, such Advance
will be included with the payment to Bondholders and the holder of the Investor
Certificate on the related Payment Date. [Any failure by a Servicer to advance
funds as required under the related Servicing Agreement will constitute a
default thereunder, in which case the Master Servicer will be obligated to make
any such advance in accordance with the terms of the Master Servicing
Agreement.] Any failure by the Master Servicer to make an Advance as required
under the Master Servicing Agreement with respect to the Bonds and the Investor
Certificate will constitute a Servicing Default thereunder, in which case the
Bond Trustee or the successor master servicer will be obligated to make any such
Advance, in accordance with the terms of the Master Servicing Agreement. Subject
to the terms of the Bond Insurance Policy, the Bond Insurance Policy will
provide protection to the Senior Bondholders against any shortfall resulting
from delinquencies as to which a
S-38
<PAGE> 86
required Advance is not made as described above or is determined to be
nonrecoverable, to the extent such shortfall is not otherwise covered by
Available Funds.
USE OF PROCEEDS
The Issuer intends to distribute all of the net proceeds of the issuance of
the Bonds to the Company which will use such proceeds to pay certain
indebtedness incurred by Redwood Trust in connection with the acquisition of the
Pledged Mortgages. See "USE OF PROCEEDS" in the Prospectus and "METHOD OF
DISTRIBUTION" herein.
FEDERAL INCOME TAX CONSEQUENCES
Giancarlo and Gnazzo, A Professional Corporation, has advised the Company
that, in its opinion the Bonds will be treated as debt for federal income tax
purposes, and not as an ownership interest in the Mortgage Collateral, the
Issuer or a separate association taxable as a corporation. Interest, including
original issue discount with respect to any Class of Bonds issued with original
issue discount, will be taxable to non-exempt Bondholders. The Tax Prepayment
Assumption (as defined in the Prospectus under "FEDERAL INCOME TAX
CONSEQUENCES -- Original Issue Discount") for the purposes of determining the
amount and rate of accrual of original issue discount on the Bonds assumes that
the Pledged Mortgages are prepaid at a rate of % of the Prepayment
Assumption. Based upon (i) [the assumed prepayment rate] and (ii) the expected
price to the public of each Class of the Bonds as of the date hereof (including
interest accrued before the issue date, if any), the Senior Bonds will not be
issued with original issue discount and the Subordinated Bonds will be treated
as issued with original issue discount. [Although it is unclear, the Issuer
intends to treat the Bonds as "Variable Rate Debt Instruments" and the stated
interest on the Bonds as "qualified stated interest payments" (as each term is
defined in the Prospectus under "FEDERAL INCOME TAX CONSEQUENCES")].
Notwithstanding the use of in pricing the Bonds, no
representation is made that the Pledged Mortgages will actually prepay at
or at any other rate. The amount of original issue discount and
certain other information with respect to each Bond will be set forth on the
face of such Bond as required by applicable regulations and as described in the
Prospectus. See "DESCRIPTION OF THE BONDS -- Weighted Average Life of the Bonds"
herein and "FEDERAL TAX CONSEQUENCES" in the Prospectus.
The Issuer will not elect to treat the segregated pool of assets securing
the Bonds as a real estate mortgage investment conduit ("REMIC") for federal
income tax purposes. Giancarlo & Gnazzo, A Professional Corporation, has further
advised the Company that, in its opinion, the Issuer will not be classified as a
taxable mortgage pool.
ERISA MATTERS
Fiduciaries of employee benefit plans and certain other retirement plans
and arrangements, including individual retirement accounts and annuities, Keogh
plans, and collective investment funds in which such plans, accounts, annuities
or arrangements are invested, that are subject to the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), or corresponding provisions of the
Internal Revenue Code of 1986, as amended (the "Code") (any of the foregoing a
"Plan"), persons acting on behalf of a Plan, or persons using the assets of a
Plan ("Plan Investors"), should carefully review with their legal advisors
whether the purchase or holding of the Bonds could give rise to a transaction
that is prohibited under ERISA or the Code or cause the Pledged Mortgages
securing the Bonds to be treated as "plan assets" for purposes of regulations of
the Department of Labor set forth in 29 C.F.R. 2510.3-101 (the "Plan Asset
Regulations"). Prospective investors should be aware that, although certain
exceptions from the application of the prohibited transaction rules and the Plan
Asset Regulations exist, there can be no assurance that any such exception will
apply with respect to the acquisition of the Bonds. See "ERISA MATTERS" in the
Prospectus.
S-39
<PAGE> 87
If the Bonds are treated as equity for purposes of ERISA, the purchaser of
the Bonds could be treated as having acquired a direct interest in the Pledged
Mortgages securing the Bonds. In that event, the purchase, holding, or resale of
the Bonds could result in a transaction that is prohibited under ERISA or the
Code. Furthermore, regardless of whether the Bonds are treated as equity for
purposes of ERISA, the acquisition or holding of the Bonds by or on behalf of a
Plan could still be considered to give rise to a prohibited transaction if the
Issuer, the Trustee, the Master Servicer, any Servicer or any of their
respective Affiliates is or becomes a party in interest or a disqualified person
with respect to such Plan. However, one or more alternative exemptions may be
available with respect to certain prohibited transaction rules of ERISA that
might apply in connection with the initial purchase, holding and resale of the
Bonds, depending in part upon the type of Plan fiduciary making the decision to
acquire the Bonds and the circumstances under which such decision is made. Those
exemptions include, but are not limited to: (i) Prohibited Transaction Class
Exemption ("PTCE") 95-60, regarding investments by insurance company general
accounts; (ii) PTCE 91-38, regarding investments by bank collective investment
funds; (iii) PTCE 90-1, regarding investments by insurance company pooled
separate accounts; (iv) PTCE 84-14, regarding transactions negotiated by
qualified professional asset managers; or (v) PTCE 96-23, regarding transactions
effected by in-house asset managers. Before purchasing the Bonds, a Plan subject
to the fiduciary responsibility provisions of ERISA or described in Section
4975(e)(1) (and not exempt under Section 4975(g)) of the Code should consult
with its counsel to determine whether the conditions of any exemption would be
met. A purchaser of the Bonds should be aware, however, that even if the
conditions specified in one or more exemptions are met, the scope of the relief
provided by an exemption might not cover all acts that might be construed as
prohibited transactions. See "ERISA MATTERS" in the Prospectus.
Although not entirely free from doubt, the Issuer believes that the Bonds
will be treated as debt obligations without significant equity features for
purposes of the Plan Asset Regulations. Accordingly, a Plan that acquires the
Bonds should not be treated as having acquired a direct interest in the assets
of the Issuer. However, there can be no complete assurance that the Bonds will
be treated as debt obligations without significant equity features for purposes
of the Plan Asset Regulations.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting Agreement
between the Company, Redwood Trust and the Underwriter, the Company has agreed
to cause the Issuer to sell to the Underwriter, and the Underwriter has agreed
to purchase from the Issuer, the Bonds. Distribution of the Bonds will be made
by the Underwriter from time to time in negotiated transactions or otherwise at
varying prices to be determined at the time of sale. In connection with the sale
of the Bonds, the Underwriter may be deemed to have received compensation from
the Issuer in the form of underwriting discounts.
The Underwriter intends to make a secondary market in the Bonds, but has no
obligation to do so. There can be no assurance that a secondary market for the
Bonds will develop or, if it does develop, that it will continue or that it will
provide Bondholders with a sufficient level of liquidity of investment. The
Bonds will not be listed on any national securities exchange.
The Company and Redwood Trust have agreed to indemnify the Underwriter
against, or make contributions to the Underwriter with respect to, certain
liabilities, including liabilities under the Securities Act of 1933, as amended.
LEGAL MATTERS
The validity of the Bonds will be passed upon for the Issuer by Tobin &
Tobin, a professional corporation, San Francisco, California. Certain tax
matters will be passed upon by for the Issuer by Giancarlo and Gnazzo, A
Professional Corporation, San Francisco, California. Brown & Wood LLP, New York,
New York will act as counsel for the Underwriter.
S-40
<PAGE> 88
RATINGS
It is a condition of the issuance of the Senior Bonds that they be rated
AAA by and AAA by ( and ,
together, the "Rating Agencies"). It is a condition to the issuance of the
Subordinated Bonds that they be rated [AA] by .
The ratings assigned by to collateralized mortgage obligations
address the likelihood of the receipt of all payments on the mortgage loans by
the related bondholders under the agreements pursuant to which such bonds are
issued. 's ratings take into consideration the credit quality of the
related mortgage pool, including any credit support providers, structural and
legal aspects associated with such bonds, and the extent to which the payment
stream on the mortgage pool is adequate to make the payments required by such
bonds. 's ratings on such bonds do not, however, constitute a
statement regarding frequency of prepayments of the mortgage loans.
The ratings assigned by to the Senior Bonds address the
likelihood of the receipt of all payments on the mortgage loans by the related
Bondholders under the agreements pursuant to which such bonds are issued.
's ratings take into consideration the credit quality of the related
mortgage pool, including any credit support providers, structural and legal
aspects associated with such bonds, and the extent to which the payment stream
on such mortgage pool is adequate to make payments required by such bonds.
's ratings on such bonds do not, however, constitute a statement
regarding frequency of prepayments on the related mortgage loans.
The ratings of the Rating Agencies do not address the possibility that, as
a result of principal prepayments, Bondholders may receive a lower than
anticipated yield.
The ratings assigned to the Bonds should be evaluated independently from
similar ratings on other types of securities. A rating is not a recommendation
to buy, sell or hold securities and may be subject to revision or withdrawal at
any time by the Rating Agencies.
The Issuer has not requested a rating of the Bonds by any rating agency
other than the Rating Agencies; there can be no assurance, however, as to
whether any other rating agency will rate the Bonds or, if it does, what rating
would be assigned by such other rating agency. The rating assigned by such other
rating agency to the Bonds could be lower than the respective ratings assigned
by the Rating Agencies.
S-41
<PAGE> 89
INDEX OF DEFINED TERMS
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
Adjustment Date...................................................................... S-29
Advance.............................................................................. S-38
Available Funds...................................................................... S-21
Belgian Cooperative.................................................................. S-19
Beneficial owner..................................................................... S-17
Bond Account..................................................................S-9, S-17, S-20
Bond Distribution Amount............................................................. S-20
Bond Interest Rate................................................................... S-21
Bond Owners.......................................................................... S-17
Bond Trustee......................................................................... S-4
Bonds...........................................................................S-1, S-4, S16
Book-Entry Bonds..................................................................... S-17
CEDEL Participants................................................................... S-18
Certificate Interest Payment Amount.................................................. S-22
Certificate Interest Rate............................................................ S-4
Class Principal Amount............................................................... S-17
Code...............................................................................S-10, S-39
Company..............................................................................S-2, S-4
Controlling Class.................................................................... S-28
Cooperative.......................................................................... S-19
CPR.................................................................................. S-26
Cut-off Date Pool Principal Balance.................................................. S-29
Definitive Bond...................................................................... S-17
Deleted Pledged Mortgage............................................................. S-35
Deposit Trust Agreement.............................................................. S-5
Distribution Account................................................................S-9, S-20
DTC.................................................................................. S-17
Due Date............................................................................. S-29
ERISA..............................................................................S-10, S-39
Euroclear Operator................................................................... S-19
Euroclear Participants............................................................... S-19
European Depositaries................................................................ S-17
Expense Fee Rate..................................................................... S-39
FHLMC................................................................................ S-30
Financial Intermediary............................................................... S-17
FNMA................................................................................. S-30
Index...............................................................................S-8, S-29
Indirect Participants................................................................ S-17
Insurance Proceeds................................................................... S-21
Interest Accrual Period.............................................................S-6, S-21
Invested Amount...................................................................... S-17
Invested Amount Payment.............................................................. S-23
Investor............................................................................. S-1
Investor Certificate................................................................S-1, S-16
Investor Percentage.................................................................. S-23
Issuer............................................................................... S-2
</TABLE>
S-42
<PAGE> 90
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
Liquidated Pledged Mortgage.......................................................... S-25
Liquidation Proceeds................................................................. S-21
Loan-to-Value Ratio.................................................................. S-30
Management Agreement................................................................. S-4
Margin............................................................................... S-29
Master Servicing Fee................................................................. S-39
Maximum Rate......................................................................... S-29
Morgan............................................................................... S-19
Mortgage............................................................................. S-35
Mortgage File........................................................................ S-35
Mortgage Loan Purchase Agreement..................................................... S-28
Mortgage Note........................................................................ S-35
Mortgaged Property................................................................... S-28
Net Interest Shortfall............................................................... S-22
Net Interest Shortfalls.............................................................. S-22
Offered Bonds..................................................................S-1, S-4, S-17
Original Class B-1 Principal Amount.................................................. S-17
Original Invested Amount............................................................. S-17
Original Senior Class Principal Amount............................................... S-17
Originator........................................................................... S-35
Owner Trustee........................................................................ S-4
Participants......................................................................... S-17
Payment Date...................................................................S-1, S-5, S-21
Periodic Rate Cap.................................................................... S-29
Plan...............................................................................S-10, S-39
Plan Asset Regulations.............................................................S-10, S-39
Plan Investors.....................................................................S-10, S-39
Pledged Mortgage Pool...............................................................S-7, S-28
Pledged Mortgages.................................................................... S-2
Pool Principal Balance............................................................... S-23
Prepayment Assumption................................................................ S-26
Prepayment Interest Shortfall........................................................ S-22
Primary Mortgage Insurance Policy.................................................... S-38
PTCE................................................................................. S-41
Rating Agencies....................................................................S-11, S-42
Realized Loss........................................................................ S-25
Record Date.......................................................................... S-21
Redwood Trust..................................................................S-2, S-4, S-16
Relevant Depositary.................................................................. S-17
REMIC................................................................................ S-39
REO Property......................................................................... S-40
Replacement Pledged Mortgage......................................................... S-36
Rules................................................................................ S-17
Scheduled Payments................................................................... S-29
Senior Bond Interest Rate............................................................ S-1
Senior Bonds........................................................................S-1, S-16
Senior Class Principal Amount........................................................ S-17
Senior Interest Payment Amount....................................................... S-21
</TABLE>
S-43
<PAGE> 91
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
Senior Percentage.................................................................... S-23
Senior Principal Payment Amount...................................................... S-22
Servicing Fee........................................................................ S-37
Shortfalls........................................................................... S-12
SMMEA................................................................................ S-10
Stated Principal Balance............................................................. S-23
Structuring Assumptions.............................................................. S-25
Subordinated Bond Interest Rate...................................................... S-1
Subordinated Bonds..................................................................S-1, S-16
Subordinated Class Principal Amount.................................................. S-17
Subordinated Interest Carryover Shortfall............................................ S-22
Subordinated Interest Payment Amount................................................. S-21
Subordinated Percentage.............................................................. S-23
Subordinated Principal Carryover Shortfall........................................... S-23
Subordinated Principal Payment Amount................................................ S-23
Substitution Adjustment Amount....................................................... S-35
Terms and Conditions................................................................. S-19
Underwriter.......................................................................... S-1
Variable Rate Debt Instruments....................................................... S-39
</TABLE>
S-44
<PAGE> 92
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered Sequoia
Mortgage Trust , Collateralized Mortgage Bonds (the "Global Bonds")
will be available only in book-entry form. Investors in the Global Bonds may
hold such Global Bonds through any of The Depository Trust Company ("DTC"),
CEDEL or Euroclear. The Global Bonds will be tradeable as home market
instruments in both the European and U.S. domestic markets. Initial settlement
and all secondary trades will settle in same-day funds.
Secondary market trading between investors holding Global Bonds through
CEDEL and Euroclear will be conducted in the ordinary way in accordance with
their normal rules and operating procedures and in accordance with conventional
Eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors holding Global Bonds through DTC
will be conducted according to the rules and procedures applicable to U.S.
corporate debt obligations and prior collateralized mortgage bond issues.
Secondary cross-market trading between CEDEL or Euroclear and DTC
Participants holding Global Bonds will be effected on a delivery-against-payment
basis through the respective Depositaries of CEDEL and Euroclear (in such
capacity) and as DTC Participants.
Non-U.S. holders (as described below) of Global Bonds will be subject to
U.S. withholding taxes unless such holders meet certain requirements and deliver
appropriate U.S. tax documents to the securities clearing organizations or their
participants.
INITIAL SETTLEMENT
All Global Bonds will be held in book-entry form by DTC in the name of Cede
& Co. as nominee of DTC. Investors' interests in the Global Bonds will be
represented through financial institutions acting on their behalf as direct and
indirect participants in DTC (each, a "DTC Participant"). As a result, CEDEL and
Euroclear will hold positions on behalf of their participants through their
respective Depositaries, which in turn will hold such positions in accounts as
DTC Participants.
Investors electing to hold their Global Bonds through DTC will follow the
settlement practices' applicable to other collateralized mortgage bond issues.
Investor securities custody accounts will be credited with their holdings
against payment in same-day funds on the settlement date.
Investors electing to hold their Global Bonds through CEDEL or Euroclear
accounts will follow the settlement procedures applicable to conventional
Eurobonds, except that there will be no temporary global security and no
"lock-up" or restricted period. Global Bonds will be credited to the securities
custody accounts on the settlement date against payment in same-day funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
TRADING BETWEEN DTC PARTICIPANTS. Secondary market trading between DTC
Participants will be settled using the procedures applicable to prior
collateralized mortgage bond issues in same-day funds.
TRADING BETWEEN CEDEL AND/OR EUROCLEAR PARTICIPANTS. Secondary market
trading between CEDEL Participants or Euroclear Participants will be settled
using the procedures applicable to conventional Eurobonds in same-day funds.
TRADING BETWEEN DTC SELLER AND CEDEL OR EUROCLEAR PURCHASER. When Global
Bonds are to be transferred from the account of a DTC Participant to the account
of a CEDEL Participant or a Euroclear Participant, the purchaser will send
instructions to CEDEL or Euroclear through a CEDEL Participant or
A-1
<PAGE> 93
Euroclear Participant at least one business day prior to settlement. CEDEL or
Euroclear will instruct the respective Depositary, as the case may be, to
receive the Global Bonds against payment. Payment will include interest accrued
on the Global Bonds from and including the last coupon payment date to and
excluding the settlement date, on the basis of the actual number of days in such
accrual period and a year assumed to consist of 360 days. For transactions
settling on the 31st of the month, payment will include interest accrued to and
excluding the first day of the following month. Payment will then be made by the
respective Depositary of the DTC Participant's account against delivery of the
Global Bonds. After settlement has been completed, the Global Bonds will be
credited to the respective clearing system and by the clearing system, in
accordance with its usual procedures, to the CEDEL Participant's or Euroclear
Participant's account. The securities credit will appear the next day (European
time) and the cash debt will be back-valued to, and the interest on the Global
Bonds will accrue from, the value date (which would be the preceding day when
settlement occurred in New York). If settlement is not completed on the intended
value date (i.e., the trade fails), the CEDEL or Euroclear cash debt will be
valued instead as of the actual settlement date.
CEDEL Participants and Euroclear Participants will need to make available
to the respective clearing systems the funds necessary to process same-day funds
settlement. The most direct means of doing so is to preposition funds for
settlement, either from cash on hand or existing lines of credit, as they would
for any settlement occurring within CEDEL or Euroclear. Under this approach,
they may take on credit exposure to CEDEL or Euroclear until the Global Bonds
are credited to their accounts one day later.
As an alternative, if CEDEL or Euroclear has extended a line of credit to
them, CEDEL Participants or Euroclear Participants can elect not to preposition
funds and allow that credit line to be drawn upon the finance settlement. Under
this procedure, CEDEL Participants or Euroclear Participants purchasing Global
Bonds would incur overdraft charges for one day, assuming they cleared the
overdraft when the Global Bonds were credited to their accounts. However,
interest on the Global Bonds would accrue from the value date. Therefore, in
many cases the investment income on the Global Bonds earned during that one-day
period may substantially reduce or offset the amount of such overdraft charges,
although this result will depend on each CEDEL Participant's or Euroclear
Participant's particular cost of funds.
Since the settlement is taking place during New York business hours, DTC
Participants can employ their usual procedures for sending Global Bonds to the
respective European Depository for the benefit of CEDEL Participants or
Euroclear Participants. The sale proceeds will be available to the DTC seller on
the settlement date. Thus, to the DTC Participants a cross-market transaction
will settle no differently than a trade between two DTC Participants.
TRADING BETWEEN CEDEL OR EUROCLEAR SELLER AND DTC PURCHASER. Due to time
zone differences in their favor, CEDEL Participants and Euroclear Participants
may employ their customary procedures for transactions in which Global Bonds are
to be transferred by the respective clearing system, through the respective
Depositary, to a DTC Participant. The seller will send instructions to CEDEL or
Euroclear through a CEDEL Participant or Euroclear Participant at least one
business day prior to settlement. In these cases CEDEL or Euroclear will
instruct the respective Depositary, as appropriate, to deliver the Global Bonds
to the DTC Participant's account against payment. Payment will include interest
accrued on the Global Bonds from and including the last coupon payment to and
excluding the settlement date on the basis of the actual number of days in such
accrual period and a year assumed to consist of 360 days. For transactions
settling on the 31st of the month, payment will include interest accrued to and
excluding the first day of the following month. The payment will then be
reflected in the account of the CEDEL Participant or Euroclear Participant the
following day, and receipt of the cash proceeds in the CEDEL Participant's or
Euroclear Participant's account would be back-valued to the value date (which
would be the preceding day, when settlement occurred in New York). Should the
CEDEL Participant or Euroclear Participant have a line of credit with its
respective clearing system and elect to be in debt in anticipation of receipt of
the sale proceeds in its account, the back-valuation will extinguish any
overdraft incurred over that one-day period. If settlement is not completed on
the intended valued date (i.e., the trade fails), receipt of the cash proceeds
in the CEDEL Participant's or Euroclear Participant's account would instead be
valued as of the actual settlement date.
A-2
<PAGE> 94
Finally, day traders that use CEDEL or Euroclear and that purchase Global
Bonds from DTC Participants for delivery to CEDEL Participants or Euroclear
Participants should note that these trades would automatically fail on the sale
side unless affirmative action were taken. At least three techniques should be
readily available to eliminate this potential problem:
(a) borrowing through CEDEL or Euroclear for one day (until the
purchase side of the day trade is reflected in their CEDEL or Euroclear
accounts) in accordance with the clearing system's customary procedures;
(b) borrowing the Global Bonds in the U.S. from a DTC Participant no
later than one day prior to settlement, which would give the Global Bonds
sufficient time to be reflected in their CEDEL or Euroclear account in
order to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the trade
so that the value date for the purchase from the DTC Participant is at
least one day prior to the value date for the sale to the CEDEL Participant
or Euroclear Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of the Global Bonds holding securities through CEDEL or
Euroclear (or through DTC if the holder has an address outside the U.S.) will be
subject to the 30% U.S. withholding tax that generally applies to payments of
interest (including original issue discount) on registered debt issued by U.S.
Persons, unless (i) each clearing system, bank or other financial institution
that holds customers' securities in the ordinary course of its trade or business
in the chain of intermediaries between such beneficial owner and the U.S. entity
required to withhold tax complies with applicable certification requirements and
(ii) such beneficial owner takes one of the following steps to obtain an
exemption or reduced tax rate:
EXEMPTION FOR NON-U.S. PERSONS (FORM W-8). Beneficial owners of the Global
Bonds that are non-U.S. Persons can obtain a complete exemption from the
withholding tax by filing a signed Form W-8 (Certificate of Foreign Status). If
the information shown on Form W-8 changes, a new Form W-8 must be filed within
30 days of such change.
EXEMPTION FOR NON-U.S. PERSONS WITH EFFECTIVELY CONNECTED INCOME (FORM
4224). A non-U.S. Person, including a non-U.S. corporation or bank with a U.S.
branch, for which the interest income is effectively connected with its conduct
of a trade or business in the United States, can obtain an exemption from the
withholding tax by filing Form 4224 (Exemption from Withholding of Tax on Income
Effectively Connected with the Conduct of a Trade or Business in the United
States).
EXEMPTION OR REDUCED RATE FOR NON-U.S. PERSONS RESIDENT IN TREATY COUNTRIES
(FORM 1001). Non-U.S. Persons that are Bond Owners residing in a country that
has a tax treaty with the United States can obtain an exemption or reduced tax
rate (depending on the treaty terms) by filing Form 1001 (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 Bond Owner or his agent.
EXEMPTION FOR U.S. PERSONS (FORM W-9). U.S. Persons can obtain a complete
exemption from the withholding tax by filing Form W-9 (Payer's Request for
Taxpayer Identification Number and Certification).
U.S. FEDERAL INCOME TAX REPORTING PROCEDURE. The Bond Owner of a Bond or,
in the case of a Form 1001 or a Form 4224 filer, his agent, files by submitting
the appropriate form to the person through whom it holds (the clearing agency,
in the case of persons holding directly on the books of the clearing agency).
Form W-8 and Form 1001 are effective for three calendar years and Form 4224 is
effective for one calendar year.
The term "U.S. Person" means a citizen or resident of the United States, a
corporation, partnership or other entity created or organized in or under the
laws of the United States or any political subdivision thereof, or an estate
whose income is subject to U.S. federal income tax regardless of its source of
income, or a trust if a court within the United States is able to exercise
primary supervision of the administration of the trust and one or more United
States fiduciaries have the authority to control all substantial decisions of
the trust. This
A-3
<PAGE> 95
summary does not deal with all aspects of U.S. federal income tax withholding
that may be relevant to foreign holders of the Global Bonds. Investors are
advised to consult their own tax advisors for specific tax advice concerning
their holding and disposing of the Global Bonds.
A-4
<PAGE> 96
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE
SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION
STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER
TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE
OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE
WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE
SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED MAY 14, 1997
PROSPECTUS
SEQUOIA MORTGAGE FUNDING CORPORATION
DEPOSITOR
$3,000,000,000
(AGGREGATE AMOUNT)
COLLATERALIZED MORTGAGE BONDS
(ISSUABLE IN SERIES)
------------------------
Sequoia Mortgage Funding Corporation, a Delaware corporation (the
"Company"), proposes to establish one or more trusts to issue and sell from time
to time under this Prospectus and related Prospectus Supplements one or more
Series of Collateralized Mortgage Bonds (the "Bonds"). The Bonds of each Series
will be collateralized by mortgage collateral (the "Mortgage Collateral")
consisting of one or more of the following: (i) fixed-rate, first or junior lien
mortgage loans secured by one- to four-family residential properties (the "Fixed
Rate Pledged Mortgages"), (ii) floating-rate, first or junior lien mortgage
loans secured by one- to four-family residential properties (the "Floating Rate
Pledged Mortgages" and, together with the Fixed Rate Pledged Mortgages, the
"Pledged Mortgages"), (iii) mortgage pass-through securities (the "Agency
Securities") issued or guaranteed by the Government National Mortgage
Association ("GNMA"), the Federal National Mortgage Association ("FNMA") or the
Federal Home Loan Mortgage Corporation ("FHLMC"), (iv) Private Mortgage-Backed
Securities (as defined herein), (v) a combination of such Agency Securities
and/or Private Mortgage-Backed Securities (collectively, the "Certificates") or
(vi) a combination of Certificates and Pledged Mortgages. A Series of Bonds also
may be secured by certain cash accounts, insurance policies, surety bonds,
guaranteed investment contracts, cross-collateralization, reinvestment income,
guaranties, letters of credit or derivative arrangements to the extent described
herein and in the related Prospectus Supplement. Certain capitalized terms used
and not otherwise defined herein shall have the meanings ascribed thereto
elsewhere in this Prospectus. See "INDEX OF CERTAIN DEFINITIONS" on page 85 of
this Prospectus for the location of the definitions of certain capitalized
terms.
Each Series of Bonds will consist of one or more Classes of Bonds. Interest
on the Bonds will accrue at a fixed rate, a variable rate or a combination
thereof, as determined in the manner specified in the related Prospectus
Supplement. Principal payments on each Class of Bonds of a Series will be made
in the manner specified in the related Prospectus Supplement. If so specified in
the related Prospectus Supplement, one or more Classes of Bonds of a Series may
be entitled to receive payments of principal, interest or any combination
thereof prior to one or more other Classes of Bonds of such Series either for
the life of such Bonds or during certain periods. A Series of Bonds may include
one or more Classes of Bonds entitled to (i) principal distributions, with
disproportionate, nominal or no interest distributions or (ii) interest
distributions, with disproportionate, nominal or no principal distributions. In
addition, a Series of Bonds may include one or more Classes of Bonds that are
senior in right of payment to one or more other Classes of Bonds of such Series.
Credit enhancement for the Bonds of a Series will be as specified in the related
Prospectus Supplement.
The rate of payment of the principal of each Class of Bonds will generally
depend, among other things, on the rate of payment (including prepayments) of
the Mortgage Collateral pledged as security therefor. Consequently, the actual
maturity of any Class of Bonds could occur substantially sooner than its Stated
Maturity. Each Series of Bonds may be redeemed under the circumstances described
herein and in the related Prospectus Supplement.
FOR A DISCUSSION OF CERTAIN RISK FACTORS RELATING TO INVESTMENTS IN THE
BONDS, SEE "RISK FACTORS" COMMENCING ON PAGE 19 OF THIS PROSPECTUS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Each Series of Bonds will be issued by a separate trust (each, an "Issuer")
established by the Company, will represent obligations solely of such Issuer and
will not be insured or guaranteed by GNMA, FNMA or FHLMC or any other
governmental agency or instrumentality or by the Company, any affiliate of the
Company, or, unless otherwise specified in the related Prospectus Supplement,
any other person or entity. No Issuer of any Series of Bonds is expected to have
significant assets other than those pledged as collateral for such Series of
Bonds. Prior to issuance, there will have been no market for the Bonds of any
Series, and there can be no assurance that a secondary market for any Bonds will
develop or, if it does develop that it will continue or provide Bondholders with
a sufficient level of liquidity of investment. This Prospectus may not be used
to consummate sales of a Series of Bonds unless accompanied by a Prospectus
Supplement.
Bonds of each Series will be characterized for federal income tax purposes
as debt instruments. See "FEDERAL INCOME TAX CONSEQUENCES" herein.
Offers of the Bonds of any Series may be made through one or more different
methods, including offerings through underwriters, as more fully described under
"PLAN OF DISTRIBUTION" herein and in the related Prospectus Supplement.
May , 1997.
<PAGE> 97
UNTIL 90 DAYS AFTER THE DATE OF EACH PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE SECURITIES COVERED BY SUCH PROSPECTUS SUPPLEMENT,
WHETHER OR NOT PARTICIPATING IN THE DISTRIBUTION THEREOF, MAY BE REQUIRED TO
DELIVER SUCH PROSPECTUS SUPPLEMENT AND THIS PROSPECTUS. THIS IS IN ADDITION TO
THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS AND PROSPECTUS SUPPLEMENT WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
PROSPECTUS SUPPLEMENT
The Prospectus Supplement relating to a Series of Bonds to be offered
hereunder will, among other things, set forth with respect to such Series of
Bonds, if applicable: (i) information concerning the Issuer of such Series of
Bonds; (ii) the principal amount and the interest rate, or the method to be used
to determine the interest rate, of each Class of such Series of Bonds; (iii)
certain characteristics of the Mortgage Collateral securing such Series of Bonds
and, if applicable, information as to any insurance policies, surety bonds,
guaranties, derivative arrangements, cross-collateralization, reinvestment
income, guaranteed investment contracts or letters of credit, and the amount and
source of any Reserve Fund or other cash account for the Bonds of such Series;
(iv) the circumstances, if any, under which the Bonds of such Series are subject
to special redemption or optional redemption; (v) the Stated Maturity of each
Class of Bonds of such Series; (vi) the method used to calculate the aggregate
amount of principal required to be applied to the Bonds of such Series on each
Payment Date and the priority in which such payments will be applied among the
Classes of Bonds of such Series; (vii) the principal amount of each Class of
Bonds of such Series that would be outstanding on specified Payment Dates if the
Pledged Mortgages or the mortgage loans underlying the Certificates, as the case
may be, pledged as security for such Bonds, were prepaid at various assumed
rates; (viii) the Payment Dates and the Assumed Reinvestment Rate for such
Series of Bonds; (ix) information as to the nature and extent of subordination
with respect to any Class of Bonds of such Series that is subordinate in right
of payment to any other Class; (x) any minimum principal payment requirements
and the terms of any related minimum principal payment agreement with respect to
such Series of Bonds; (xi) additional information with respect to the plan of
distribution of the Bonds of such Series; and (xii) information as to the Master
Servicer and the Bond Trustee for such Series.
AVAILABLE INFORMATION
The Depositor has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement under the Securities Act of 1933, as
amended (the "Securities Act"), with respect to the Bonds. This Prospectus,
which forms a part of the Registration Statement, and the Prospectus Supplement
relating to each Series of Bonds contain summaries of the material terms of the
documents referred to herein and therein, but do not contain all of the
information set forth in the Registration Statement pursuant to the Rules and
Regulations of the Commission. For further information, reference is made to
such Registration Statement and the exhibits thereto. Such Registration
Statement and exhibits can be inspected and copied at prescribed rates at the
public reference facilities maintained by the Commission at its Public Reference
Section, 450 Fifth Street, N.W., Washington, D.C. 20549, and at its Regional
Offices located as follows: Midwest Regional Office, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661; and Northeast Regional Office, Seven World
Trade Center, New York, New York 10048. The Commission also maintains a Web site
at http://www.sec.gov from which such Registration Statement and exhibits may be
obtained.
No person has been authorized to give any information or to make any
representation other than those contained in this Prospectus and any Prospectus
Supplement with respect hereto and, if given or made, such information or
representations must not be relied upon. This Prospectus and any Prospectus
Supplement with respect hereto do not constitute an offer to sell or a
solicitation of an offer to buy any securities other than the Bonds offered
hereby and thereby nor an offer of the Bonds to any person in any state or other
jurisdiction in which such offer would be unlawful. The delivery of this
Prospectus at any time does not imply that information herein is correct as of
any time subsequent to its date.
2
<PAGE> 98
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents subsequently filed by or on behalf of the Issuer referred to
in the accompanying Prospectus Supplement with the Commission pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), after the date of this Prospectus and prior to the
termination of any offering of the Bonds issued by such Issuer shall be deemed
to be incorporated by reference in this Prospectus and to be a part of this
Prospectus from the date of the filing of such 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 all purposes of this
Prospectus to the extent that a statement contained herein (or in the
accompanying Prospectus Supplement) or in any other subsequently filed document
which also is or is deemed to be incorporated by reference modifies or replaces
such statement. Any such statement so modified or superseded shall not be
deemed, except as so modified or superseded, to constitute a part of this
Prospectus. None of the Company, the Master Servicer or the Bond Trustee for any
Series intends to file with the Commission periodic reports with respect to the
related Issuer following completion of the reporting period required by Rule
15d-1 or Regulation 15D under the Exchange Act.
The Bond Trustee or such other entity specified in the related Prospectus
Supplement on behalf of any Issuer will provide without charge to each person to
whom this Prospectus is delivered, on the written or oral request of such
person, a copy of any or all of the documents referred to above that have been
or may be incorporated by reference in this Prospectus (not including exhibits
to the information that is incorporated by reference unless such exhibits are
specifically incorporated by reference into the information that this Prospectus
incorporates). Such requests should be directed to the Corporate Trust Office of
the Bond Trustee or the address of such other entity specified in the
accompanying Prospectus Supplement. Included in the accompanying Prospectus
Supplement is the name, address, telephone number and, if available, facsimile
number of the office or contact person at the Corporate Trust Office of the Bond
Trustee or such other entity.
3
<PAGE> 99
SUMMARY
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus and in the related
Prospectus Supplement with respect to the Series of Bonds offered thereby and to
the related Indenture (as defined herein). Certain capitalized terms used and
not otherwise defined herein shall have the meanings ascribed thereto elsewhere
in this Prospectus. See "INDEX OF CERTAIN DEFINITIONS" on page 85 of this
Prospectus for the location of the definitions of certain capitalized terms.
Securities Offered......... The Collateralized Mortgage Bonds (the "Bonds")
offered hereby will be secured by mortgage
collateral (the "Mortgage Collateral") consisting
of one or more of the following: (i) fixed-rate,
first or junior lien mortgage loans secured by one-
to four-family residential properties (the "Fixed
Rate Pledged Mortgages"), (ii) floating-rate, first
or junior lien mortgage loans secured by one-to
four-family residential properties (the "Floating
Rate Pledged Mortgages" and, together with the
Fixed Rate Pledged Mortgages, the "Pledged
Mortgages"), (iii) mortgage pass-through securities
(the "Agency Securities") issued or guaranteed by
the Government National Mortgage Corporation
("GNMA"), the Federal National Mortgage Corporation
("FNMA") or the Federal Home Loan Mortgage
Corporation ("FHLMC"), (iv) other mortgage pass-
through certificates or collateralized mortgage
obligations (the "Private Mortgage-Backed
Securities"), (v) a combination of such Agency
Securities and/or Private Mortgage-Backed
Securities (collectively, the "Certificates") or
(vi) a combination of Certificates and Pledged
Mortgages. A Series of Bonds also may be secured by
certain cash accounts, insurance policies, surety
bonds, guaranteed investment contracts, cross-
collateralization, reinvestment income, guaranties
or letters of credit to the extent described herein
and in the related Prospectus Supplement. See
"SECURITY FOR THE BONDS" herein.
The Bonds will be issued from time to time in one
or more Series pursuant to Indentures (as defined
herein) between each Issuer and a bank or trust
company acting as trustee (the "Bond Trustee") for
the holders of the Bonds of each Series (the
"Bondholders") under the relevant Indenture. Each
Series of Bonds will consist of one or more Classes
of Bonds which may include one or more Classes of
Deferred Interest Bonds (as defined herein). A
Series of Bonds may include one or more Classes of
Senior Bonds (collectively, the "Senior Bonds") and
one or more Classes of Subordinated Bonds
(collectively, the "Subordinated Bonds"). Unless
otherwise specified in the related Prospectus
Supplement, the Bonds represent obligations solely
of the Issuer and are not insured or guaranteed by
any other person or entity. See "DESCRIPTION OF THE
BONDS" herein. Bonds of a Class may differ from
Bonds of other Classes of the same Series in the
amounts allocated to and the priority of principal
payments and interest rate or in such other manner
as specified in the related Prospectus Supplement.
A Series of Bonds may include one or more Classes
of Bonds entitled to (i) principal distributions,
with disproportionate, nominal or no interest
distributions or (ii) interest distributions, with
disproportionate, nominal or no principal
distributions. A Series of Bonds may be insured or
guaranteed as to payment of principal and interest
by a third-party insurer or guarantor, or secured
by certain cash accounts, insurance policies,
surety bonds, guaranteed investment contracts,
cross-collateral-
4
<PAGE> 100
ization, reinvestment income, guaranties, letters
of credit or derivative arrangements, in each case
to the extent provided herein and in the related
Prospectus Supplement.
Issuer..................... The Issuer with respect to each Series of Bonds
will be a trust established by Sequoia Mortgage
Funding Corporation, a Delaware corporation (the
"Company"), for the sole purpose of issuing such
Series of Bonds and engaging in transactions
relating thereto. The Company is a wholly owned
limited purpose finance subsidiary of Redwood
Trust, Inc. ("Redwood Trust"). Redwood Trust, a
Maryland corporation, has elected to be taxed as a
real estate investment trust under the Internal
Revenue Code of 1986, as amended (the "Code"). Each
trust that is formed to act as an Issuer will be
created pursuant to a deposit trust agreement
between the Company, acting as depositor (in such
capacity, the "Depositor"), and a bank, trust
company, or other fiduciary acting as owner trustee
(the "Owner Trustee"). Each trust will be
established by the Company solely for the purpose
of issuing one Series of Bonds and engaging in
transactions relating thereto. Neither Redwood
Trust, the Company nor any of their respective
affiliates will guarantee or otherwise be obligated
to make payments on the Bonds. The Bonds will be
obligations solely of their respective Issuers. The
assets of each such Issuer, other than those
pledged as collateral for the Bonds it issues, are
not expected to be significant. See "THE ISSUER"
herein.
Master Servicer............ The entity or entities named as Master Servicer
(each, a "Master Servicer") in the related
Prospectus Supplement will act as master servicer
with respect to all of the Pledged Mortgages
securing a Series of Bonds pursuant to an agreement
(each, a "Master Servicing Agreement") among the
Master Servicer, the related Issuer and the related
Bond Trustee. The Master Servicer will administer
and supervise the performance of the entities
primarily responsible for servicing the Pledged
Mortgages (each, a "Servicer"), who may in turn be
administering and supervising the performance of
one or more subservicers of such Pledged Mortgages,
and will be obligated to perform the obligations of
a terminated Servicer or appoint a successor
Servicer. See "SERVICING OF THE PLEDGED MORTGAGES"
herein.
Special Servicer........... If specified in the related Prospectus Supplement,
the Company may appoint a special servicer (each, a
"Special Servicer") to service, make certain
decisions and take various actions with respect to
delinquent or defaulted Pledged Mortgages pledged
as security for the related Series of Bonds. See
"SERVICING OF THE PLEDGED MORTGAGES -- Special
Servicing Agreement" herein.
Interest Payments.......... Each Class of Bonds of a Series will bear interest
at the rate, or determined in the manner, set forth
for such Class in the related Prospectus
Supplement. Interest on a Series of Bonds or on a
Class of Bonds within a Series may accrue at a
fixed rate, a variable rate or a combination
thereof, as determined in the manner specified in
the related Prospectus Supplement. One or more
Classes of Bonds within a Series may be zero coupon
bonds. Interest on each Class of Bonds of a Series
other than a Class of Deferred Interest Bonds will
be paid on the dates specified in the related
Prospectus Supplement (each, a "Payment Date"), to
holders of record at the close of business on each
of the dates specified in such Prospectus
Supplement (each, a "Record Date").
5
<PAGE> 101
Interest on each Class of Deferred Interest Bonds
of a Series will accrue but will not be paid
(except in certain circumstances involving an
optional redemption of the Deferred Interest Bonds
or as otherwise specified in the related Prospectus
Supplement) until the Classes of Bonds specified in
the related Prospectus Supplement have been paid in
full. Interest accrued but not paid on a Class of
Deferred Interest Bonds will be added to the
principal thereof on each Payment Date. Each such
payment or accrual of interest will include all
interest accrued either to, but not including, the
related Payment Date or, if so indicated in the
related Prospectus Supplement, through a date prior
to such Payment Date, as specified in the related
Prospectus Supplement. In the latter case, the
effective yield to the holders of the Bonds will be
reduced to a level below the yield which would
apply if interest were paid or accrued to the
respective Payment Date. One or more Classes of
Bonds of a Series may be subordinated in the right
to receive payments of interest (and/or principal
or any combination thereof) to one or more other
Classes of Bonds of such Series, either throughout
the lives of the Bonds of such Class or during
specified periods, and, in addition, may be
entitled to receive such payments only after the
occurrence of certain events specified in the
related Prospectus Supplement. See "DESCRIPTION OF
THE BONDS -- Payments of Interest" herein.
Principal Payments......... Principal payments on each Series of Bonds will be
made on each Payment Date in an aggregate amount
equal to the sum of (a) if specified in the related
Prospectus Supplement, the amount of interest
accrued but not then payable on the Deferred
Interest Bonds of the Series, if any, from the
prior Payment Date or, if specified in the related
Prospectus Supplement, from a date prior to such
prior Payment Date, and (b) either (i) the
percentage or percentages specified in the related
Prospectus Supplement of the funds available for
such purpose ("Available Funds") for such Payment
Date or (ii) the sum of (x) an amount determined by
reference to the aggregate decline in the bond
values (the "Bond Values") of the Mortgage
Collateral securing the Bonds of such Series in the
period (each, a "Due Period") ending prior to such
Payment Date (collectively, the "Basic Principal
Payment") and (y) the amount, if any, of the spread
(the "Spread") specified in the related Prospectus
Supplement. The Prospectus Supplement for a Series
of Bonds will specify the method or methods used to
determine Available Funds for each related Payment
Date.
Payments of principal of the Bonds of a Series will
be allocated among the Classes of Bonds of such
Series in the manner specified in the related
Prospectus Supplement. One or more Classes of Bonds
of a Series may be subordinated in the right to
receive payments of principal (and/or interest or
any combination thereof) to one or more other
Classes of Bonds of such Series, either throughout
the lives of the Bonds of such Class or during
specified periods, and, in addition, may be
entitled to receive such payments only after the
occurrence of certain events specified in the
related Prospectus Supplement. All payments of
principal of Bonds of a particular Class will be
applied on a pro rata basis among all Bonds of such
Class, unless otherwise specified in the related
Prospectus Supplement. See "DESCRIPTION OF THE
BONDS -- Payments of Principal" herein.
6
<PAGE> 102
The "Bond Value" of an item of Mortgage Collateral
represents the principal amount of the Bonds of a
Series that, based on certain assumptions and
irrespective of prepayments on the Mortgage
Collateral, can be supported by scheduled
distributions on the Mortgage Collateral, together
with (depending on the method used to determine the
Bond Value of the Mortgage Collateral) (i)
reinvestment earnings thereon at the Assumed
Reinvestment Rate (as defined herein) specified in
the related Prospectus Supplement and (ii) if
applicable, the cash available to be withdrawn from
any Reserve Fund (as defined herein) established
for such purpose for such Series. The Prospectus
Supplement for a Series of Bonds will specify the
method or methods and related assumptions used to
determine the Bond Values of the Mortgage
Collateral securing the Series.
Unless otherwise provided in the related Prospectus
Supplement, the Spread for a Series of Bonds, if
applicable, will represent the excess, if any, of
the sum of (i) all payments on the related Mortgage
Collateral deposited in the related Bond Account
(as defined herein) in the Due Period preceding a
Payment Date for the Series, (ii) the reinvestment
income thereon and (iii) amounts which are required
or are permitted to be withdrawn from any Reserve
Fund less the sum of (i) all interest payable on
the Bonds of such Series on such Payment Date, (ii)
the Basic Principal Payment required to be made on
the Bonds of such Series on such Payment Date,
(iii) an amount reflecting the redemption price of
certain Bonds of such Series redeemed, and (iv)
certain expenses accrued by the Issuer, during the
preceding Due Period.
The Stated Maturities for the Classes of Bonds
comprising a Series are the dates determined by the
Company to fall a specified period after the dates
on which the Bonds of each such Class will be fully
paid assuming (i) timely receipt of scheduled
payments (with no prepayments) on the Mortgage
Collateral securing such Bonds, (ii) if applicable,
such scheduled payments are, upon deposit in the
Bond Account, reinvested at the Assumed
Reinvestment Rate specified in the related
Prospectus Supplement, (iii) no Mortgage Collateral
is substituted by the Issuer or the Seller for any
of the Mortgage Collateral initially pledged to
secure the Bonds of the Series and (iv) if
applicable, no portion of the Spread is applied to
the payment of the Bonds, unless the related
Prospectus Supplement provides otherwise, in which
event such Stated Maturities will be based on the
assumptions specified in such Prospectus
Supplement. If so provided in the related
Prospectus Supplement, holders of one or more
Classes of Bonds of a Series may have the right, at
their option, to receive full payment in respect of
such Bonds prior to Stated Maturity, in each case
to the extent and subject to the conditions
specified in such Prospectus Supplement.
The Assumed Reinvestment Rate, if applicable, for a
Series of Bonds will be set forth in the related
Prospectus Supplement and may be any rate permitted
by the nationally recognized statistical rating
agency or agencies rating such Series of Bonds
(each, a "Rating Agency") or a rate provided under
a guaranteed investment contract, surety bond or
similar arrangement satisfactory to each Rating
Agency. If the Assumed Reinvestment Rate is so
provided, the related Prospectus Supplement will
describe the terms of such arrangement. The rate of
prepayments
7
<PAGE> 103
(including for this purpose prepayments resulting
from refinancing or liquidations of the Pledged
Mortgages or the mortgage loans underlying the
Certificates, as the case may be, due to defaults,
casualties, condemnations and repurchases by the
Seller (as defined herein), the Issuer or Redwood
Trust or purchases by the Master Servicer or the
Company) on the Mortgage Collateral securing any
Series of Bonds will depend on the characteristics
of the Pledged Mortgages or the mortgage loans
underlying the Certificates, as the case may be, as
well as on other factors including, without
limitation, homeowner mobility, economic
conditions, the presence and enforceability of
"due-on-sale" clauses, mortgage market interest
rates and the availability of mortgage funds, and
no assurance can be given as to the actual
prepayment experience of the Mortgage Collateral.
The weighted average life of the Bonds of a Series
may also be affected by the exercise by the Issuer
of its right to substitute other Mortgage
Collateral for the Mortgage Collateral originally
pledged as security for such Bonds. See
"DESCRIPTION OF THE BONDS and -- Weighted Average
Life of the Bonds" and "SECURITY FOR THE
BONDS -- Substitution of Mortgage Collateral"
herein.
Redemption of Bonds........ The Bonds of each Series will be redeemable under
the following circumstances:
A. Special Redemption...... The Bonds of a Series or a Class may be subject to
special redemption, in whole or in part, as
specified in the related Prospectus Supplement.
Pursuant to a special redemption, the Issuer will
be required to redeem, on the dates specified in
such Prospectus Supplement, at 100% of their unpaid
principal amount, plus accrued interest,
outstanding Bonds of a Series or Class if, as a
result of substantial payments of principal on the
Pledged Mortgages or on the mortgage loans
underlying the Certificates pledged as security for
such Series or Class of Bonds or low reinvestment
yields, or both, the Bond Trustee determines, based
on the assumptions specified in the Indenture, that
in the absence of such special redemption the
amount of cash expected to be on deposit in the
Bond Account on the next Payment Date for such
Series of Bonds would be insufficient to make
required payments on the Bonds of such Series on
such Payment Date. Any such redemption will not
exceed the principal amount of Bonds that would
otherwise be required to be paid on the next
Payment Date out of the principal payments and
prepayments so received. See "DESCRIPTION OF THE
BONDS -- Special Redemption" herein. Principal
payments on a special redemption will be applied to
Bonds of a Series in accordance with the priorities
specified in the related Prospectus Supplement.
B. Optional Redemption..... If so provided in the related Prospectus
Supplement, the Bonds of each Series may be subject
to redemption at the option of the Issuer. The
Prospectus Supplement for each Series will specify
the circumstances, if any, under which the Bonds of
such Series may be so redeemed, the manner of
effecting such redemption, the conditions to which
such redemption are subject and the redemption
prices for each Class of Bonds to be redeemed. See
"DESCRIPTION OF THE BONDS -- Optional Redemption"
herein.
Security for the Bonds..... Each Series of Bonds will be separately secured by
collateral consisting of the items set forth below.
Unless otherwise provided in the related Prospectus
Supplement, the Issuer may substitute other
Mortgage Col-
8
<PAGE> 104
lateral for the Mortgage Collateral originally
pledged as security for the Bonds of a Series so
long as the substitute Mortgage Collateral meets
certain criteria. See "SECURITY FOR THE
BONDS -- Substitution of Mortgage Collateral"
herein.
A. Pledged Mortgages....... In connection with the issuance of a Series of
Bonds secured in whole or in part by Pledged
Mortgages, the Issuer will pledge and assign to the
Bond Trustee a pool of conventional (i.e., not
insured or guaranteed by any governmental agency)
loans secured by first or junior mortgages or deeds
of trust on one- to four-family residential
properties. If so specified in the related
Prospectus Supplement, the Pledged Mortgages may
include cooperative apartment loans ("Cooperative
Loans") secured by security interests in shares
issued by private, nonprofit, cooperative housing
corporations ("Cooperatives") and in the related
proprietary leases or occupancy agreements granting
exclusive rights to occupy specific dwelling units
in such Cooperatives' buildings. See "SECURITY FOR
THE BONDS -- The Pledged Mortgages" herein.
B. General Attributes of
Pledged Mortgages........ The payment terms of the Pledged Mortgages securing
a Series of Bonds, if any, will be described in the
related Prospectus Supplement and may include any
of the following features or combinations thereof
or other features described in the related
Prospectus Supplement:
(a) Interest may be payable at a fixed rate, a rate
adjustable from time to time in relation to an
index (which will be specified in the related
Prospectus Supplement), a rate that is fixed
for a period of time or under certain
circumstances and is followed by an adjustable
rate, a rate that otherwise varies from time to
time, or a rate that is convertible from an
adjustable rate to a fixed rate. Changes to an
adjustable rate may be subject to periodic
limitations, maximum rates, minimum rates or a
combination of such limitations. Accrued
interest may be deferred and added to the
principal of a loan for such periods and under
such circumstances as may be specified in the
related Prospectus Supplement. The loan
agreement or promissory note (the "Mortgage
Note") in respect of a Pledged Mortgage may
provide for the payment of interest at a rate
lower than the interest rate (the "Mortgage
Rate") specified in such Mortgage Note for a
period of time or for the life of the loan, and
the amount of any difference may be contributed
from funds supplied by a third party.
(b) Principal may be payable on a level debt
service basis to fully amortize the loan over
its term, may be calculated on the basis of an
assumed amortization schedule that is
significantly longer than the original term to
maturity or on an interest rate that is
different from the interest rate on the Pledged
Mortgage or may not be amortized during all or
a portion of the original term. Payment of all
or a substantial portion of the principal may
be due on maturity ("balloon payments").
Principal may include interest that has been
deferred and added to the principal balance of
the Pledged Mortgage.
(c) Monthly payments of principal and interest may
be fixed for the life of the loan, may increase
over a specified period of time or may
9
<PAGE> 105
change from period to period. Pledged Mortgages
may include limits on periodic increases or
decreases in the amount of monthly payments and
may include maximum or minimum amounts of
monthly payments.
(d) The Pledged Mortgages generally may be prepaid
at any time without payment of any prepayment
fee, unless otherwise specified in the related
Prospectus Supplement. If so specified in the
related Prospectus Supplement, prepayments of
principal may be subject to a prepayment fee,
which may be fixed for the life of any such
Pledged Mortgage or may decline over time, and
may be prohibited for the life of any such
Pledged Mortgage or for certain periods
("lockout periods"). Certain Pledged Mortgages
may permit prepayments after expiration of the
applicable lockout period and may require the
payment of a prepayment fee in connection with
any such subsequent prepayment. All or a
portion of any prepayment fee may be payable as
additional interest on the Bonds, if so
specified in the related Prospectus Supplement.
Other Pledged Mortgages may permit prepayments
without payment of a fee unless the prepayment
occurs during specified time periods. The
Pledged Mortgages may include "due-on-sale"
clauses which permit the mortgagee to demand
payment of the entire Pledged Mortgage in
connection with the sale or certain transfers
of the related Mortgaged Property (as defined
below). Other Pledged Mortgages may be
assumable by persons meeting then applicable
underwriting standards. See "MORTGAGE LOAN
PROGRAM -- Underwriting Standards" herein.
(e) The real property constituting security for
repayment of a Pledged Mortgage (each, a
"Mortgaged Property") may be located in any one
of the fifty states, the District of Columbia,
Guam, Puerto Rico, any other territory of the
United States or such other location as may be
specified in the related Prospectus Supplement.
Unless otherwise specified in the related
Prospectus Supplement, all of the Pledged
Mortgages will be covered by standard hazard
insurance policies insuring against losses due
to fire and various other causes. The Pledged
Mortgages will be covered by Primary Mortgage
Insurance Policies (as defined herein) to the
extent provided in the related Prospectus
Supplement. See "SECURITY FOR THE BONDS -- The
Pledged Mortgages" herein.
C. Agency Securities....... The Agency Securities securing a Series of Bonds
will consist of (i) fully modified pass-through
mortgage-backed certificates guaranteed as to
timely payment of principal and interest by the
Government National Mortgage Association ("GNMA
Certificates"), (ii) certificates ("Guaranteed
Mortgage Pass-Through Certificates") issued and
guaranteed as to timely payment of principal and
interest by the Federal National Mortgage
Association ("FNMA Certificates"), (iii) mortgage
participation certificates issued and guaranteed as
to timely payment of interest and, unless otherwise
specified in the related Prospectus Supplement,
ultimate payment of principal by the Federal Home
Loan Mortgage Corporation ("FHLMC Certificates"),
(iv) stripped mortgage-backed securities
representing an undivided interest in all or a part
of either the principal distributions (but not the
interest distributions) or
10
<PAGE> 106
the interest distributions (but not the principal
distributions) or in some specified portion of the
principal and interest distributions (but not all
of such distributions) on certain GNMA, FNMA or
FHLMC Certificates and, unless otherwise specified
in the related Prospectus Supplement, guaranteed to
the same extent as the underlying securities, (v)
another type of pass-through certificate issued or
guaranteed by GNMA, FNMA or FHLMC and described in
the related Prospectus Supplement or (vi) a
combination of such Agency Securities. All GNMA
Certificates will be backed by the full faith and
credit of the United States. No FHLMC or FNMA
Certificates will be backed, directly or
indirectly, by the full faith and credit of the
United States. See "SECURITY FOR THE
BONDS -- Agency Securities" herein.
D. Private Mortgage-Backed
Securities............... Private Mortgage-Backed Securities may include (a)
mortgage pass-through certificates representing
beneficial interests in certain mortgage loans or
(b) collateralized mortgage obligations secured by
such mortgage loans. Private Mortgage-Backed
Securities may include stripped mortgage-backed
securities representing an undivided interest in
all or a part of any of the principal distributions
(but not the interest distributions) or the
interest distributions (but not the principal
distributions) or in some specified portion of the
principal and interest distributions (but not all
of such distributions) on certain mortgage loans.
Although individual mortgage loans underlying a
Private Mortgage-Backed Security may be insured or
guaranteed by the United States or an agency or
instrumentality thereof, they need not be, and the
Private Mortgage-Backed Securities themselves will
not be so insured or guaranteed. Unless otherwise
specified in the Prospectus Supplement relating to
a Series of Bonds, payments on the Private
Mortgage-Backed Securities will be distributed
directly to the Bond Trustee as registered owner of
such Private Mortgage-Backed Securities. See
"SECURITY FOR THE BONDS -- Private Mortgage-Backed
Securities" herein.
The related Prospectus Supplement for a Series of
Bonds will specify, among other things, the
approximate aggregate principal amount and type of
any Private Mortgage-Backed Securities to be
included in the Mortgage Collateral for such Series
and, as to any such Private Mortgage-Backed
Securities comprising a significant portion of the
Mortgage Collateral, to the extent such information
is known to the Issuer, will in general include the
following: (i) certain characteristics of the
mortgage loans that comprise the underlying assets
for the Private Mortgage-Backed Securities
including (A) the payment features of such mortgage
loans (B) the approximate aggregate principal
amount of the underlying mortgage loans that are
insured or guaranteed by a governmental entity, (C)
the servicing fee or range of servicing fees with
respect to the mortgage loans and (D) the minimum
and maximum stated maturities of the mortgage loans
at origination; (ii) the maximum original term to
stated maturity of the Private Mortgage-Backed
Securities; (iii) the weighted average term to
stated maturity of the Private Mortgage-Backed
Securities; (iv) the pass-through or certificate
rate or ranges thereof for the Private
Mortgage-Backed Securities; (v) the weighted
average pass-through or certificate rate of the
Private Mortgage-Backed Securities; (vi) the issuer
of the Private Mortgage-Backed Securities (the
"PMBS Issuer"), the servicer of the Private
Mortgage-Backed
11
<PAGE> 107
Securities (the "PMBS Servicer") and the trustee of
the Private Mortgage-Backed Securities (the "PMBS
Trustee"); (vii) certain characteristics of credit
support, if any, such as reserve funds, insurance
policies, surety bonds, letters of credit or
guaranties relating to the mortgage loans
underlying the Private Mortgage-Backed Securities
or to such Private Mortgage-Backed Securities
themselves; (viii) the terms on which underlying
mortgage loans for such Private Mortgage-Backed
Securities may, or are required to, be repurchased
prior to stated maturity and the terms of any
redemption; and (ix) the terms on which substitute
mortgage loans may be delivered to replace those
initially deposited with the PMBS Trustee. See
"SECURITY FOR THE BONDS -- Private Mortgage-Backed
Securities" herein.
E. Bond and Distribution
Accounts................. All scheduled monthly principal and interest
payments and all prepayments received with respect
to the Mortgage Collateral for a Series of Bonds,
other than amounts not required to be remitted to
the Bond Trustee, such as amounts retained by the
Master Servicer, any Servicer or any subservicer of
Pledged Mortgages as servicing compensation, to pay
certain insurance premiums or to reimburse the
Master Servicer or any Servicer for certain
advances it has made, will be remitted to an
account (the "Bond Account") to be established as
an Eligible Account (as defined herein) on the
closing date for the sale of such Series of Bonds
(the "Closing Date"). All principal and interest
distributions received from the Mortgage Collateral
and remitted to the Bond Account, other than
amounts, if any, subsequently withdrawn to
reimburse the Master Servicer or any Servicer for
certain non-recoverable advances it has made,
together with (i) the amount of cash, if any,
initially deposited in the Bond Account by the
Issuer, (ii) if applicable, all amounts withdrawn
from any related Reserve Funds, (iii) any Insurance
Proceeds and Liquidation Proceeds (as such terms
are defined herein) and (iv) if so specified in the
related Prospectus Supplement, all reinvestment
income earned thereon, will be available transfer
to the Distribution Account (as defined herein) for
application to the payment of the principal of, and
interest on, such Series of Bonds as described in
the related Prospectus Supplement.
On or prior to the Closing Date, the Bond Trustee
will establish an account (the "Distribution
Account") which shall be an Eligible Account (as
defined herein) maintained with the Bond Trustee
for the benefit of the Bondholders of the related
Series. On or prior to a date specified in the
related Prospectus Supplement and preceding each
related Payment Date (each, a "Distribution Account
Deposit Date"), the Master Servicer shall withdraw
from the Bond Account the amount required to be
distributed to Bondholders on such Payment Date
(the "Bond Distribution Amount"), to the extent of
funds available for such purpose on deposit
therein, and will deposit such amount in the
Distribution Account.
Any funds remaining in the Bond Account on a
Payment Date, other than amounts not constituting
Available Funds, if so specified in the related
Prospectus Supplement, after (i) the reimbursement
of the Master Servicer or any Servicer for
non-recoverable advances made by it, (ii) each
required payment of interest and principal to
Bondholders of
12
<PAGE> 108
the related Series has been paid in full, (iii) if
applicable, any Reserve Fund has been funded in the
manner described in the related Prospectus
Supplement and (iv) the payment of certain expenses
relating to such Series of Bonds, will be subject
to withdrawal upon the order of the Issuer. See
"SECURITY FOR THE BONDS -- Bond and Distribution
Accounts" and "SERVICING OF THE PLEDGED MORTGAGES"
herein.
Pre-Funding Accounts....... If so specified in the related Prospectus
Supplement, the assets of the Issuer will include
the funds on deposit in an account (a "Pre-Funding
Account") which will be used to purchase additional
Mortgage Collateral during a period specified in
such Prospectus Supplement (such period, the
"Funding Period"). See "SECURITY FOR THE
BONDS -- Pre-Funding Accounts" herein.
Credit Enhancement......... The Mortgage Collateral securing a Series of Bonds
or the Bonds of one or more Classes in the related
Series may have the benefit of one or more types of
credit enhancement as described in the related
Prospectus Supplement. The protection against
losses afforded by any such credit enhancement may
be limited. The type, characteristics and amount of
credit enhancement will be determined based on the
characteristics of the Pledged Mortgages underlying
or comprising the Mortgage Collateral and will be
established on the basis of requirements of each
Rating Agency. In addition, one or more Classes of
Bonds of a Series may be guaranteed as to payment
of principal and interest by a third party insurer
or guarantor, to the extent provided in the related
Prospectus Supplement. See "CREDIT ENHANCEMENT"
herein.
A. Subordination........... A Series of Bonds may consist of one or more
Classes of Senior Bonds and one or more Classes of
Subordinated Bonds. The rights of the holders of
the Subordinated Bonds of a Series (the
"Subordinated Bondholders") to receive payments of
principal and/or interest (or any combination
thereof) will be subordinated to such rights of the
holders of the Senior Bonds of the same Series (the
"Senior Bondholders") to the extent described in
the related Prospectus Supplement. This
subordination is intended to enhance the likelihood
of regular receipt by the Senior Bondholders of the
full amount of their scheduled payments of
principal and/or interest. The protection afforded
to the Senior Bondholders of a Series by means of
the subordination feature will be accomplished by
(i) the preferential right of such holders to
receive, prior to any payment being made on the
related Subordinated Bonds, the amounts of
principal and/or interest due them on each Payment
Date out of the funds available for payment on such
date in the related Distribution Account and, to
the extent described in the related Prospectus
Supplement, by the right of such holders to receive
future payments that would otherwise have been
payable to the Subordinated Bondholders; or (ii) as
otherwise described in the related Prospectus
Supplement. If so specified in the related
Prospectus Supplement, subordination may apply only
in the event of certain types of losses not covered
by other forms of credit support, such as hazard
losses not covered by standard hazard insurance
policies or losses due to the bankruptcy or fraud
of the borrower. The related Prospectus Supplement
will set forth information concerning, among other
things, the amount of subordination of a Class or
Classes of Subordinated Bonds in a Series, the
circumstances in which such
13
<PAGE> 109
subordination will be applicable and the manner, if
any, in which the amount of subordination will
decrease over time. See "CREDIT
ENHANCEMENT -- Subordination" herein.
B. Reserve Funds........... If so specified in the related Prospectus
Supplement, the Issuer will deposit in one or more
Reserve Funds to be established with the Bond
Trustee, cash, certificates of deposit, letters of
credit, surety bonds, guaranteed investment
contracts, reinvestment income or any combination
thereof, which may be used by the Bond Trustee to
make payments on such Series of Bonds to the extent
funds are not otherwise available. The related
Prospectus Supplement will specify the manner of
funding the related Reserve Fund and the conditions
under which the amounts in any such Reserve Fund
will be used to make payments to holders of Bonds
of a particular Class or released from the lien of
the related Indenture. See "CREDIT
ENHANCEMENT -- Reserve Funds" herein.
C. Mortgage Pool Insurance
Policy................... If so specified in the related Prospectus
Supplement, a mortgage pool insurance policy or
policies (the "Mortgage Pool Insurance Policy") may
be obtained and maintained for a Series of Bonds
secured by Pledged Mortgages, which shall be
limited in scope, covering defaults on such Pledged
Mortgages in an initial amount equal to a specified
percentage of the aggregate principal balance of
all Pledged Mortgages included in the related
mortgage pool as of the first day of the month of
issuance of the related Series of Bonds or such
other date as is specified in the related
Prospectus Supplement (the "Cut-off Date"). See
"CREDIT ENHANCEMENT -- Mortgage Pool Insurance
Policies" herein.
D. Special Hazard Insurance
Policy................... If so specified in the related Prospectus
Supplement, a special hazard insurance policy or
policies (the "Special Hazard Insurance Policy")
may be obtained and maintained for a Series of
Bonds secured by Pledged Mortgages, covering
certain physical risks that are not otherwise
insured against by standard hazard insurance
policies. Each Special Hazard Insurance Policy will
be limited in scope and will cover losses pursuant
to the provisions of each such Special Hazard
Insurance Policy as described in the related
Prospectus Supplement. See "CREDIT
ENHANCEMENT -- Special Hazard Insurance Policies"
herein.
E. Bankruptcy Bond......... If so specified in the related Prospectus
Supplement, a bankruptcy bond or bonds (the
"Bankruptcy Bond") may be obtained for a Series of
Bonds secured by Pledged Mortgages to cover certain
losses resulting from action that may be taken by a
bankruptcy court in connection with a Pledged
Mortgage. The level of coverage and the limitations
in scope of each Bankruptcy Bond will be specified
in the related Prospectus Supplement. See "CREDIT
ENHANCEMENT -- Bankruptcy Bonds" herein.
F. Bond Insurance Policies,
Surety Bonds and
Guarantees............... If so specified in the related Prospectus
Supplement, credit enhancement for one or more
Classes of Bonds of a Series may be provided by
insurance policies or surety bonds (each, a "Bond
Insurance Policy")
14
<PAGE> 110
issued by one or more insurance companies or
sureties. Such bond guarantee insurance or surety
bond will guarantee timely payments of interest
and/or full payment of principal on the basis of a
schedule of principal payments set forth in or
determined in the manner specified in the related
Prospectus Supplement. If specified in the related
Prospectus Supplement, one or more surety bonds,
insurance policies or third-party guarantees may be
used to provide coverage for the risks of default
or types of loses set forth in such Prospectus
Supplement. See "CREDIT ENHANCEMENT -- Bond
Insurance Policies, Surety Bonds and Guarantees"
herein.
G. Letter of Credit........ If so specified in the related Prospectus
Supplement, credit enhancement may be provided for
a Series of Bonds secured by Pledged Mortgages by
one or more letters of credit. A letter of credit
may provide limited protection against certain
losses in addition to or in lieu of other credit
enhancement, such as losses resulting from
delinquent payments on the Pledged Mortgages
securing the related Series of Bonds, losses from
risks not covered by standard hazard insurance
policies, losses due to bankruptcy of a borrower
and application of certain provisions of the
federal Bankruptcy Code, and losses due to denial
of insurance coverage due to misrepresentations
made in connection with the origination or sale of
a Pledged Mortgage. The issuer of the letter of
credit (the "L/C Bank") will be obligated to honor
demands with respect to such letter or credit, to
the extent of the amount available thereunder to
provide funds under the circumstances and subject
to such conditions as are specified in the related
Prospectus Supplement. The liability of the L/C
Bank under its letter of credit will be reduced by
the amount of unreimbursed payments thereunder.
The maximum liability of a L/C Bank under its
letter of credit will be an amount equal to a
percentage specified in the related Prospectus
Supplement of the initial aggregate outstanding
principal balance of the Pledged Mortgages securing
the related Series of Bonds or one or more Classes
of Bonds of such Series (the "L/C Percentage"). The
maximum amount available at any time to be paid
under a letter of credit will be determined in the
manner specified therein and in the related
Prospectus Supplement. See "CREDIT
ENHANCEMENT -- Letter of Credit" herein.
H. Over-Collateralization... If so specified in the related Prospectus
Supplement, credit enhancement may consist of
over-collateralization whereby the aggregate
principal balance of the related Mortgage
Collateral exceeds the aggregate principal balance
of the Bonds of the related Series. Such
over-collateralization may exist on the related
Closing Date or develop thereafter as a result of
the application of a portion of the interest
payment on each Pledged Mortgage or Certificate, as
the case may be, as an additional payment in
respect of principal to reduce the principal
balance of a certain Class or Classes of Bonds of
such Series and, thus, accelerate the rate of
payment of principal on such Class or Classes of
Bonds. See "CREDIT
ENHANCEMENT -- Over-Collateralization" herein.
I. Cross-Collateralization...If so specified in the related Prospectus
Supplement, separate Classes of such Series may be
secured by separate groups of Mortgage Collateral.
In such case, credit support may be provided by a
cross-collateralization feature which requires that
payments be made with respect to Bonds
15
<PAGE> 111
secured by one or more groups of Mortgage
Collateral prior to payments to Subordinated Bonds
secured by other groups of Mortgage Collateral
within the same Series. See "CREDIT
ENHANCEMENT -- Cross-Collateralization" herein.
If so specified in the related Prospectus
Supplement, the coverage provided by one or more of
the forms of credit enhancement described in this
Prospectus may apply concurrently to two or more
separate Series of Bonds. If applicable, the
related Prospectus Supplement will identify the
Series of Bonds to which such credit enhancement
relates and the manner of determining the amount of
coverage provided to such Series of Bonds thereby
and of the application of such coverage to the
identified Series of Bonds. See "CREDIT
ENHANCEMENT -- Cross-Collateralization" herein.
J. Minimum Principal
Payment Agreement........ If so specified in the related Prospectus
Supplement, an Issuer may enter into an agreement
with an institution pursuant to which such
institution will provide such funds as may be
necessary to enable such Issuer to make principal
payments on the Bonds of the related Series at a
minimum rate set forth in such Prospectus
Supplement. See "CREDIT ENHANCEMENT -- Minimum
Principal Payment Agreement" herein.
K. Derivative
Arrangements............... If so specified and to the extent described in the
related Prospectus Supplement, one or more
derivative arrangements may be used to support
payments on the Bonds. A derivative arrangement is
a contract or agreement, the price of which is
directly dependent upon (i.e., "derived from") the
value of one or more underlying assets. Derivatives
involve rights or obligations based on the
underlying asset, but do not necessarily result in
a transfer of the underlying asset. Derivative
arrangements include swap agreements, interest rate
swaps, interest rate caps, interest rate floors,
interest rate collars and currency swap agreements.
See "CREDIT ENHANCEMENT -- Derivative Arrangements"
herein.
Advances................... The Master Servicer and each Servicer may be
obligated to advance amounts (each, an "Advance")
corresponding to delinquent interest and/or
principal payments on the Pledged Mortgages
securing a Series of Bonds (including, in the case
of Cooperative Loans, unpaid maintenance fees or
other charges under the related proprietary lease)
until the date, as specified in the related
Prospectus Supplement, following the date on which
the related Mortgaged Property is sold at a
foreclosure sale or the related Pledged Mortgages
are otherwise liquidated. Any obligation to make
Advances may be subject to limitations as specified
in the related Prospectus Supplement. If so
specified in the related Prospectus Supplement,
Advances may be drawn from a cash account available
for such purpose as described in such Prospectus
Supplement. Advances will be reimbursable to the
extent described under "SERVICING OF THE PLEDGED
MORTGAGES -- Advances and Other Amounts Payable by
Master Servicer" herein and " -- Advances" in the
related Prospectus Supplement.
In the event the Master Servicer or Servicer fails
to make a required Advance, the Bond Trustee may be
obligated to advance such amounts
16
<PAGE> 112
otherwise required to be advanced by the Master
Servicer or Servicer. See "SERVICING OF PLEDGED
MORTGAGES -- Advances and Other Amounts Payable by
Master Servicer" herein.
Tax Status of the Bonds.... The Bonds, when beneficially owned by someone other
than Redwood Trust or one of its qualified real
estate investment trust ("REIT") subsidiaries (as
defined in section 856(i) of the Code), will
constitute indebtedness for federal income tax
purposes and not an ownership interest in the
Issuer or the Collateral. See "FEDERAL INCOME TAX
CONSEQUENCES" herein and in the related Prospectus
Supplement for information concerning the material
federal tax consequences of an investment in the
Bonds. See "FEDERAL INCOME TAX CONSEQUENCES"
herein.
Use of Proceeds............ The net proceeds to be received from the sale of
the Bonds of each Series will be applied by the
Company to the purchase or acquisition of the
related Mortgage Collateral or will be used by the
Company for general corporate purposes. The
Mortgage Collateral pledged to secure a Series of
Bonds will either be contributed to the Company's
capital by Redwood Trust (or an affiliate) or
acquired by the Company from Redwood Trust (or an
affiliate) and deposited with the Issuer of such
Series by the Company. See "USE OF PROCEEDS"
herein.
Ratings.................... It is a condition to the issuance of each Series of
Bonds that the Bonds of such Series to be offered
hereunder be rated in one of the four highest
rating categories by at least one nationally
recognized statistical rating organization. A
rating is not a recommendation to purchase, hold or
sell Bonds inasmuch as such rating does not comment
as to market price or suitability for a particular
investor. Ratings of Bonds will address the
likelihood of the payment of principal and interest
thereon pursuant to their terms. There can be no
assurance that a rating will remain for a given
period of time or that a rating will not be lowered
or withdrawn entirely by a rating agency if in its
judgment circumstances in the future so warrant.
See "RATINGS" herein. For more detailed information
regarding the ratings assigned to any Class of a
particular Series of Bonds, see "SUMMARY OF
TERMS -- Ratings" and "RATINGS" in the related
Prospectus Supplement.
Legal Investment........... The Prospectus Supplement for each Series of Bonds
will specify which, if any, of the Classes of Bonds
offered thereby will constitute "mortgage related
securities" for purposes of the Secondary Mortgage
Market Enhancement Act of 1984 ("SMMEA"). Classes
of Bonds that qualify as "mortgage-related
securities" will be legal investments for certain
types of institutional investors to the extent
provided in SMMEA, subject, in any case, to any
other regulations that may govern investments by
such institutional investors. Institutions whose
investment activities are subject to review by
federal or state authorities should consult with
their counsel or the applicable authorities to
determine whether an investment in a particular
Class of Bonds of a Series (whether or not such
Class constitutes a "mortgage-related security")
complies with applicable guidelines, policy
statements or restrictions. See "LEGAL INVESTMENT"
herein.
ERISA Matters.............. Generally, plans that are subject to the
requirements of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), and
17
<PAGE> 113
the Internal Revenue Code of 1986, as amended (the
"Code"), are permitted to purchase instruments,
like the Bonds, that are debt under applicable
state law and have no "substantial equity
features". If the Bonds are deemed to be equity
interests and no statutory, regulatory or
administrative exemption applies, the Issuer will
hold plan assets by reason of a Plan's investment
in the Bonds. Accordingly, any Plan fiduciary
considering whether to purchase the Bonds on behalf
of a Plan should consult with its counsel regarding
the applicability of the provisions of ERISA and
the Code and the availability of any exemptions.
See "ERISA MATTERS" herein.
Risk Factors............... For a discussion of certain risks associated with
an investment in the Bonds, see "RISK FACTORS"
commencing on page 19 herein and in the related
Prospectus Supplement.
18
<PAGE> 114
RISK FACTORS
Investors should consider, among other things, the following factors in
connection with an investment in the Bonds.
RISKS ASSOCIATED WITH NATURE OF PLEDGED MORTGAGES
FACTORS WHICH MAY ADVERSELY AFFECT PROPERTY VALUES. There are several
factors that could adversely affect the value of Mortgaged Properties such that
the outstanding balance of the related Pledged Mortgages would equal or exceed
the value of the Mortgaged Properties. Among the factors that could adversely
affect the value of the Mortgaged Properties are an overall decline in the
residential real estate market in the areas in which the Mortgaged Properties
are located or a decline in the general condition of the Mortgaged Properties as
a result of failure of borrowers to maintain adequately the Mortgaged Properties
or of natural disasters that are not necessarily covered by insurance, such as
earthquakes and floods. If such a decline occurs, the actual rates of
delinquencies, foreclosures and losses on the Pledged Mortgages could be higher
than those currently experienced in the mortgage lending industry in general.
Losses on such Pledged Mortgages that are not otherwise covered by the credit
enhancement described in the applicable Prospectus Supplement will be borne by
the holder of one or more classes of Bonds of the related Series.
DELAYS DUE TO LIQUIDATION. Even assuming that the Mortgaged Properties
provide adequate security for the Pledged Mortgages, substantial delays could be
encountered in connection with the liquidation of defaulted Pledged Mortgages
and corresponding delays in the receipt of related proceeds by Bondholders could
occur. An action to foreclose on a Mortgaged Property securing a Pledged
Mortgage is regulated by state statutes and rules and is subject to many of the
delays and expenses of other lawsuits if defenses or counterclaims are
interposed, sometimes requiring several years to complete. Furthermore, in some
states an action to obtain a deficiency judgment is not permitted following a
nonjudicial sale of a Mortgaged Property. In the event of a default by a
borrower, these restrictions, among other things, may impede the ability of the
Master Servicer to foreclose on or sell the Mortgaged Property or to obtain
liquidation proceeds sufficient to repay all amounts due on the related Pledged
Mortgage. In addition, the Master Servicer will be entitled to deduct from
related liquidation proceeds all expenses reasonably incurred in attempting to
recover amounts due on defaulted Pledged Mortgages and not yet repaid, including
legal fees and costs of legal action, real estate taxes and maintenance and
preservation expenses.
DISPROPORTIONATE EFFECT OF LIQUIDATION EXPENSES. Liquidation expenses with
respect to defaulted loans do not vary directly with the outstanding principal
balance of the loan at the time of default. Therefore, assuming that a servicer
took the same steps in realizing upon a defaulted loan having a small remaining
principal balance as it would in the case of a defaulted loan having a large
remaining principal balance, the amount realized after expenses of liquidation
would be smaller as a percentage of the outstanding principal balance of the
small loan than would be the case with the defaulted loan having a large
remaining principal balance.
NATURE OF SECURITY PROVIDED BY JUNIOR LIENS. Certain Pledged Mortgages may
be secured by second liens on the related Mortgaged Properties. As to Pledged
Mortgages secured by second mortgages, the proceeds from any liquidation,
insurance or condemnation proceedings will be available to satisfy the
outstanding balance of such Pledged Mortgages only to the extent that the claims
of such senior mortgages have been satisfied in full, including any related
foreclosure costs. In addition, the holder of a Pledged Mortgage secured by a
junior mortgage may not foreclose on the Mortgaged Property unless it forecloses
subject to the senior mortgages, in which case it must either pay the entire
amount due on the senior mortgages to the senior mortgagees at or prior to the
foreclosure sale or undertake the obligation to make payments on the senior
mortgages in the event the mortgagor is in default thereunder. The Issuer will
not have any source of funds to satisfy the senior mortgages or make payments
due to the senior mortgagees, although the Master Servicer or Servicer may, at
its option, advance such amounts to the extent deemed recoverable and prudent.
In the event that such proceeds from a foreclosure or similar sale of the
related Mortgaged Property are insufficient to satisfy all senior liens and the
Pledged Mortgage in the aggregate, the Issuer, as the holder of the junior lien,
and, accordingly, Holders of one or more Classes of the Bonds, to the extent not
19
<PAGE> 115
covered by credit enhancement, are likely to (i) incur losses in jurisdictions
in which a deficiency judgment against the borrower is not available, and (ii)
incur losses if any deficiency judgment obtained is not realized upon. In
addition, the rate of default of second mortgage loans may be greater than that
of mortgage loans secured by first liens on comparable properties.
PREPAYMENT AND YIELD CONSIDERATIONS; REINVESTMENT RISK
The rate of payments of principal, including prepayments (including for
this purpose prepayments resulting from refinancing or liquidations of the
Pledged Mortgages or the mortgage loans underlying the Certificates, as the case
may be, due to defaults, casualties, condemnations and repurchases by the
Seller, the Issuer or Redwood Trust or purchases by the Master Servicer or the
Company), on the Mortgage Collateral securing a Series of Bonds will directly
affect the weighted average life of such Series of Bonds. The "weighted average
life" of a security refers to the average length of time, weighted by principal,
that will elapse from the date of issuance to the date each dollar of principal
is repaid to the investor. The yields to maturity and weighted average lives of
the Bonds will be affected primarily by the amount and timing of principal
payments received on or in respect of the Mortgage Collateral securing the
related Series of Bonds. The "yield to maturity" of a security refers to the
investment rate of return on such security if held to maturity. A Series of
Bonds may include one or more Classes of Deferred Interest Bonds with respect to
which certain accrued interest will not be paid but rather will be added to the
principal balance thereof and, as a result, yields on such Bonds will be
sensitive to (a) the provisions of such Deferred Interest Bonds relating to the
timing of payments of interest thereon and (b) if such Deferred Interest Bonds
accrue interest at a variable or adjustable rate, changes in such rate.
The rate of prepayments with respect to conventional mortgage loans has
fluctuated significantly in recent years. The rate of payment of principal,
including prepayments, on the Pledged Mortgages or the mortgage loans underlying
the Certificates, as the case may be, may be influenced by a variety of
economic, geographic, social, tax, legal and other factors. In general, if
prevailing interest rates fall significantly below the Mortgage Rates borne by
the mortgage loans underlying the Certificates or the Pledged Mortgages, such
mortgage loans or Pledged Mortgages are likely to be subject to higher
prepayment rates than if prevailing interest rates remain at or above such
Mortgage Rates. Conversely, if prevailing interest rates rise appreciably above
the Mortgage Rates borne by the mortgage loans underlying the Certificates or
the Pledged Mortgages, such mortgage loans or the Pledged Mortgages are likely
to experience a lower prepayment rate than if prevailing interest rates remain
at or below such Mortgage Rates. However, there can be no assurance that such
will be the case. In addition, the yields to maturity and weighted average lives
of the Bonds of a Series will be affected by the distribution of amounts
remaining in any Pre-Funding Account following the end of the related Funding
Period. In each case, Bondholders may be unable to reinvest such payments in
securities of comparable quality having interest rates similar to those borne by
such Bonds. It is possible that yields on any such reinvestments will be lower,
and may be significantly lower, than the yields on such Bonds.
The extent to which the yields to maturity of the Bonds of a Series may
vary from the anticipated yields will depend upon the degree to which such Bonds
are purchased at a discount or premium, and the degree to which the timing of
payments thereon is sensitive to the rate of payments of principal, including
prepayments, on the related Mortgage Collateral. The timing of changes in the
rate of prepayments on such Mortgage Collateral may significantly affect an
investor's actual yield to maturity, even if the average rate of principal
payments is consistent with an investor's expectation. The Prospectus Supplement
relating to a Series of Bonds will discuss in greater detail the effect of the
rate and timing of principal payments (including prepayments), delinquencies and
losses on the yield, weighted average lives and maturities of such Bonds.
ENVIRONMENTAL RISKS
Real property pledged as security to a lender may be subject to certain
environmental risks. Under the laws of certain states, contamination of a
property may give rise to a lien on the property to assure the costs of cleanup.
In several states, such a lien has priority over the lien of an existing
mortgage against such property. In addition, under the laws of some states and
under the federal Comprehensive Environmental Response Compensation and
Liability Act of 1980 ("CERCLA"), a lender may be liable, as an "owner" or
"operator",
20
<PAGE> 116
for costs of addressing releases or threatened releases of hazardous substances
that require remedy at a property, if agents or employees of the lender have
become sufficiently involved in the operations of the borrower, regardless of
whether the environmental damage or threat was caused by a prior owner. Such
costs could result in a loss to the holders of one or more Classes of a Series
of Bonds. A lender also risks such liability on foreclosure of the related
property. See "CERTAIN LEGAL ASPECTS OF PLEDGED MORTGAGES -- Environmental
Risks" herein.
LIMITED LIQUIDITY OF INVESTMENT
Prior to issuance, there will have been no market for the Bonds of any
Series, and there can be no assurance that a secondary market for any Bonds will
develop or, if it does develop, that it will provide Bondholders with a
sufficient level of liquidity of investment or will continue while Bonds of such
Series remain outstanding. In addition, the market value of Bonds of any Series
may fluctuate with changes in prevailing rates of interest and prepayments,
spreads and other factors. Consequently, the sale of Bonds by a Bondholder in
any secondary market that may develop may be at a discount from their purchase
price. Issuance of the Bonds of a Series in book-entry form may also reduce the
liquidity of such Bonds since investors may be unwilling to purchase Bonds for
which they cannot obtain physical certificates. See "-- Book-Entry Registration"
herein. No Issuer is expected to apply to have the Bonds issued by it listed on
any exchange.
BANKRUPTCY AND INSOLVENCY RISKS
EFFECTS OF BANKRUPTCY OF REDWOOD TRUST OR DEPOSITOR. Redwood Trust and the
Depositor will treat the transfer of the Mortgage Collateral by Redwood Trust to
the Depositor as a sale for accounting purposes. The Depositor and each Issuer
will treat the transfer of Mortgage Collateral from the Depositor to such Issuer
as a sale for accounting purposes. As a sale of the Mortgage Collateral by
Redwood Trust to the Depositor, the Mortgage Collateral would not be part of
Redwood Trust's bankruptcy estate and would not be available to Redwood Trust's
creditors. However, in the event of the insolvency of Redwood Trust, it is
possible that the bankruptcy trustee or a creditor of Redwood Trust may attempt
to recharacterize the sale of the Mortgage Collateral as a borrowing by Redwood
Trust, secured by a pledge of the Mortgage Collateral. Similarly, as a sale of
the Mortgage Collateral by the Depositor to an Issuer, the Mortgage Collateral
would not be part of the Depositor's bankruptcy estate and would not be
available to the Depositor's creditors. However, in the event of the insolvency
of the Depositor, it is possible that the bankruptcy trustee or a creditor of
the Depositor may attempt to recharacterize the sale of the Mortgage Collateral
as a borrowing by the Depositor, secured by a pledge of the Mortgage Collateral.
In either case, in the event the transfer is recharacterized as a pledge, unless
otherwise provided in the related Prospectus Supplement, the Depositor or the
Issuer, as the case may be, will have a perfected security interest in the
related Mortgage Collateral. Nonetheless, a court could prevent timely payments
of amounts due on the Bonds and result in a reduction of payments due on the
Bonds.
EFFECTS OF BANKRUPTCY OF THE MASTER SERVICER. In the event of a bankruptcy
or insolvency of the Master Servicer, the bankruptcy trustee or receiver may
have the power to prevent the Bond Trustee or the Bondholders from appointing a
successor Master Servicer. The time period during which cash collections may be
commingled with the Master Servicer's own funds prior to each Distribution Date
will be specified in the related Prospectus Supplement. In the event of the
insolvency of the Master Servicer and if such cash collections are commingled
with the Master Servicer's own funds for at least ten days, the Bond Trustee
will likely not have a perfected interest in such collections since such
collections would not have been deposited in a segregated account within ten
days after the collection thereof, and the inclusion thereof in the bankruptcy
estate of the Master Servicer may result in delays in payment and failure to pay
amounts due on the Bonds of the related Series.
EFFECTS OF BANKRUPTCY OF OBLIGORS ON THE MORTGAGE COLLATERAL. In addition,
federal and state statutory provisions, including the federal bankruptcy laws
and state laws affording relief to debtors, may interfere with or affect the
ability of the secured mortgage lender to realize upon its security. For
example, in a proceeding under the federal Bankruptcy Code, a lender may not
foreclose on a mortgaged property without the permission of the bankruptcy
court. The rehabilitation plan proposed by the debtor may reduce the secured
21
<PAGE> 117
indebtedness to the value of the mortgaged property as of the date of the
commencement of the bankruptcy, rendering the lender a general unsecured
creditor for the difference, and also may reduce the monthly payments due under
such mortgage loan, change the rate of interest and alter the mortgage loan
repayment schedule. The effect of any such proceedings under the federal
Bankruptcy Code, including but not limited to any automatic stay, could result
in delays in receiving payments on the Mortgage Collateral securing a Series of
Bonds and possible reductions in the aggregate amount of such payments.
EFFECTS OF BOOK-ENTRY REGISTRATION
LIMITED LIQUIDITY. If the Bonds of a Series are issued in book-entry form,
such registration may reduce the liquidity of such Bonds in the secondary
trading market since investors may be unwilling to purchase Bonds for which they
cannot obtain physical certificates. Since transactions in book-entry Bonds can
be effected only through the Depository Trust Company ("DTC") in the United
States, CEDEL or Euroclear in Europe, participating organizations and Financial
Intermediaries (as defined herein), the ability of a Bondholder to pledge a
book-entry Bond to persons or entities that do not participate in the DTC, CEDEL
or Euroclear systems may be limited due to lack of a physical certificate
representing such Bonds. Bond Owners will not be recognized as Bondholders as
such term is used in the related Indenture, and Bond Owners will be permitted to
exercise the rights of Bondholders only indirectly through DTC and its
Participants.
POTENTIAL DELAYS IN PAYMENTS. In addition, Bondholders may experience some
delay in their receipt of distributions of interest and principal on book-entry
Bonds since distributions are required to be forwarded by the Bond Trustee to
DTC and DTC will then be required to credit such distributions to the accounts
of depository participants which thereafter will be required to credit them to
the account of Bondholders either directly or indirectly through Financial
Intermediaries. See "DESCRIPTION OF THE BONDS -- Book-Entry Bonds" herein.
RATINGS OF THE BONDS
RATINGS NOT A RECOMMENDATION. It will be a condition to the issuance of a
Class of Bonds offered hereby that they be rated in one of the four highest
rating categories by each Rating Agency identified as rating such Class in the
related Prospectus Supplement. Any such rating would be based on, among other
things, the adequacy of the value of the related Mortgage Collateral and any
credit enhancement with respect to such Class and will represent such Rating
Agency's assessment solely of the likelihood that holders of such Class of Bonds
will receive payments to which such Bondholders are entitled under the
Indenture. Such rating will not constitute an assessment of the likelihood that
principal prepayments on mortgages underlying the related Mortgage Collateral
will be made, the degree to which the rate of such prepayments might differ from
that originally anticipated or the likelihood of early optional termination of
the Series of Bonds. Such rating shall not be deemed a recommendation to
purchase, hold or sell Bonds, inasmuch as it does not address market price or
suitability for a particular investor. Such rating will not address the
possibility that prepayment at higher or lower rates than anticipated by an
investor may cause such investor to experience a lower than anticipated yield or
that an investor purchasing a Bond at a significant premium might fail to recoup
its initial investment under certain prepayment scenarios.
RATINGS MAY BE LOWERED OR WITHDRAWN. There is also no assurance that any
such rating will remain in effect for any given period of time or may not be
lowered or withdrawn entirely by the applicable Rating Agency in the future if
in its judgment circumstances so warrant. In addition to being lowered or
withdrawn due to any erosion in the adequacy of the value of the assets of the
Issuer or any credit enhancement with respect to a Series of Bonds, such rating
might also be lowered or withdrawn because of, among other reasons, an adverse
change in the financial or other condition of a credit enhancement provider or a
change in the rating of such credit enhancement provider's long term debt.
LIMITATIONS OF ANALYSIS PERFORMED BY RATING AGENCIES. The amount, type and
nature of credit enhancement, if any, established with respect to a Class of
Bonds of a Series will be determined on the basis of criteria established by
each Rating Agency. Such criteria are sometimes based upon an actuarial analysis
of the behavior of similar loans in a larger group. Such analysis is often the
basis upon which each Rating Agency
22
<PAGE> 118
determines the amount of credit enhancement required with respect to each such
Class. There can be no assurance that the historical data supporting any such
actuarial analysis will accurately reflect future experience nor any assurance
that the data derived from a large pool of similar loans accurately predicts the
delinquency, foreclosure or loss experience of any particular pool of mortgages
underlying the Mortgage Collateral. No assurance can be given that the values of
any Mortgaged Properties have remained or will remain at their levels on the
respective dates of origination of the related mortgages. If the residential
real estate markets should experience an overall decline in values such that the
outstanding principal balances of the mortgages underlying the Mortgage
Collateral securing a particular Series of Bonds and any secondary financing on
the related Mortgaged Properties become equal to or greater than the value of
the Mortgaged Properties, the rates of delinquencies, foreclosures and losses
could be higher than those now generally experienced in the mortgage lending
industry. In addition, adverse economic conditions (which may or may not affect
real property values) may affect the timely payment by mortgagors of scheduled
payments of principal and interest on the Mortgage Collateral and, accordingly,
the rates of delinquencies, foreclosures and losses with respect to any Mortgage
Collateral securing a Series of Bonds. To the extent that such losses are not
covered by credit enhancement, such losses will be borne, at least in part by
the holders of one or more Classes of Bonds of the related Series.
CREDIT CONSIDERATIONS AND RISKS
LIMITED SOURCE OF PAYMENTS. The Company does not have, nor is it expected
to have, any significant assets. Although the Bonds will be obligations of their
respective Issuers, no Issuer is expected to have significant assets other than
those pledged to secure separately the Series of Bonds issued by it. Unless
otherwise provided in the related Prospectus Supplement, the Bonds of a Series
will be payable solely from the assets pledged to secure such Series and will
not have any claim against or security interest in the assets pledged to secure
any other Series. There will be no recourse to the Company or Redwood Trust, or
any other person for any failure to make payments on the Bonds. In addition, at
the times set forth in the related Prospectus Supplement, certain Mortgage
Collateral and/or any balance remaining in the Bond Account for a Series of
Bonds immediately after making all payments due on such Bonds, after making any
other payments specified in the related Prospectus Supplement, may be promptly
released or remitted to the Company, Redwood Trust, any credit enhancement
provider or any other person entitled thereto and will no longer be available
for making payments on such Bonds. Consequently, investors in the Bonds of a
Series must rely solely upon payments of principal and interest on the Mortgage
Collateral pledged to secure such Series, the security therefor and the sources
of credit enhancement identified in the related Prospectus Supplement to provide
for payments on such Bonds.
NO RECOURSE TO COMPANY OR REDWOOD TRUST. The Bonds will not represent an
interest in or obligation of the Company or Redwood Trust or any affiliate
thereof. The only obligations, if any, of the Company with respect to the
Mortgage Collateral or the Bonds of any Series will be pursuant to certain
representations and warranties. The Company does not have, and is not expected
in the future to have, any significant assets with which to meet any obligation
to repurchase Mortgage Collateral with respect to which there has been a breach
of any representation or warranty. If, for example, the Company were required to
repurchase a Pledged Mortgage, its only sources of funds to make such repurchase
would be from funds obtained (i) from the enforcement of a corresponding
obligation, if any, on the part of Redwood Trust or other Seller, or (ii) to the
extent provided in the related Prospectus Supplement, from a Reserve Fund or
similar credit enhancement established to provide funds for such repurchases.
The only obligations of Redwood Trust or other Seller with respect to the
Mortgage Collateral or the Bonds of any Series will be pursuant to certain
representations and warranties. Redwood Trust or such other Seller may be
required to repurchase or substitute for any Pledged Mortgage with respect to
which such representations and warranties are breached. There is no assurance,
however, that Redwood Trust or such other Seller will have the financial ability
to effect any such repurchase or substitution.
LIMITATIONS OF DIRECT OR INDIRECT BACKING FOR BONDS. Only Agency
Certificates are guaranteed by any agency or instrumentality of the United
States and only the guarantee by GNMA of GNMA Certificates is entitled to the
full faith and credit of the United States. The guarantees by FNMA and FHLMC of
FNMA
23
<PAGE> 119
Certificates and FHLMC Certificates, respectively, are backed only by the credit
of FNMA, a federally chartered, privately owned corporation or by the credit of
FHLMC, a federally chartered corporation controlled by the Federal Home Loan
Banks. Neither the United States nor any agency thereof will be obligated to
finance the operations of FNMA or FHLMC or to assist either FNMA or FHLMC in any
other way. See "SECURITY FOR THE BOND -- Agency Securities" herein. Although
payment of principal of, and interest on, any Agency Certificate securing all or
part of a Series of Bonds will be guaranteed by either GNMA, FNMA or FHLMC, such
guarantee will run only to such Agency Certificate and will not guarantee the
payment of principal or interest on the Bonds of such Series. The Prospectus
Supplement for a Series of Bonds which is secured in whole or in part by
Mortgage Collateral other than Agency Certificates may describe certain
arrangements through which such Bonds, such Private Mortgage-Backed Certificates
and/or the mortgage loans underlying such Private Mortgage-Backed Certificates
are insured, guaranteed or otherwise backed. Any such backing may be subject to
contingencies described in the applicable Prospectus Supplement and will be
limited to the credit and assets of the particular specified insurer or
guarantor and will not be entitled to the full faith and credit of the United
States or to any agency or instrumentality thereof.
DEFICIENCY ON SALE OF MORTGAGE COLLATERAL. In the event of an acceleration
of the payment of the Bonds of a Series, upon an Event of Default (as defined
herein) under the Indenture with respect to such Series, there is no assurance
that the proceeds from any sale of the Mortgage Collateral would be sufficient
to pay in full the outstanding principal amount of such Series of Bonds together
with interest accrued thereon. The market value of such Mortgage Collateral
generally will fluctuate with changes in prevailing rates of interest.
Consequently, such Mortgage Collateral may be liquidated at a discount, in which
case the proceeds of liquidation might be less than the aggregate outstanding
principal amount and interest payable on the Bonds of such Series. Although the
Bonds will be obligations of their respective Issuers, no Issuer is expected to
have significant assets other than those pledged to secure separately the Series
of Bonds issued by it. It is therefore unlikely that the Issuer will have
sufficient other assets available for payment of any such deficiency. If,
following an Event of Default, a Series of Bonds has been declared to be due and
payable, the Bond Trustee may, in its discretion, but subject to the direction
of the Bondholders, refrain from selling the collateral for such Series of Bonds
and continue to apply amounts received on the collateral to payments due on the
Bonds of such Series in accordance with their terms, notwithstanding the
acceleration of the maturity of such Bonds. See "THE INDENTURE -- Rights Upon
Events of Default" herein.
EFFECT OF SUBORDINATION. If so specified in the related Prospectus
Supplement, the rights of the holders of one or more Classes of Subordinated
Bonds will be subordinate to the rights of one or more Classes of Senior Bonds
of such Series to payments of principal and/or interest (or any combination
thereof) to the extent specified in the related Prospectus Supplement. Although
subordination is intended to reduce the risk to holders of Senior Bonds of
delinquent payments or ultimate losses, the amount of subordination will be
limited. In addition, if principal payments on one or more Classes of Bonds of a
Series are made in a specified order of priority, any limits with respect to the
aggregate amount of claims under any related credit enhancement may be exhausted
before the principal of the lower priority Classes of Bonds of such Series has
been repaid. As a result, the impact of significant losses on the Mortgage
Collateral may be borne first by any Class of Subordinated Bonds of a Series and
thereafter by the Classes of Senior Bonds of such Series, in each case to the
extent described in the related Prospectus Supplement.
LIMITATIONS, REDUCTION AND SUBSTITUTION OF CREDIT ENHANCEMENT. The
Prospectus Supplement for a Series of Bonds will describe any credit enhancement
for such Series, which may include cash accounts, insurance policies, surety
bonds, guaranteed investment contracts, cross-collateralization, reinvestment
income, guarantees, letters of credit or derivative arrangements to the extent
described herein and therein. Although credit enhancement is intended to reduce
the risk of delinquent payments or losses to holders of Bonds entitled to the
benefit thereof, the amount of such credit enhancement will be limited, as set
forth in the related Prospectus Supplement, and may be subject to periodic
reduction in accordance with a schedule or formula or otherwise decline, and
could be depleted under certain circumstances prior to the payment in full of
the related Series of Bonds, and as a result Bondholders of the related Series
may suffer losses. Moreover, such credit enhancement may not cover all potential
losses or risks. For example, credit enhancement may or may not cover fraud or
negligence by a loan originator or other parties. In addition, the Trustee will
generally be
24
<PAGE> 120
permitted to reduce, terminate or substitute all or a portion of the credit
enhancement for any Series of Bonds, provided each applicable Rating Agency
indicates that the then-current rating of the Bonds of such Series will not be
adversely affected. See "CREDIT ENHANCEMENT" herein.
The amount of applicable credit enhancement supporting one or more Classes
of Bonds of a Series, including the subordination of one or more Classes of
Bonds, will be determined on the basis of criteria established by each Rating
Agency rating such Classes of Bonds based on, among other things, assumptions
regarding levels of defaults, delinquencies and losses. There can be no
assurance that the default, delinquency and loss experience on the related
Mortgage Collateral will not exceed such assumed levels. See "-- Rating of the
Bonds" herein.
DELINQUENT LOANS MAY ADVERSELY AFFECT INVESTMENT. Certain of the Pledged
Mortgages or mortgage loans underlying the Certificates securing a Series of
Bonds may be past due or non-performing as of the related Cut-off Date.
Investors should consider the risk that the inclusion of such loans in the
Mortgage Collateral for a Series of Bonds may affect the rate of defaults and
prepayments on such Mortgage Collateral and the yield on the Bonds of such
Series.
PRE-FUNDING ACCOUNTS MAY RESULT IN REINVESTMENT RISK
If so specified in the related Prospectus Supplement, on the related
Closing Date the Depositor will deposit cash in an amount (the "Pre-Funded
Amount") specified in such Prospectus Supplement into an account (the
"Pre-Funding Account"). The Pre-Funded Amount will be used to purchase
additional Pledged Mortgages and/or Certificates ("Subsequent Mortgage
Collateral") during a period from the related Closing Date to a date not more
than one year after such Closing Date (such period, the "Funding Period") from
the Depositor (which, in turn, will acquire such Subsequent Mortgage Collateral
from Redwood Trust). The Pre-Funding Account will be maintained with the Bond
Trustee for the related Series of Bonds and is designed solely to hold funds to
be applied by such Bond Trustee during the Funding Period to pay to the
Depositor the purchase price for Subsequent Mortgage Collateral. Monies on
deposit in the Pre-Funding Account will not be available to cover losses on or
in respect of the related Mortgage Collateral. To the extent that the entire
Pre-Funded Amount has not been applied to the purchase of Subsequent Mortgage
Collateral by the end of the related Funding Period, any amounts remaining in
the Pre-Funding Account will be distributed as a prepayment of principal to
Bondholders on the Distribution Date immediately following the end of the
Funding Period in the amounts and pursuant to the priorities set forth in the
related Prospectus Supplement. Any reinvestment risk resulting from such
prepayment will be borne entirely by the holders of one or more Classes of the
related Series of Bonds. See "SECURITY FOR THE BOND -- Pre-Funding Account"
herein.
PRE-FUNDING ACCOUNTS MAY ADVERSELY AFFECT INVESTMENT
The ability of the Issuer to acquire Subsequent Mortgage Collateral during
the Funding Period will be dependent upon the ability of the Depositor to
acquire Subsequent Mortgage Collateral that satisfies the requirements described
in the related Prospectus Supplement. Although such Subsequent Mortgage
Collateral must satisfy the characteristics described in the related Prospectus
Supplement, such Subsequent Mortgage Collateral may have certain different
characteristics, including, without limitation, a more recent origination date
than the initial Mortgage Collateral. As a result, the addition of such
Subsequent Mortgage Collateral pursuant to the Pre-Funding Account may adversely
affect the performance of the related Bonds. See "SECURITY FOR THE
BONDS -- Pre-Funding Account" herein.
CONSEQUENCES OF OWNING ORIGINAL ISSUE DISCOUNT BONDS
All of the Deferred Interest Bonds will be, and certain of the other Bonds
may be, issued with original issue discount for federal income tax purposes. A
holder of a Bond issued with original issue discount will be required to include
original issue discount in ordinary gross income for federal income tax purposes
as it accrues, in advance of receipt of the cash attributable to such income.
Accrued but unpaid interest on the
25
<PAGE> 121
Deferred Interest Bonds generally will be treated as original issue discount for
this purpose. See "FEDERAL INCOME TAX CONSEQUENCES -- Original Issue Discount"
and "-- Market Discount" herein.
CONSOLIDATED TAX RETURN
Whether or not the Bonds are treated as debt for federal income tax
purposes, so long as such Bonds are not deemed to have two or more maturities,
the Issuer will be treated as a branch of Redwood Trust or a partnership for
federal income tax purposes. However, if the Issuer is deemed to have issued
debt with two or more maturities, it will be treated as a taxable mortgage pool
that is a "qualified REIT subsidiary" of Redwood Trust. If such an Issuer were
to fail to be treated for federal income tax purposes as a "qualified REIT
subsidiary" by reason of Redwood Trust's failure to continue to qualify as a
real estate investment trust ("REIT") for federal income tax purposes or for any
other reason, the net income of the Issuer would be subject to corporate income
tax and the Issuer would not be permitted to be included on a consolidated
income tax return of another corporate entity. No assurance can be given with
regard to the prospective qualification of an Issuer as a qualified REIT
subsidiary or of Redwood Trust as a REIT for federal income tax purposes. See
"FEDERAL INCOME TAX CONSEQUENCES" herein.
INTRODUCTION
Sequoia Mortgage Funding Corporation, a Delaware corporation (the
"Company"), proposes to establish one or more trusts to issue and sell Bonds
from time to time under this Prospectus and related Prospectus Supplements. The
Company is a limited purpose finance corporation whose capital stock is wholly
owned by Redwood Trust, Inc. ("Redwood Trust"). Redwood Trust, a Maryland
corporation, has elected to be treated as a real estate investment trust under
the Internal Revenue Code of 1986, as amended (the "Code"). The Company was
formed for the sole purpose of acting as the depositor of one or more trusts to
be formed for the purpose of issuing the Bonds offered hereby and by the related
Prospectus Supplements. Each trust that is formed to act as an Issuer will be
created pursuant to an agreement between the Company acting as depositor (in
such capacity, the "Depositor"), and a bank, trust company or other fiduciary,
acting as owner trustee (the "Owner Trustee"). Each trust will be established
solely for the purpose of issuing one Series of Bonds and engaging in
transactions relating thereto. Each Series of Bonds will be separately secured
by the collateral described in the Prospectus Supplement relating to such
Series, which collateral will constitute the only significant assets available
to make payments on the Bonds of such Series. Accordingly, the investment
characteristics of a Series of Bonds will be determined by the collateral
pledged to secure such Series and will not be affected by the identity of the
obligor with respect to such Series of Bonds. The term "Issuer," as used herein,
with respect to a Series of Bonds refers to the trust established by the Company
for the sole purpose of issuing such Series of Bonds.
Each Series of Bonds will be issued pursuant to a separate Indenture (the
"Indenture") between the Issuer of such Series and a bank or trust company
acting as trustee for the holders of such Bonds (the "Bond Trustee"). A form of
the Indenture has been filed as an exhibit to the Registration Statement of
which this Prospectus forms a part. The Indenture relating to each Series of
Bonds will be filed with the Securities and Exchange Commission as soon as
practicable following the issuance of such Series of Bonds.
THE ISSUER
GENERAL
Any trust established to act as Issuer of a Series of Bonds will be created
pursuant to a deposit trust agreement between the Company and a bank, trust
company or other fiduciary acting as Owner Trustee. Under the terms of each
deposit trust agreement, the Company initially will retain the entire beneficial
interest in the trust created thereunder unless otherwise specified in the
related Prospectus Supplement. The Company may thereafter sell or assign all or
a portion of such beneficial ownership to another entity or entities unless
prohibited from doing so by the related deposit trust agreement. The beneficial
owners of each Issuer will have no liability for the obligations of the Issuer
under the Bonds issued by it. Unless otherwise specified in the related
Prospectus Supplement, each Issuer will be managed by Redwood Trust.
26
<PAGE> 122
The Mortgage Collateral for each Series of Bonds will have been deposited
with the Issuer of such Series by the Company which, in turn, will have either
(i) received such collateral from Redwood Trust (or an affiliate) as a
contribution to the Company's capital or (ii) acquired such collateral from
Redwood Trust (or an affiliate) or another entity or entities (in such capacity,
each a "Seller"), as provided in the related Prospectus Supplement, in exchange
for the net proceeds from the issuance of such Series plus the beneficial
interest in the Issuer issuing such Series. (References herein to Redwood Trust
in its capacity as Seller shall be deemed to include any affiliate of Redwood
Trust acting in such capacity.) Redwood Trust acquires mortgage loans in the
normal course of its business from persons who have originated or otherwise
acquired such loans.
Upon the issuance of each Series of Bonds, the related Mortgage Collateral
will be deposited by the Company with the Issuer of such Series and pledged by
such Issuer to the Bond Trustee under the related Indenture to secure such
Series of Bonds. The Indenture with respect to each Series of Bonds will
prohibit the incurrence of further indebtedness by the Issuer of such Series of
Bonds. The Bond Trustee will hold the Mortgage Collateral for a Series of Bonds
as security pledged only for that Series, and holders of the Bonds of that
Series will be entitled to the equal and proportionate benefits of such
security.
Each deposit trust agreement will provide that the related trust may not
conduct any activities other than those related to the issuance and sale of the
Bonds of the particular Series issued by it and such other limited activities as
may be required in connection with reports and distributions to holders of
beneficial interests in the trust. No deposit trust agreement will be subject to
amendment without the prior written consent of the Bond Trustee for the related
Series, which consent may not be unreasonably withheld if such amendment would
not adversely affect the interests of the Bondholders of such Series. The
holders of the beneficial interest in each Issuer will not be liable for payment
of principal and interest on the Bonds, and holders of Bonds of each Series will
be deemed to have released the holders of beneficial interest from any claim,
liability or obligation on or with respect to the Bonds of such Series.
THE COMPANY
The Company was incorporated in the State of Delaware on January 31, 1997
and is a limited purpose finance subsidiary of Redwood Trust. The Company is a
qualified real estate investment trust subsidiary. Redwood Trust is a publicly
owned real estate investment trust. The Company's principal executive offices
are located at 591 Redwood Highway, Suite 3125, Mill Valley, California 94941.
The Company's telephone number is 415-381-1765.
Redwood Trust has agreed with the Company that Redwood Trust will not file
or cause to be filed any voluntary petition in bankruptcy against the Company or
any trust created by it until at least one year after the date on which the
Bonds have been paid in full, if at all.
USE OF PROCEEDS
The net proceeds to be received from the sale of the Bonds of each Series
will be applied by the Company to the purchase or acquisition of the related
Mortgage Collateral or the payment of expenses incurred in connection with the
issuance of Bonds and otherwise incurred in connection with the conduct of the
Company's operations. The Mortgage Collateral pledged to secure a Series of
Bonds will either be contributed to the Company's capital by Redwood Trust (or
an affiliate) or acquired by the Company from Redwood Trust (or an affiliate) or
another Seller and deposited with the Issuer of such Series by the Company.
MORTGAGE LOAN PROGRAM
The Pledged Mortgages will have been purchased by the Depositor, either
directly or through affiliates, from Sellers. The Pledged Mortgages so acquired
by the Depositor will have been originated substantially in accordance with the
underwriting criteria specified below under "Underwriting Standards."
27
<PAGE> 123
UNDERWRITING STANDARDS
Unless otherwise specified in the related Prospectus Supplement, each
Seller will represent and warrant that all Pledged Mortgages originated and/or
sold by it to the Depositor or one of its affiliates will have been underwritten
in accordance with standards consistent with those utilized by mortgage lenders
generally during the period of origination. The related Prospectus Supplement
will include detailed information with respect to the underwriting standards
employed by the applicable originators of the Pledged Mortgages, to the extent
such information is reasonably available to the Depositor. Such information may
include, as applicable, underwriting guidelines with respect to required
borrower income, debt to income ratios, credit histories, loan-to-value ratios
and documentation and verification requirements.
Underwriting standards are applied by or on behalf of a lender to evaluate
the borrower's credit standing and repayment ability, and the value and adequacy
of the related Mortgaged Property as collateral. In general, a prospective
borrower applying for a loan is required to fill out a detailed application
designed to provide to the underwriting officer pertinent credit information. As
part of the description of the borrower's financial conditions, the borrower
generally is required to provide a current list of assets and liabilities and a
statement of income and expenses, as well as an authorization to apply for a
credit report which summarizes the borrower's credit history with local
merchants and lenders and any record of bankruptcy. In most cases, an employment
verification is obtained from an independent source (typically the borrower's
employer) which verification reports, among other things, the length of
employment with that organization, the current salary, and whether it is
expected that the borrower will continue such employment in the future. If a
prospective borrower is self-employed, the borrower may be required to submit
copies of signed tax returns. The borrower may also be required to authorize
verification of deposits at financial institutions where the borrower has demand
or savings accounts.
In determining the adequacy of the Mortgaged Property as collateral, an
appraisal is made of each property considered for financing. The appraiser is
required to inspect the property and verify that it is in good condition and
that construction, if new, has been completed. The appraisal is based on the
market value of comparable homes, the estimated rental income (if considered
applicable by the appraiser) and the cost of replacing the home. The value of
the property being financed, as indicated by the appraisal, must be such that it
currently supports, and is anticipated to support in the future, the outstanding
loan balance. The maximum Loan-to-Value Ratio is generally not expected to
exceed 95%. Most loans with Loan-to-Value Ratios in excess of 80% at origination
must be covered by private mortgage insurance insuring the balance thereof down
to a 75% Loan-to-Value Ratio. The method of calculating the "Loan-to-Value
Ratio" of a Pledged Mortgage will be described in the Prospectus Supplement for
a Series of Bonds secured by Pledged Mortgages.
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 (i) to meet the borrower's
monthly obligations on the proposed mortgage loan (determined on the basis of
the monthly payments due in the year of origination) and other expenses related
to the Mortgaged Property (such as property taxes and hazard insurance) and (ii)
to meet monthly housing expenses and other financial obligations and monthly
living expenses. The maximum housing expense to income ratio referred to in (i)
is generally not expected to exceed 40% and the maximum debt to income ratio
described in (ii) is generally not expected to exceed 55%. The underwriting
standards applied by Sellers may be varied in appropriate cases where factors
such as low Loan-to-Value Ratios or other favorable credit issues exist.
The Depositor expects that a substantial portion of the Pledged Mortgages
it purchases will be "jumbo" loans, i.e., loans that exceed the maximum balance
for purchase by FNMA or FHLMC. Under current regulations, the maximum principal
balance allowed on loans eligible for purchase by FNMA or FHLMC ranges from
$214,600 ($321,900 for mortgage loans secured by mortgaged properties located in
either Alaska or Hawaii) for one-unit to $412,450 ($618,675 for mortgage loans
secured by mortgaged properties located in either Alaska or Hawaii) for
four-unit residential loans. The maximum loan amount is generally not expected
to exceed $1,500,000 in the case of any of the foregoing types of loans.
A lender may originate mortgage loans under a reduced documentation
program. A reduced documentation program is designed to facilitate the loan
approval process and thereby improve the lender's competitive
28
<PAGE> 124
position among other loan originators. Under a reduced documentation program,
relatively more emphasis is placed on property underwriting than on credit
underwriting and certain underwriting documentation concerning income and
employment verification is waived.
In the case of a loan secured by a leasehold interest in a real property,
the title to which is held by a third party lessor, generally, the Seller will
be required to represent and warrant, among other things, that the remaining
term of the lease and any sublease is at least five years longer than the
remaining term of the mortgage loan.
Certain of the types of loans which may be included in the Mortgage
Collateral are recently developed and may involve additional uncertainties not
present in traditional types of loans. For example, certain of such Pledged
Mortgages may provide for escalating or variable payments by the mortgagor or
obligor. These types of Pledged Mortgages are underwritten on the basis of a
judgment that mortgagors or obligors will have the ability to make monthly
payments required initially. In some instances, however, a mortgagor's or
obligor's income may not be sufficient to permit continued loan payments as such
payments increase. These types of loans may also be underwritten primarily upon
the basis of Loan-to-Value Ratios or other favorable credit factors.
QUALITY CONTROL
The Depositor's parent, Redwood Trust, has developed a quality control
program to monitor the quality of loan underwriting at the time of acquisition
and on an ongoing basis. All loans purchased by the Depositor will be subject to
this quality control program. A legal document review of each loan acquired will
be conducted to verify the accuracy and completeness of the information
contained in the mortgage notes, security instruments and other pertinent
documents in the file. A sample of loans to be acquired, selected by focusing on
those loans with higher risk characteristics, will normally be submitted to a
third party nationally recognized underwriting review firm for a compliance
check of underwriting and review of income, asset and appraisal information.
REPRESENTATIONS BY SELLERS; REPURCHASES
Each Seller will have made representations and warranties in respect of the
mortgage loans sold by such Seller and included in the Pledged Mortgages
securing a Series of Bonds. Such representations and warranties generally
include, among other things: (i) that title insurance (or in the case of
Mortgaged Properties located in areas where such policies are generally not
available, an attorney's certificate of title) and any required hazard insurance
policy and Primary Mortgage Insurance Policy (as defined herein) were effective
at the origination of each mortgage loan other than Cooperative Loans, and that
each policy (or certificate of title as applicable) remained in effect on the
date of purchase of the mortgage loan from the Seller by or on behalf of the
Company; (ii) that the Seller had good title to each such mortgage loan and such
mortgage loan was subject to no offsets, defenses, counterclaims or rights of
rescission except to the extent that any buydown agreement described herein may
forgive certain indebtedness of the obligors on such Pledged Mortgages (each, a
"Mortgagor"); (iii) that each mortgage loan constituted a valid first or junior
lien, as the case may be, on the Mortgaged Property (subject only to permissible
title insurance exceptions, if applicable, and certain other exceptions
described in the Master Servicing Agreement) and that the Mortgaged Property was
free from damage and was in good repair; (iv) that there were no delinquent tax
or assessment liens against the Mortgaged Property; (v) that no required payment
on a mortgage loan was 60 or more days delinquent at any time during the twelve
months prior to the date it is pledged to secure the related Series of Bonds;
and (vi) that each mortgage loan was made in compliance with, and is enforceable
under, all applicable local, state and federal laws and regulations in all
material respects.
If the Seller cannot cure a breach of any representation or warranty made
by it in respect of a Pledged Mortgage that materially and adversely affects the
interests of the Bondholders in such Pledged Mortgage within 90 days after
notice of such breach, then such Seller will be obligated to either (i)
substitute a similar mortgage loan for such Pledged Mortgage under the
conditions specified in the related Prospectus Supplement or (ii) repurchase
such Pledged Mortgage from the Issuer at a price (the "Purchase Price") equal to
100% of
29
<PAGE> 125
the outstanding principal balance thereof as of the date of the repurchase plus
accrued interest thereon to the first day of the month following the month in
which such Pledged Mortgage is repurchased at the Mortgage Rate (less any
unreimbursed advances or amount payable as related master servicing compensation
if the Seller is the Master Servicer with respect to such Pledged Mortgage). The
Master Servicer will be required under the applicable Master Servicing Agreement
and Indenture to enforce this obligation for the benefit of the Bond Trustee and
the Bondholders, following the practices it would employ in its good faith
business judgment were it the owner of such Pledged Mortgage. These substitution
or repurchase obligations will constitute the sole remedies available to
Bondholders or the Bond Trustee for a breach of representation by a Seller.
DESCRIPTION OF THE BONDS
GENERAL
Each Series of Bonds offered hereby and by the related Prospectus
Supplement will be issued pursuant to a separate Indenture between the Issuer of
such Series and the Bond Trustee for such Series. The following summaries
describe certain provisions common to each Series of Bonds. The summaries are
subject to, and are qualified in their entirety by reference to, the Prospectus
Supplement and the provisions of the Indenture relating to each Series of Bonds.
Summaries of particular provisions or terms used in the Indenture incorporate by
reference the actual provisions (including definitions of terms) as part of such
summaries, and are qualified in their entirety by reference to the actual
provisions of the Indenture.
The Bonds are issuable in Series. Each Series may include one or more
Classes of Bonds ("Deferred Interest Bonds") upon which interest will accrue but
will not be payable, except in certain circumstances upon the optional
redemption thereof or as otherwise provided in the related Prospectus
Supplement. Prior to such time, the amount of interest so accrued will be added
to the principal of such Class of Deferred Interest Bonds on each Payment Date.
(Indenture, Section 2.03) A Series of Bonds may include one or more Classes that
are senior in right of payment to one or more other Classes of Bonds of such
Series. A Series of Bonds may also include one or more Classes of zero coupon
bonds. The Bonds of each Series will be issued in either fully registered or
book-entry form in the authorized denominations specified in the related
Prospectus Supplement. (Indenture, Section 2.04) The transfer of the Bonds will
be registered and the Bonds may be exchanged without the payment of any service
charge other than any tax or governmental charge payable in connection with such
registration of transfer or exchange. (Indenture, Section 2.07)
Payments of principal of, and interest on, each Series of Bonds will be
made on the Payment Dates set forth in the Prospectus Supplement relating to
such Series by check mailed to Bondholders of such Series registered as such on
the related Record Date preceding such Payment Date at their addresses appearing
on the Bond Register, except that final payments of principal in retirement of
each Bond will be made only upon presentation and surrender of such Bond at the
office or agency of the Issuer maintained for that purpose. (Indenture, Section
2.09(a) and (b)) Notice will be mailed before the Payment Date on which the
final principal payment on any Bond is expected to be made by the Bond Trustee
to the holder of such Bond. (Indenture, Section 2.09(b)) Payments in respect of
interest and principal on the Bonds will be made by the Bond Trustee, or such
other bank, trust company or other fiduciary identified in the related
Prospectus Supplement, as the paying agent of the Issuer. (Indenture, Section
3.03)
The Bond Trustee will include with each payment on a Bond which includes
principal and interest a statement showing the allocation of such payment to
principal and interest and the remaining unpaid principal amount of such Bond.
Payments on Bonds which include only interest will be accompanied by a statement
showing the aggregate unpaid principal amount of the Bonds of each Class of the
same Series. On each Payment Date before payments of principal are first made on
a particular Class of Deferred Interest Bonds of a Series, the Bond Trustee for
such Series will furnish to each holder of a Bond of such Class a statement
showing the aggregate unpaid principal amount of such Class of Bonds and the new
principal balance of such holder's Deferred Interest Bond.
30
<PAGE> 126
PAYMENTS OF INTEREST
The Bonds of each Class will bear interest on their unpaid principal
amounts from the date and at the rates per annum specified or determined in the
manner set forth in the related Prospectus Supplement (calculated on the basis
of a 360-day year of twelve 30-day months unless otherwise specified in the
related Prospectus Supplement) until the principal amount of the Bonds of such
Class is paid in full. Interest on a Series of Bonds or on a Class of Bonds
within a Series may accrue at a fixed rate, a variable rate or a combination
thereof, as determined or reset in the manner specified in the related
Prospectus Supplement. Interest on the Bonds other than Deferred Interest Bonds
will be due and payable on the Payment Dates specified in the related Prospectus
Supplement. Payments of interest on each Class of Deferred Interest Bonds will
commence as specified in the related Prospectus Supplement. Prior to such time,
interest on such Class of Deferred Interest Bonds will accrue and the amount of
interest so accrued will be added to the principal thereof on each Payment Date.
Such Class of Deferred Interest Bonds will thereafter accrue interest on the
outstanding principal amount thereof as so adjusted. Each such payment or
accrual of interest will include all interest accrued either to, but not
including, the related Payment Date or through a date prior to such Payment Date
as specified in the related Prospectus Supplement. In the latter case, the
effective yield to the Bondholders will be reduced to a level below the yield
that would apply if interest were accrued to, but not including, the respective
Payment Date.
A Series of Bonds or one or more Classes of Bonds within a Series may bear
interest at a variable rate (the "Floating Rate Bonds") which may have an
interest rate cap or an interest rate floor, or both, as specified in the
related Prospectus Supplement. The interest payment dates on Floating Rate Bonds
will be set forth in the related Prospectus Supplement and may not be the same
as the interest payment dates for the other Bonds of such Series, but may be
either more or less frequent. The variable interest rate formula for any Series
or Class of Floating Rate Bonds will generally be based off a financial index
recognized in the national or international financial markets. The Prospectus
Supplement for any Series or Class within a Series of Floating Rate Bonds will
set forth the initial interest rate, the index upon which adjustments thereto
will be computed, the formula for such computation, the intervals at which such
computations will be made, the maximum and minimum interest rates, if any, and
other characteristics common to such Bonds.
PAYMENTS OF PRINCIPAL
Principal payments on each Series of Bonds will be made on each Payment
Date in an amount equal to the sum of (a) if specified in the related Prospectus
Supplement, the amount of interest, if any, accrued but not then payable on the
Deferred Interest Bonds of such Series from the prior Payment Date or, if
specified in the related Prospectus Supplement, from a date prior to such prior
Payment Date and (b) either (i) the percentage or percentages specified in the
related Prospectus Supplement of the funds available for such purpose
("Available Funds") for such Payment Date or (ii) the sum of (x) an amount
determined by reference to the aggregate decline in the Bond Values of the
Mortgage Collateral securing such Series of Bonds in the related Due Period and
(y) the amount, if any, of the Spread specified in such Prospectus Supplement.
The Prospectus Supplement for each Series of Bonds will specify the manner in
which the Available Funds or the Bond Values, as applicable, will be determined.
The aggregate amount of principal payments required to be made on a Series of
Bonds on any Payment Date will be reduced by the principal amount of the Bonds
of such Series redeemed pursuant to any special redemption and certain optional
redemptions occurring subsequent to the preceding Payment Date. See "DESCRIPTION
OF THE BONDS -- Special Redemption" and " -- Optional Redemption" herein.
The Bond Value of Mortgage Collateral securing the Bonds of a Series
represents the principal amount of Bonds of such Series that, based on certain
assumptions and irrespective of prepayments on such Mortgage Collateral, can be
supported by scheduled distributions on such Mortgage Collateral, together with
(depending on the method used to determine the Bond Value of the Mortgage
Collateral) the reinvestment earnings thereon at the rate described in the
related Prospectus Supplement (the "Assumed Reinvestment Rate") and, if
applicable, the cash available to be withdrawn from a related Reserve Fund, if
any. For convenience of calculation with respect to each Series of Bonds,
Certificates securing a Series of Bonds that are backed by a pool of mortgage
loans sharing similar payment characteristics, or Pledged Mortgages which secure
a Series of
31
<PAGE> 127
Bonds and share similar payment characteristics, may be aggregated into one or
more groups (each, a "Collateral Group") each of which will be assigned an
aggregate Bond Value.
If so specified in the related Prospectus Supplement, the aggregate Bond
Value of a Collateral Group consisting of Pledged Mortgages or Certificates
sharing similar payment characteristics will be calculated as if such Pledged
Mortgages or the mortgage loans underlying such Certificates constituted a
single mortgage loan having such of the payment characteristics of such Pledged
Mortgages or of the mortgage loans underlying the Certificates included in such
Collateral Group as would result in the lowest Bond Value being assigned to the
Pledged Mortgages or Certificates included in such Collateral Group. There are a
number of alternative means of determining the Bond Value of a mortgage loan or
of collateral backed by mortgage loans, including determinations based on the
discounted present value of the remaining scheduled distributions on such
mortgage loans and determinations based on the relationship of the interest rate
borne by such mortgage loans and by the related Bonds. If applicable, the
Prospectus Supplement for a Series of Bonds will specify the method or methods
used to determine the Bond Values of the Collateral Groups securing such Series
of Bonds. The aggregate of the Bond Values on any Payment Date of all such
Collateral Groups will be at least equal to the outstanding principal amount of
the Bonds of such Series.
If applicable, the Assumed Reinvestment Rate for a Series of Bonds will be
described in the related Prospectus Supplement and may be any rate permitted by
each applicable Rating Agency or a rate provided under a guaranteed investment
contract, surety bond or similar arrangement satisfactory to each applicable
Rating Agency. If the Assumed Reinvestment Rate is so provided, the related
Prospectus Supplement will describe the terms of such arrangement.
Unless the related Prospectus Supplement provides otherwise, the Spread, if
applicable, for each Series of Bonds as of any Payment Date will be the excess,
if any, of the sum of (i) all distributions received with respect to the
Mortgage Collateral securing such Series of Bonds in the related Due Period,
(ii) the reinvestment income thereon and (iii) amounts which are required or are
permitted to be withdrawn from a Reserve Fund, if any, less the sum of (i) all
interest payable on the Bonds of such Series on such Payment Date, (ii) the
Basic Principal Payment required to be made on such Series of Bonds on such
Payment Date and (iii) an amount reflecting the redemption price of any Bonds of
such Series redeemed during the related Due Period and the expenses accrued by
the Issuer during the related Due Period relating to the administration of such
Series of Bonds.
Payments of principal will be allocated among the Classes of Bonds
comprising a Series in the manner specified in the related Prospectus Supplement
and, with respect to a particular Class of Bonds, will be applied on a pro rata
basis, unless otherwise specified in the related Prospectus Supplement. Each
Class of Bonds will be scheduled to be fully paid no later than the Stated
Maturity for such Class of Bonds specified in the related Prospectus Supplement.
If so specified in the related Prospectus Supplement, holders of one or more
Classes of Bonds of a Series may have the right, at their option, to receive
full payment in respect of such Bonds prior to Stated Maturity, in each case to
the extent and under the circumstances specified in their related Prospectus
Supplement.
SPECIAL REDEMPTION
If so specified in the related Prospectus Supplement, the Bonds of each
Series or Class may be subject to special redemption, in whole or in part, under
the circumstances and in the manner described below or in the related Prospectus
Supplement. If applicable, the Issuer will be required to redeem, on the day of
any month specified in the related Prospectus Supplement, outstanding Bonds of a
Series in the amount described below if, as a result of substantial payments of
principal on the Pledged Mortgages or the mortgage loans underlying the
Certificates pledged as security for such Series of Bonds or low reinvestment
yields, or both, the Bond Trustee determines, based on the procedures and
assumptions specified in the Indenture, that, in the absence of such special
redemption, the amount of cash to be on deposit in the related Bond Account on
the next Payment Date for such Series of Bonds would be insufficient to make
required payments on the Bonds of such Series on such Payment Date. (Indenture,
Section 10.01) The amount of Bonds required to be so redeemed will not exceed
the distributions on the Mortgage Collateral securing such Series of Bonds
received during the
32
<PAGE> 128
Due Period that would otherwise be required to be applied to the payment of
principal of such Series of Bonds on the following Payment Date.
All payments of principal pursuant to any special redemption will be made
in the priority and manner specified in the related Prospectus Supplement. Bonds
of the same Class will be redeemed in the manner specified in the related
Prospectus Supplement. Notice of any such redemption must be mailed by the
Issuer or the Bond Trustee at least five days prior to the special redemption
date. (Indenture, Section 10.02) The redemption price required to be paid for
any Bond to be so redeemed will be equal to 100% of the principal amount thereof
together with accrued interest. (Indenture, Section 10.01)
OPTIONAL REDEMPTION
If so provided in the related Prospectus Supplement, the Bonds of any Class
of a Series may be subject to redemption at the option of the Issuer. Unless
otherwise provided in the related Prospectus Supplement, notice of any such
redemption must be given by the Issuer to the Bond Trustee not less than 30 days
prior to the redemption date and must be mailed by the Issuer or the Bond
Trustee to affected Bondholders at least five days prior to the redemption date.
(Indenture, Sections 10.01 and 10.02) The Prospectus Supplement for each Series
will specify the circumstances, if any, under which the Bonds of such Series may
be so redeemed, the manner of effecting such redemption, the conditions to which
such redemption are subject and the redemption prices for each Class of Bonds to
be redeemed.
CALL PROTECTION AND GUARANTEES
The Issuer also may, at its option, obtain for any Series of Bonds one or
more guarantees from a company or companies acceptable to each applicable Rating
Agency, which guarantees may provide for (i) call protection (which may include
yield maintenance) for any Class of Bonds of such Series or (ii) a guarantee of
a certain prepayment rate with respect to some or all of the Pledged Mortgages
or mortgage loans underlying the Certificates pledged as collateral for such
Series. Any call protection or guarantees may affect the weighted average life
of the Bonds of such Series.
WEIGHTED AVERAGE LIFE OF THE BONDS
All of the Pledged Mortgages securing a Series of Bonds will consist of
mortgage loans which are neither insured nor guaranteed by any governmental
agency ("Conventional Loans"). See "SECURITY FOR THE BONDS -- The Pledged
Mortgages" herein. The mortgage loans underlying the Private Mortgage-Backed
Securities, FHLMC Certificates and FNMA Certificates securing a Series of Bonds
will consist of either Conventional Loans, FHA Loans (as defined herein) or VA
Loans (as defined herein), or any combination thereof. The mortgage loans
underlying the GNMA Certificates securing a Series of Bonds will consist of FHA
Loans or VA Loans. Each Pledged Mortgage and each Certificate will provide by
its terms for monthly payments (or, in the case of Private Mortgage-Backed
Securities, such other period as may be specified in the related Prospectus
Supplement) of principal and interest in the amounts described in "SECURITY FOR
THE BONDS -- The Pledged Mortgages," " -- Agency Securities," and " -- Private
Mortgage-Backed Securities" herein.
Since the aggregate amount of the principal payment required to be made on
a Series of Bonds on a Payment Date will depend on the amount of the principal
payments (including for this purpose prepayments resulting from refinancing or
liquidations due to defaults, casualties, condemnations and repurchases by the
Seller, the Issuer or Redwood Trust or purchases by the Master Servicer or the
Company) received on the related Pledged Mortgages or Certificates, as the case
may be, in the related Due Period, the prepayment experience on the underlying
mortgage loans (with respect to a Series of Bonds secured by Certificates) or on
the Pledged Mortgages (with respect to a Series of Bonds secured by Pledged
Mortgages) will affect (i) the weighted average life of each Class of Bonds and
(ii) the extent to which such Class is paid prior to its Stated Maturity. The
prepayment experience on the Pledged Mortgages which secure a Series of Bonds
may be affected by recoveries on foreclosures or other liquidations of Pledged
Mortgages and by losses from defaults and delinquencies on Pledged Mortgages.
See "SERVICING OF THE PLEDGED MORTGAGES" herein.
33
<PAGE> 129
The weighted average life of each outstanding Class of Bonds also may be
affected by the actual reinvestment income earned on the payments on the
Mortgage Collateral, if applicable, if a portion of the Spread is paid as a
principal payment on such Bonds and by the exercise by the Issuer of its right
to substitute other Mortgage Collateral for the Mortgage Collateral originally
pledged as security for such Bonds. Although any substitute Mortgage Collateral
will have payment terms anticipated to result in a cash flow substantially
similar to, but in no event less than, the anticipated cash flow of the Mortgage
Collateral it replaces, such substitutions may, individually or in the
aggregate, affect the weighted average life of such Bonds. See "SECURITY FOR THE
BONDS -- Substitution of Mortgage Collateral" herein. Further, the weighted
average life of each Class of a Series of Bonds secured by FNMA Certificates may
be affected by the exercise by FNMA of its right to repurchase the mortgage
loans backing such FNMA Certificates, as described under "SECURITY FOR THE
BONDS -- Agency Securities" herein. Any Private Mortgage-Backed Securities may
also be redeemed or otherwise subject to early prepayment in accordance with
their terms. The Stated Maturity for each Class of Bonds is the date determined
by the Company to fall a specified period after the date on which the principal
thereof will be fully paid, assuming (i) timely receipt of scheduled payments
(with no prepayments) on the Mortgage Collateral, (ii) if applicable, such
scheduled payments are reinvested at the Assumed Reinvestment Rate for such
Series, (iii) no Mortgage Collateral is substituted by the Issuer or the Seller
in place of the Mortgage Collateral initially pledged to secure such Bonds and
(iv) if applicable, no portion of the Spread is applied to the payment of the
Bonds, unless the related Prospectus Supplement provides otherwise, in which
event such Stated Maturities will be based on the assumptions specified in such
Prospectus Supplement. If so provided in the related Prospectus Supplement,
holders of one or more Classes of Bonds of a Series may have the right, at their
option, to receive full payment in respect of such Bonds prior to Stated
Maturity, in each case to the extent and subject to the conditions specified in
such Prospectus Supplement.
The rate of principal prepayments on pools of mortgage loans is influenced
by a variety of economic, geographic, social and other factors including,
without limitation, homeowner mobility, economic conditions, the presence and
enforceability of "due-on-sale" clauses, mortgage market interest rates and the
availability of mortgage funds, and no assurance can be given as to the actual
prepayment experience of the Mortgage Collateral. In general, however, if
interest rates vary significantly from those prevailing when the Pledged
Mortgages or the mortgage loans underlying the Certificates pledged as security
for a Series of Bonds were originated, such Pledged Mortgages and mortgage loans
are likely to be subject to higher or lower principal prepayments than if
interest rates remain at or near those prevailing when such Pledged Mortgages
and mortgage loans were originated. It should be noted that certain Certificates
pledged as security for a Series of Bonds may be backed by mortgage loans with
different interest rates, and, similarly, that not all of the Pledged Mortgages
securing a Series of Bonds are likely to bear the same interest rate.
Accordingly, the prepayment experience of these Certificates and Pledged
Mortgages will to some extent be a function of the mix of interest rates of the
underlying mortgage loans and of the Pledged Mortgages. Furthermore, the stated
certificate rate on certain Certificates may be less than the weighted average
interest rate of the underlying mortgage loans. See "SECURITY FOR THE BONDS"
herein.
BOOK-ENTRY BONDS
As described in the related Prospectus Supplement, if not issued in fully
registered form, one or more Classes of Bonds of any Series (each, a Class of
"Book-Entry Bonds") will be registered as book-entry certificates. Persons
acquiring beneficial ownership interests in the Bonds ("Bond Owners") will hold
their Bonds through the Depository Trust Company ("DTC") in the United States,
or CEDEL or Euroclear (in Europe) if they are participants of such systems, or
indirectly through organizations which are participants in such systems. The
Book-Entry Bonds will be issued in one or more certificates which equal the
aggregate principal balance of the Bonds and will initially be registered in the
name of Cede & Co., the nominee of DTC. CEDEL and Euroclear will hold omnibus
positions on behalf of their participants through customers' securities accounts
in CEDEL's and Euroclear's names on the books of their respective depositaries
which in turn will hold such positions in customers' securities accounts in the
depositaries' names on the books of DTC. Citibank, N.A., will act as depositary
for CEDEL and The Chase Manhattan Bank will act as depositary for Euroclear (in
such capacities, individually the "Relevant Depositary" and collectively the
"European Depositaries"). Except as described below, no person acquiring a
Book-Entry Bond (each, a "beneficial
34
<PAGE> 130
owner") will be entitled to receive a physical certificate representing such
Bond (a "Definitive Bond"). Unless and until Definitive Bonds are issued, it is
anticipated that the only "Bondholders" of the Bonds will be Cede & Co., as
nominee of DTC. Bond Owners are only permitted to exercise their rights
indirectly through Participants and DTC.
The beneficial owner's ownership of a Book-Entry Bond will be recorded on
the records of the brokerage firm, bank, thrift institution or other financial
intermediary (each, a "Financial Intermediary") that maintains the beneficial
owner's account for such purpose. In turn, the Financial Intermediary's
ownership of such Book-Entry Bond will be recorded on the records of DTC (or of
a participating firm that acts as agent for the Financial Intermediary, whose
interest will in turn be recorded on the records of DTC, if the beneficial
owner's Financial Intermediary is not a DTC participant, and on the records of
CEDEL or Euroclear, as appropriate).
Bond Owners will receive all distributions of principal of, and interest
on, the Bonds from the Bond Trustee through DTC and DTC participants. While the
Bonds are outstanding (except under the circumstances described below), under
the rules, regulations and procedures creating and affecting DTC and its
operations (the "Rules"), DTC is required to make book-entry transfers among
Participants on whose behalf it acts with respect to the Bonds and is required
to receive and transmit distributions of principal of, and interest on, the
Bonds. Participants and indirect participants with whom Bond Owners have
accounts with respect to Bonds are similarly required to make book-entry
transfers and receive and transmit such distributions on behalf of their
respective Bond Owners. Accordingly, although Bond Owners will not possess
certificates, the Rules provide a mechanism by which Bond Owners will receive
distributions and will be able to transfer their interest.
Bond Owners will not receive or be entitled to receive certificates
representing their respective interests in the Bonds, except under the limited
circumstances described below. Unless and until Definitive Bonds are issued,
Bond Owners who are not Participants may transfer ownership of Bonds only
through Participants and indirect participants by instructing such Participants
and indirect participants to transfer Bonds, by book-entry transfer, through DTC
for the account of the purchasers of such Bonds, which account is maintained
with their respective Participants. Under the Rules and in accordance with DTC's
normal procedures, transfers of ownership of Bonds will be executed through DTC
and the accounts of the respective Participants at DTC will be debited and
credited. Similarly, the Participants and indirect participants will make debits
or credits, as the case may be, on their records on behalf of the selling and
purchasing Bond Owners.
Because of time zone differences, credits of securities received in CEDEL
or Euroclear as a result of a transaction with a Participant will be made during
subsequent securities settlement processing and dated the business day following
the DTC settlement date. Such credits or any transactions in such securities
settled during such processing will be reported to the relevant Euroclear or
CEDEL Participants on such business day. Cash received in CEDEL or Euroclear as
a result of sales of securities by or through a CEDEL Participant (as defined
herein) or Euroclear Participant (as defined herein) to a DTC Participant will
be received with value on the DTC settlement date but will be available in the
relevant CEDEL or Euroclear cash account only as of the business day following
settlement in DTC.
Transfers between Participants will occur in accordance with DTC Rules.
Transfers between CEDEL Participants and Euroclear Participants will occur in
accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through CEDEL
Participants or Euroclear Participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by the Relevant Depositary; however, such cross-market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in accordance
with its rules and procedures and within its established deadlines (European
time). The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to the
Relevant Depositary to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving payment in
accordance with normal procedures for same day fund
35
<PAGE> 131
settlement applicable to DTC. CEDEL Participants and Euroclear Participants may
not deliver instructions directly to the European Depositaries.
CEDEL is incorporated under the laws of Luxembourg as a professional
depository. CEDEL holds securities for its participating organizations ("CEDEL
Participants") and facilitates the clearance and settlement of securities
transactions between CEDEL Participants through electronic book-entry changes in
accounts of CEDEL Participants, thereby eliminating the need for physical
movement of certificates. Transactions may be settled in CEDEL in any of 28
currencies, including United States dollars. CEDEL provides to its CEDEL
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. CEDEL interfaces with domestic markets in several
countries. As a professional depository, CEDEL is subject to regulation by the
Luxembourg Monetary Institute. CEDEL participants are recognized financial
institutions around the world, including underwriters, securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations. Indirect access to CEDEL is also available to others, such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a CEDEL Participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for its participants
("Euroclear Participants") and to clear and settle transactions between
Euroclear Participants through simultaneous electronic book-entry delivery
against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Transactions may be settled in any of 32 currencies, including United
States dollars. Euroclear includes various other services, including securities
lending and borrowing and interfaces with domestic markets in several countries
generally similar to the arrangements for cross-market transfers with DTC
described above. Euroclear is operated by the Brussels, Belgium office of Morgan
Guaranty Trust Company of New York ("Morgan" and in such capacity, the
"Euroclear Operator"), under contract with Euroclear Clearance Systems S.C., a
Belgian cooperative corporation (the "Belgian Cooperative"). All operations are
conducted by Morgan, and all Euroclear securities clearance accounts and
Euroclear cash accounts are accounts with the Euroclear Operator, not the
Belgian Cooperative. The Belgian Cooperative establishes policy for Euroclear on
behalf of Euroclear Participants. Euroclear Participants include banks
(including central banks), securities brokers and dealers and other professional
financial intermediaries. Indirect access to Euroclear is also available to
other firms that clear through or maintain a custodial relationship with a
Euroclear Participant, either directly or indirectly.
Morgan is the Belgian branch of a New York banking corporation which is a
member bank of the Federal Reserve System. As such, it is regulated and examined
by the Board of Governors of the Federal Reserve System and the New York State
Banking Department, as well as the Belgian Banking Commission.
Securities clearance accounts and cash accounts with Morgan are governed by
the Terms and Conditions Governing Use of Euroclear and the related Operating
Procedures of the Euroclear System and applicable Belgian law (collectively, the
"Terms and Conditions"). The Terms and Conditions govern transfers of securities
and cash within Euroclear, withdrawals of securities and cash from Euroclear,
and receipts of payments with respect to securities in Euroclear. All securities
in Euroclear are held on a fungible basis without attribution of specific
certificates to specific securities clearance accounts. The Euroclear Operator
acts under the Terms and Conditions only on behalf of Euroclear Participants,
and has no record of or relationship with persons holding through Euroclear
Participants.
Under a book-entry format, beneficial owners of the Book-Entry Bonds may
experience some delay in their receipt of payments, since such payments will be
forwarded by the Bond Trustee to Cede & Co., as nominee of DTC. Distributions
with respect to Bonds held through CEDEL or Euroclear will be credited to the
cash accounts of CEDEL Participants or Euroclear Participants in accordance with
the relevant system's rules and procedures, to the extent received by the
Relevant Depositary. Such distributions will be subject to tax reporting in
accordance with relevant United States tax laws and regulations. See "FEDERAL
INCOME TAX CONSEQUENCES -- Withholding with Respect to Certain Foreign
Investors" and " -- Backup Withholding" herein. Because DTC can only act on
behalf of Financial Intermediaries, the ability of a beneficial owner to pledge
Book-Entry Bonds to persons or entities that do not participate in the
depository
36
<PAGE> 132
system may be limited due to the lack of physical certificates for such
Book-Entry Bonds. In addition, issuance of the Book-Entry Bonds in book-entry
form may reduce the liquidity of such Bonds in the secondary market since
certain potential investors may be unwilling to purchase Bonds for which they
cannot obtain physical certificates.
Monthly and annual reports on the Issuer will be provided to Cede & Co., as
nominee of DTC, and may be made available by Cede & Co. to beneficial owners
upon request, in accordance with the rules, regulations and procedures creating
and affecting DTC, and to the Financial Intermediaries to whose DTC accounts the
Book-Entry Bonds or such beneficial owners are credited.
DTC has advised the Bond Trustee that, unless and until Definitive Bonds
are issued, DTC will take any action permitted to be taken by the holders of the
Book-Entry Bonds under the Indenture only at the direction of one or more
Financial Intermediaries to whose DTC accounts the Book-Entry Bonds are
credited, to the extent that such actions are taken on behalf of Financial
Intermediaries whose holdings include such Book-Entry Bonds. CEDEL or the
Euroclear Operator, as the case may be, will take any other action permitted to
be taken by a Bondholder under the Indenture on behalf of a CEDEL Participant or
Euroclear Participant only in accordance with its relevant rules and procedures
and subject to the ability of the Relevant Depositary to effect such actions on
its behalf through DTC. DTC may take actions with respect to some Bonds, at the
direction of the related Participants, which conflict with actions taken with
respect to other Bonds.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Bond Trustee will be required to notify all beneficial
owners of the occurrence of such event and the availability through DTC of the
Definitive Bonds. Upon surrender by DTC of the global certificate or
certificates representing the Book-Entry Bonds and instructions for
re-registration, the Bond Trustee will issue Definitive Bonds, and thereafter
the Bond Trustee will recognize the holders of such Definitive Bonds as
Bondholders under the Indenture.
Although DTC, CEDEL and Euroclear have agreed to the foregoing procedures
in order to facilitate transfers of Bonds among participants of DTC, CEDEL and
Euroclear, they are under no obligation to perform or continue to perform such
procedures and such procedures may be discontinued at any time.
None of the Master Servicer, the Depositor, the Issuer or the Bond Trustee
will have any responsibility for any aspect of the records relating to or
payments made on account of beneficial ownership interests of the Book-Entry
Bonds held by Cede & Co., as nominee of DTC, or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interests.
SECURITY FOR THE BONDS
GENERAL
Each Series of Bonds will be secured by assignments to the Bond Trustee of
collateral (the "Collateral") consisting of (i) the Mortgage Collateral pledged
as security for such Series of Bonds, (ii) funds on deposit in the Bond Account
and the Distribution Account under the Indenture for such Series of Bonds
representing payments and prepayments on Mortgage Collateral, including, to the
extent applicable, all payments which may become due under any applicable
hazard, mortgage guaranty, mortgagor bankruptcy, title insurance and bond
insurance policies (collectively, the "Insurance Proceeds") and the proceeds
(the "Liquidation Proceeds") of foreclosure or settlement of defaulted Pledged
Mortgages each as required to be remitted to the Bond Trustee, (iii) cash,
certificates of deposit, letters of credit, surety bonds, reinvestment income,
guaranteed investment contracts or any combination thereof in the aggregate
amount, if any, specified in the related Prospectus Supplement to be deposited
by the Issuer in a related Reserve Fund, (iv) the amount of cash, if any,
specified in the related Prospectus Supplement, to be initially deposited by the
Issuer in the related Bond Account, (v) certain cash accounts, insurance
policies, surety bonds, reinvestment income, guarantees, letters of credit,
cross-collateralization or derivative arrangements, as specified herein and in
the related Prospectus Supplement, (vi) to the extent applicable, the
reinvestment income on all of the foregoing, (vii) the Issuer's rights under the
Master Servicing Agreement with respect to the Series of Bonds, (viii) the
37
<PAGE> 133
Issuer's rights under the Mortgage Loan Purchase Agreement with respect to the
Series of Bonds, (ix) amounts (excluding any reinvestment income thereon)
deposited in the related early remittance account, if any, under the Indenture
for such Series of Bonds and (x) the Issuer's rights under certain of the
Mortgage Pool Insurance Policies and/or Bond Insurance Policies obtained for
such Series of Bonds. Scheduled payments on the Mortgage Collateral securing a
Series of Bonds and amounts, if any, initially deposited in the related Bond
Account, together with, to the extent applicable, the earnings thereon at the
Assumed Reinvestment Rate for such Series specified in the related Prospectus
Supplement and, if applicable, amounts available to be withdrawn from any
related Reserve Fund, will be sufficient to make timely payments of interest on
the Bonds of such Series and to retire each Class of Bonds comprising such
Series not later than the Stated Maturity of such Class of Bonds specified in
the related Prospectus Supplement.
Each Prospectus Supplement relating to a Series of Bonds will include
information as to (i) the approximate aggregate principal amount of the Mortgage
Collateral securing such Series and whether the Mortgage Collateral consists of
Pledged Mortgages, GNMA Certificates, FNMA Certificates, FHLMC Certificates,
Private Mortgage-Backed Securities or some combination of Pledged Mortgages and
Certificates and (ii) the approximate weighted average terms to maturity of such
Mortgage Collateral.
The Collateral securing each Series of Bonds will equally and ratably
secure each Class of the Bonds of such Series, and the Collateral securing such
Series will serve as collateral only for that Series of Bonds, except to the
extent that any Mortgage Pool Insurance Policies, Special Hazard Insurance
Policies, Bankruptcy Bonds or other form of credit enhancement specified herein
may, if specified in the related Prospectus Supplement, be pledged to secure
more than one Series of Bonds. See "CREDIT ENHANCEMENT" herein.
The following is a brief description of the Mortgage Collateral expected to
secure a Series of Bonds. If specific information respecting the Mortgage
Collateral is not known at the time the related Series of Bonds initially is
offered, more general information of the nature described below will be provided
in the related Prospectus Supplement, and specific information will be set forth
in a report on Form 8-K to be filed with the Securities and Exchange Commission
within fifteen days after the initial issuance of such Bonds (the "Detailed
Description"). A schedule of the Mortgage Collateral relating to such Series of
Bonds will be attached to the Indenture delivered to the Bond Trustee upon
delivery of the Bonds.
THE PLEDGED MORTGAGES
General. All of the Pledged Mortgages will be contributed to the Company's
capital by Redwood Trust (or an affiliate) or acquired by the Company from
Redwood Trust (or an affiliate) or another Seller and will be master serviced by
the Master Servicer specified in the related Prospectus Supplement. See
"SERVICING OF THE PLEDGED MORTGAGES" herein. Pledged Mortgages contributed to or
acquired by the Company will have been originated in accordance with the
underwriting criteria specified under "MORTGAGE LOAN PROGRAM -- Underwriting
Standards" herein and in the related Prospectus Supplement. The Pledged
Mortgages securing a Series of Bonds will consist solely of conventional loans
secured by first or junior liens on one- to four-family residential properties.
See "CERTAIN LEGAL ASPECTS OF PLEDGED MORTGAGES -- General" herein. The real
property constituting security for repayment of a Pledged Mortgage (each, a
"Mortgaged Property") may be located in any one of the fifty states, the
District of Columbia, Guam, Puerto Rico, any other territory of the United
States or such other location as may be specified in the related Prospectus
Supplement. Pledged Mortgages with certain Loan-to-Value Ratios and/or certain
principal balances may be covered wholly or partially by primary mortgage
insurance policies (each, a "Primary Mortgage Insurance Policy"). The existence,
extent and duration of any such coverage will be described in the applicable
Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, all of the
Pledged Mortgages securing a Series of Bonds will have monthly payments due on
the first day of each month. Such monthly installments on each such Pledged
Mortgage, net of (i) applicable servicing compensation or master servicing
compensation, (ii) amounts retained by the Master Servicer or Servicer (as
defined herein) to be applied to the payment of premiums for certain Mortgage
Pool Insurance Policies and, if applicable, bond insurance policies and
38
<PAGE> 134
(iii) amounts retained to reimburse the Master Servicer or Servicer for certain
advances it has made, will be payable to the Bond Trustee by the Master Servicer
on or before the monthly remittance date specified in the Prospectus Supplement
relating to the Series of Bonds secured by such Pledged Mortgages (each, a
"Remittance Date"). See "SERVICING OF THE PLEDGED MORTGAGES -- Payments on
Pledged Mortgages" and " -- Advances and Other Amounts Payable by Master
Servicer" herein. The payment terms of the Pledged Mortgages securing a Series
of Bonds will be described in the related Prospectus Supplement and may include
any of the following features or combination thereof or other features described
in the related Prospectus Supplement:
(a) Interest may be payable at a fixed rate, a rate adjustable from
time to time in relation to an index (which will be specified in the
related Prospectus Supplement), a rate that is fixed for a period of time
or under certain circumstances and is followed by an adjustable rate, a
rate that otherwise varies from time to time, or a rate that is convertible
from an adjustable rate to a fixed rate. Changes to an adjustable rate may
be subject to periodic limitations, maximum rates, minimum rates or a
combination of such limitations as set forth in the related Mortgage Note.
Accrued interest may be deferred and added to the principal of a loan for
such periods and under such circumstances as may be specified in the
related Prospectus Supplement. A Mortgage Note may provide for the payment
of interest at a rate lower than the Mortgage Rate specified in such
Mortgage Note for a period of time or for the life of the loan and the
amount of any difference may be contributed from funds supplied by the
seller of the Mortgaged Property or another source.
(b) Principal may be payable on a level debt service basis to fully
amortize the Pledged Mortgage over its term, may be calculated on the basis
of an assumed amortization schedule that is significantly longer than the
original term to maturity or on an interest rate that is different from the
Mortgage Rate or may not be amortized during all or a portion of the
original term. Payment of all or a substantial portion of the principal may
be due on maturity ("balloon payments"). Principal may include interest
that has been deferred and added to the principal balance of the Pledged
Mortgage.
(c) Monthly payments of principal and interest may be fixed for the
life of the Pledged Mortgage, may increase over a specified period of time
or may change from period to period. The terms of a Pledged Mortgage may
include limits on periodic increases or decreases in the amount of monthly
payments and may include maximum or minimum amounts of monthly payments.
(d) The Pledged Mortgages may be prepaid (i) at any time without the
payment of any prepayment fee or (ii) subject to a prepayment fee, which
may be fixed for the life of any such Pledged Mortgage or may decline over
time, and may be prohibited for the life of such Pledged Mortgage or for
certain periods ("lockout periods"). Certain Pledged Mortgages may permit
prepayments after expiration of the applicable lockout period and may
require the payment of a prepayment fee in connection with any such
subsequent prepayment. Other Pledged Mortgages may permit prepayments
without payment of a fee unless the prepayment occurs during specified time
periods. The loans may include "due-on-sale" clauses that permit the
mortgagee to demand payment of the entire Pledged Mortgage in connection
with the sale or certain transfers of the related Mortgaged Property. Other
Pledged Mortgages may be assumable by persons meeting the then applicable
underwriting standards. See "MORTGAGE LOAN PROGRAM -- Underwriting
Standards" herein.
The Mortgage Collateral securing a Series of Bonds may include certain
Pledged Mortgages ("Buydown Loans") that include provisions whereby a third
party partially subsidizes the monthly payments of the Mortgagors during the
early years of such Pledged Mortgages, the difference to be made up from a fund
(a "Buydown Fund") contributed by such third party at the time of origination of
the Pledged Mortgage. A Buydown Fund will be in an amount equal either to the
discounted value or full aggregate amount of future payment subsidies. The
underlying assumption of buydown plans is that the income of the Mortgagor will
increase during the buydown period as a result of normal increases in
compensation and inflation, so that the Mortgagor will be able to meet the full
mortgage payments at the end of the buydown period. To the extent that this
assumption as to increased income is not fulfilled, the possibility of defaults
on Buydown Loans is increased. The related Prospectus Supplement will contain
information with respect to any Buydown Loan
39
<PAGE> 135
concerning limitations on the interest rate paid by the Mortgagor initially, on
annual increases in the interest rate and on the length of the buydown period.
Each Prospectus Supplement will contain information, as of the date of such
Prospectus Supplement and to the extent then specifically known to the Company,
with respect to the Pledged Mortgages securing the related Series of Bonds,
including (i) the aggregate outstanding principal balance and the average
outstanding principal balance of the Pledged Mortgages as of the date pledged to
secure the related Series of Bonds, (ii) the types of property securing the
Pledged Mortgages, (iii) the original terms to maturity of the Pledged
Mortgages, (iv) the earliest origination date and latest maturity date of any of
the Pledged Mortgages, (v) the maximum and minimum per annum Mortgage Rates and
(vi) the geographical distribution of the Pledged Mortgages.
No assurance can be given that values of the Mortgaged Properties have
remained or will remain at their levels on the dates of origination of the
related Pledged Mortgages. If the residential real estate market should
experience an overall decline in property values such that the outstanding
principal balances of the Pledged Mortgages, and any secondary financing on the
Mortgaged Properties, securing a Series of Bonds become equal to or greater than
the value of the Mortgaged Properties, the actual rates of delinquencies,
foreclosures and losses could be higher than those now generally experienced in
the mortgage lending industry. In addition, adverse economic conditions and
other factors (which may or may not affect real property values) may affect the
timely payment by Mortgagors of scheduled payments of principal and interest on
the Pledged Mortgages and, accordingly, the actual rates of delinquencies,
foreclosures and losses with respect to any Mortgage Collateral. To the extent
that such losses are not covered by subordination provisions, any other credit
enhancement or alternative arrangements described herein and in the related
Prospectus Supplement, such losses will be borne, at least in part, by the
holders of the Bonds of the related Series.
The Issuer will cause the Pledged Mortgages securing each Series of Bonds
to be pledged to the Bond Trustee named in the related Prospectus Supplement for
the benefit of the Bondholders of such Series. The Master Servicer will service
the Pledged Mortgages, either directly or through other mortgage servicing
institutions ("Servicers"), pursuant to a Master Servicing Agreement (as defined
herein), and will receive a fee for such services. See "MORTGAGE LOAN PROGRAM"
and "SERVICING OF THE PLEDGED MORTGAGES" herein. With respect to Pledged
Mortgages serviced by the Master Servicer through a Servicer, the Master
Servicer will remain liable for its servicing obligations under the related
Master Servicing Agreement as if the Master Servicer alone were servicing such
Pledged Mortgages.
The obligations of the Master Servicer with respect to the Pledged
Mortgages will consist principally of its contractual master servicing
obligations under the related Master Servicing Agreement (including its
obligation to enforce the obligations of the Servicers) as more fully described
herein under "MORTGAGE LOAN PROGRAM -- Representations by Sellers; Repurchases"
and its obligation to make certain cash advances in the event of delinquencies
in payments on or with respect to the Pledged Mortgages in the amounts described
herein under "SERVICING OF THE PLEDGED MORTGAGES -- Advances and Other Amounts
Payable by Master Servicer" herein. The obligations of the Master Servicer to
make advances may be subject to limitations, to the extent provided herein and
in the related Prospectus Supplement.
Pledged Mortgages will consist of mortgage loans or deeds of trust secured
by first or junior liens on one-to four-family residential properties. If
provided in the related Prospectus Supplement, certain of the Pledged Mortgages
may be secured by junior liens where the related senior liens ("Senior Liens")
are not to be included as part of the Mortgage Collateral. Holders of such
Pledged Mortgages secured by junior liens are subject to the risk that adequate
funds will not be received in connection with a foreclosure of the related
Senior Liens to satisfy fully both the Senior Liens and the Pledged Mortgages.
In the event that a holder of a Senior Lien forecloses on a Mortgaged Property,
the proceeds of the foreclosure or similar sale will be applied first to the
payment of court costs and fees in connection with the foreclosure, second to
real estate taxes, third in satisfaction of all principal, interest, prepayment
or acceleration penalties, if any, and any other sums due and owing to the
holder of the Senior Liens. The claims of the holders of the Senior Liens will
be satisfied in full out of proceeds of the liquidation of the related Mortgaged
Property, if such proceeds are sufficient, before the Issuer as holder of the
junior lien receives any payments in respect of the Pledged Mortgage. If the
Master
40
<PAGE> 136
Servicer or a Servicer were to foreclose on any such Pledged Mortgage, it would
do so subject to any related Senior Liens. In order for the debt related to the
Pledged Mortgage to be paid in full at such sale, a bidder at the foreclosure
sale of such Pledged Mortgage would have to bid an amount sufficient to pay off
all sums due under the Pledged Mortgage and the Senior Liens or purchase the
Mortgaged Property subject to the Senior Liens. In the event that such proceeds
from a foreclosure or similar sale of the related Mortgaged Property are
insufficient to satisfy all Senior Liens and the Pledged Mortgage in the
aggregate, the Issuer, as the holder of the junior liens, and, accordingly,
holders of one or more classes of the Bonds of the related Series, bear (i) the
risk of delay in distributions while a deficiency judgment against the borrower
is obtained and (ii) the risk of loss if the deficiency judgment is not realized
upon. Moreover, deficiency judgments may not be available in certain
jurisdictions or the Pledged Mortgage may be nonrecourse. In addition, a junior
mortgagee may not foreclose on the property securing a junior mortgage unless it
forecloses subject to the senior mortgages.
If so specified in the related Prospectus Supplement, the Pledged Mortgages
may include cooperative apartment loans ("Cooperative Loans") secured by
security interests in shares issued by private, non-profit, cooperative housing
corporations ("Cooperatives") and in the related proprietary leases or occupancy
agreements granting exclusive rights to occupy specific dwelling units in such
Cooperatives' buildings.
The Mortgaged Properties relating to Pledged Mortgages will consist of
detached or semi-detached one-family dwelling units, two- to four-family
dwelling units, townhouses, rowhouses, individual condominium units, individual
units in planned unit developments and certain other dwelling units. Such
Mortgaged Properties may include vacation and second homes, investment
properties and leasehold interests. In the case of leasehold interests, the term
of the leasehold will exceed the scheduled maturity of the Pledged Mortgages by
at least five years, or such other period specified in the related Prospectus
Supplement.
ASSIGNMENT OF PLEDGED MORTGAGES TO BOND TRUSTEE. Assignments of the
mortgages or deeds of trust in recordable form, naming the Bond Trustee as
assignee, will be executed and, subject to release for recording purposes,
delivered to the Bond Trustee along with certain other original documents
evidencing the Pledged Mortgages, including the related Mortgage Notes. The
original mortgage documents will be held by the Bond Trustee or its custodian,
except to the extent released to the Master Servicer or any Servicer from time
to time in connection with its respective servicing activities. Except as
otherwise specified in the related Prospectus Supplement, the Issuer will
promptly cause the assignments of the related Pledged Mortgages to be recorded
in the appropriate public office for real property records, except in states in
which, in the opinion of counsel acceptable to the Bond Trustee, such recording
is not required to protect the Bond Trustee's interest in such Pledged Mortgages
against the claim of any subsequent transferee or any successor to or creditor
of the Issuer or the originator of such Pledged Mortgage. In the event an
assignment of a Pledged Mortgage to the Bond Trustee is not recorded or the
opinion referred to above is not delivered to the Bond Trustee within the period
specified in the related Prospectus Supplement, Redwood Trust, may, if required
by the Bond Trustee in accordance with the terms of the Indenture, be obligated
to (i) purchase such Pledged Mortgage at a price equal to the outstanding
principal balance thereof on the date of such purchase plus accrued and unpaid
interest thereon to the first day of the month following the month in which such
Pledged Mortgage is purchased and deposit such amount in the Bond Account for
such Series of Bonds or (ii) if permitted by the applicable provisions of the
Indenture and the Mortgage Loan Purchase Agreement with respect to such Series
of Bonds, replace such Pledged Mortgage with an eligible substitute mortgage
loan (an "Eligible Substitute Pledged Mortgage"). See " -- Substitution of
Mortgage Collateral" herein.
AGENCY SECURITIES
GENERAL. The Agency Securities securing a Series of Bonds will consist of
(i) fully modified pass-through mortgage-backed certificates guaranteed as to
timely payment of principal and interest by the Government National Mortgage
Association ("GNMA Certificates"), (ii) certificates ("Guaranteed Mortgage
Pass-Through Certificates") issued and guaranteed as to timely payment of
principal and interest by the Federal National Mortgage Association ("FNMA
Certificates"), (iii) mortgage participation certificates issued and guaranteed
as to timely payment of interest and, unless otherwise specified in the related
Prospectus Supplement, ultimate payment of principal by the Federal Home Loan
Mortgage Corporation ("FHLMC Certificates"), (iv) stripped mortgage-backed
securities representing an undivided interest in all
41
<PAGE> 137
or a part of either the principal distributions (but not the interest
distributions) or the interest distributions (but not the principal
distributions) or in some specified portion of the principal and interest
distributions (but not all of such distributions) on certain GNMA, FNMA or FHLMC
Certificates and, unless otherwise specified in the related Prospectus
Supplement, guaranteed to the same extent as the underlying securities, (v)
another type of pass-through certificate issued or guaranteed by GNMA, FNMA or
FHLMC and described in the related Prospectus Supplement or (vi) a combination
of such Agency Securities.
GNMA CERTIFICATES. GNMA is a wholly-owned corporate instrumentality of the
United States with the Department of Housing and Urban Development. Section
306(g) of Title III of the National Housing Act of 1934, as amended (the
"Housing Act"), authorizes GNMA to guarantee the timely payment of the principal
of, and interest on, GNMA Certificates that represent an interest in a pool of
mortgage loans insured by the FHA under the Housing Act or Title V of the
Housing Act of 1949 ("FHA Loans"), or partially guaranteed by the VA under the
Servicemen's Readjustment Act of 1944, as amended, or Chapter 37 of Title 38,
United States Code ("VA Loans").
Section 306(g) of the Housing Act provides that "the full faith and credit
of the United States is pledged to the payment of all amounts which may be
required to be paid under any guaranty under this subsection." In order to meet
its obligations under such guaranty, GNMA may, under Section 306(d) of the
Housing Act, borrow from the United States Treasury in an unlimited amount which
is at any time sufficient to enable GNMA to perform its obligations under its
guaranty.
Each GNMA Certificate pledged to secure a Series of Bonds (which may be
issued under either the GNMA I program (each such certificate, a "GNMA I
Certificate") or the GNMA II program (each such certificate, a "GNMA II
Certificate")) will be a "fully modified pass-through" mortgage-backed
certificate issued and serviced by a mortgage banking company or other financial
concern ("GNMA Issuer") approved by GNMA or by FNMA as a seller-servicer of FHA
Loans and/or VA Loans. The mortgage loans underlying the GNMA Certificates will
consist of FHA Loans and/or VA Loans. Each such mortgage loan is secured by a
one- to four-family or multifamily residential property. GNMA will approve the
issuance of each such GNMA Certificate in accordance with a guaranty agreement
(a "Guaranty Agreement") between GNMA and the GNMA Issuer. Pursuant to its
Guaranty Agreement, a GNMA Issuer will be required to advance its own funds in
order to make timely payments of all amounts due on each such GNMA Certificate
if the payments received by the GNMA Issuer on the FHA Loans or VA Loans
underlying each such GNMA Certificate are less than the amounts due on each such
GNMA Certificate.
The full and timely payment of principal of and interest on each GNMA
Certificate will be guaranteed by GNMA, which obligation is backed by the full
faith and credit of the United States. Each such GNMA Certificate will have an
original maturity of not more than 30 years (but may have original maturities of
substantially less than 30 years). Each such GNMA Certificate will be based on
and backed by a pool of FHA Loans or VA Loans secured by one- to four-family
residential properties and will provide for the payment by or on behalf of the
GNMA Issuer to the registered holder of such GNMA Certificate of scheduled
monthly payments of principal and interest equal to the registered holder's
proportionate interest in the aggregate amount of the monthly principal and
interest payment on each FHA Loan or VA Loan underlying such GNMA Certificate,
less the applicable servicing and guaranty fee, which together equal the
difference between the interest on the FHA Loan or VA Loan and the pass-through
rate on the GNMA Certificate. In addition, each payment will include
proportionate pass-through payments of any prepayments of principal on the FHA
Loans or VA Loans underlying such GNMA Certificate and liquidation proceeds in
the event of a foreclosure or other disposition of any such FHA Loans or VA
Loans.
If a GNMA Issuer is unable to make the payments on a GNMA Certificate as it
becomes due, it must promptly notify GNMA and request GNMA to make such payment.
Upon notification and request, GNMA will make such payments directly to the
registered holder of such GNMA Certificate. In the event no payment is made by a
GNMA Issuer and the GNMA Issuer fails to notify and request GNMA to make such
payment, the holder of such GNMA Certificate will have recourse only against
GNMA to obtain such payment. The Bond Trustee or its nominee, as registered
holder of the GNMA Certificates securing a Series of Bonds will
42
<PAGE> 138
have the right to proceed directly against GNMA under the terms of the Guaranty
Agreements relating to such GNMA Certificates for any amounts that are not paid
when due.
All mortgage loans underlying a particular GNMA I Certificate must have the
same interest rate (except for pools of mortgage loans secured by manufactured
homes) over the term of the loan. The interest rate on such GNMA I Certificate
will equal the interest rate on the mortgage loans included in the pool of
mortgage loans underlying such GNMA I Certificate, less one-half percentage
point per annum of the unpaid principal balance of the mortgage loans.
Mortgage loans underlying a particular GNMA II Certificate may have per
annum interest rates that vary from each other by up to one percentage point.
The interest rate on each GNMA II Certificate will be between one-half
percentage point and one and one-half percentage points lower than the highest
interest rate on the mortgage loans included in the pool of mortgage loans
underlying such GNMA II Certificate (except for pools of mortgage loans secured
by manufactured homes).
Regular monthly installment payments on each GNMA Certificate securing a
Series of Bonds will be comprised of interest due as specified on such GNMA
Certificate plus the scheduled principal payments on the FHA Loans or VA Loans
underlying such GNMA Certificate due on the first day of the month in which the
scheduled monthly installments on such GNMA Certificate are due. Such regular
monthly installments on each such GNMA Certificate are required to be paid to
the registered holder by the 15th day of each month in the case of a GNMA I
Certificate and are required to be mailed to the registered holder by the 20th
day of each month in the case of a GNMA II Certificate. Any principal
prepayments on any FHA Loans or VA Loans underlying a GNMA Certificate securing
a Series of Bonds or any other early recovery of principal on such loans will be
passed through to the registered holder of such GNMA Certificate.
GNMA Certificates may be backed by graduated payment mortgage loans or by
Buydown Loans for which funds will have been provided (and deposited into escrow
accounts) for application to the payment of a portion of the borrowers' monthly
payments during the early years of such mortgage loan. Payments due the
registered holders of GNMA Certificates backed by pools containing Buydown Loans
will be computed in the same manner as payments derived from other GNMA
Certificates and will include amounts to be collected from both the borrower and
the related escrow account. The graduated payment mortgage loans will provide
for graduated interest payments that, during the early years of such mortgage
loans, will be less than the amount of stated interest on such mortgage loans.
The interest not so paid will be added to the principal of such graduated
payment mortgage loans and, together with interest thereon, will be paid in
subsequent years. The obligations of GNMA and of a GNMA Issuer will be the same
irrespective of whether the GNMA Certificates are backed by graduated payment
mortgage loans or Buydown Loans. No statistics comparable to the FHA's
prepayment experience on level payment, non-"buydown" mortgage loans are
available in respect of graduated payment or Buydown Loans. GNMA Certificates
related to a Series of Bonds may he held in book-entry form.
The GNMA Certificates securing a Series of Bonds, and the related
underlying mortgage loans, may have characteristics and terms different from
those described above. Any such different characteristics and terms will be
described in the related Prospectus Supplement.
FNMA CERTIFICATES. FNMA is a federally chartered and privately owned
corporation organized and existing under the Federal National Mortgage
Association Charter Act, as amended. FNMA originally was established in 1938 as
a United States government agency to provide supplemental liquidity to the
mortgage market and was transformed into a stockholder-owned and
privately-managed corporation by legislation enacted in 1968.
FNMA provides funds to the mortgage market primarily by purchasing mortgage
loans from lenders, thereby replenishing their funds for additional lending.
FNMA acquires funds to purchase mortgage loans from many capital market
investors that may not ordinarily invest in mortgages, thereby expanding the
total amount of funds available for housing. Operating nationwide, FNMA helps to
redistribute mortgage funds from capital-surplus to capital-short areas.
43
<PAGE> 139
FNMA Certificates are Guaranteed Mortgage Pass-Through Certificates
representing fractional undivided interests in a pool of mortgage loans formed
by FNMA. Each mortgage loan generally must meet the applicable standards of the
FNMA purchase program. Mortgage loans comprising a pool are either provided by
FNMA from its own portfolio or purchased pursuant to the criteria of the FNMA
purchase program.
Mortgage loans underlying FNMA Certificates securing a Series of Bonds will
consist of conventional loans, FHA Loans or VA Loans. Original maturities of
substantially all of the conventional, level payment mortgage loans underlying a
FNMA Certificate are expected to be between either 8 to 15 years or 20 to 40
years. The original maturities of substantially all of the fixed rate, level
payment FHA Loans or VA Loans are expected to be 30 years.
Mortgage loans underlying a FNMA Certificate may have annual interest rates
that vary by as much as two percentage points from each other. The rate of
interest payable on a FNMA Certificate is equal to the lowest interest rate of
any mortgage loan in the related pools, less a specified minimum annual
percentage representing servicing compensation and FNMA's guaranty fee. Under a
regular servicing option (pursuant to which the mortgagee or each other servicer
assumes the entire risk of foreclosure losses), the annual interest rates on the
mortgage loans underlying a FNMA Certificate will be between 50 basis points and
250 basis points greater than is its annual pass-through rate and under a
special servicing option (pursuant to which FNMA assumes the entire risk for
foreclosure losses), the annual interest rates on the mortgage loans underlying
a FNMA Certificate will generally be between 55 basis points and 255 basis
points greater than the annual FNMA Certificate pass-through rate. One "basis
point" is equal to one-hundredth of a percentage point (0.01%). If specified in
the related Prospectus Supplement, FNMA Certificates may be backed by adjustable
rate mortgages.
FNMA guarantees to each registered holder of a FNMA Certificate that it
will distribute amounts representing such holder's proportionate share of
scheduled principal and interest payments at the applicable pass-through rate
provided for by such FNMA Certificate on the underlying mortgage loans, whether
or not received, and such holder's proportionate share of the full principal
amount of any foreclosed or other finally liquidated mortgage loan, whether or
not such principal amount is actually recovered. The obligations of FNMA under
its guaranties are obligations solely of FNMA and are not backed by, or entitled
to, the full faith and credit of the United States. Although the Secretary of
the Treasury of the United States has discretionary authority to lend FNMA up to
$2.25 billion outstanding at any time, neither the United States nor any agency
thereof is obligated to finance FNMA's operations or to assist FNMA in any other
manner. If FNMA were unable to satisfy its obligations, distributions to holders
of FNMA Certificates would consist solely of payments and other recoveries on
the underlying mortgage loans and accordingly, monthly distributions to holders
of FNMA Certificates would be affected by delinquent payments and defaults on
such mortgage loans.
FNMA Certificates evidencing interests in pools of mortgage loans formed on
or after May 1, 1985 (other than FNMA Certificates backed by pools containing
graduated payment mortgage loans or mortgage loans secured by multifamily
projects) are available in book-entry form only. Distributions of principal and
interest on each FNMA Certificate will be made by FNMA on the 25th day of each
month to the persons in whose name the FNMA Certificate is entered in the books
of the Federal Reserve Banks (or registered on the FNMA Certificate register in
the case of fully registered FNMA Certificates) as of the close of business on
the last day of the preceding month. With respect to FNMA Certificates issued in
book-entry form, distributions thereon will be made by wire, and with respect to
fully registered FNMA Certificates, distributions thereon will be made by check.
The FNMA Certificates securing a Series of Bonds, and the related
underlying mortgage loans, may have characteristics and terms different from
those described above. Any such different characteristics and terms will be
described in the related Prospectus Supplement.
FHLMC CERTIFICATES. FHLMC is a corporate instrumentality of the United
States created pursuant to Title III of the Emergency Home Finance Act of 1970,
as amended (the "FHLMC Act"). The common stock of FHLMC is owned by the Federal
Home Loan Banks and its preferred stock is owned by stockholders of the Federal
Home Loan Banks. FHLMC was established primarily for the purpose of increasing
the availability of mortgage credit for the financing of urgently needed
housing. It seeks to provide an enhanced
44
<PAGE> 140
degree of liquidity for residential mortgage investments primarily by assisting
in the development of secondary markets for conventional mortgages. The
principal activity of FHLMC currently consists of the purchase of first lien,
conventional mortgage loans or participation interests in such mortgage loans
and the sale of the mortgage loans or participations so purchased in the form of
guaranteed mortgage securities, primarily FHLMC Certificates. FHLMC is confined
to purchasing, so far as practicable, mortgage loans that it deems to be of such
quality, type and class as to meet generally the purchase standards imposed by
private institutional mortgage investors.
Each FHLMC Certificate represents an undivided interest in a pool of
mortgage loans that may consist of first lien Conventional Loans, FHA Loans or
VA Loans. FHLMC Certificates are sold under the terms of a Mortgage
Participation Certificate Agreement. A FHLMC Certificate may be issued under
either FHLMC's Cash Program or Guarantor Program.
Mortgage loans underlying the FHLMC Certificates securing a Series of Bonds
will generally consist of mortgage loans with original terms to maturity of
between 10 and 40 years. Each such mortgage loan must meet the applicable
standards set forth in the FHLMC Act. A FHLMC Certificate group may include
whole loans, participation interests in whole loans and undivided interests in
whole loans and/or participations comprising another FHLMC Certificate group.
Under the Guarantor Program, any such FHLMC Certificate group may include only
whole loans or participation interests in whole loans.
FHLMC guarantees to each registered holder of a FHLMC Certificate the
timely payment of interest on the underlying mortgage loans to the extent of the
applicable certificate interest rate on the registered holder's pro rata share
of the unpaid principal balance outstanding on the underlying mortgage loans in
the FHLMC Certificate group represented by such FHLMC Certificate, whether or
not received. FHLMC also guarantees to each registered holder of a FHLMC
Certificate collection by such holder of all principal on the underlying
mortgage loans, without any offset or deduction, to the extent of such holder's
pro rata share thereof, but does not, except if and to the extent specified in
the related Prospectus Supplement for a Series of Bonds, guarantee the timely
payment of scheduled principal. Under FHLMC's Gold PC Program, FHLMC guarantees
the timely payment of principal based on the difference between the pool factor
published in the month preceding the month of distribution and the pool factor
published in such month of distribution. Pursuant to its guaranties, FHLMC
indemnifies holders of FHLMC Certificates against any diminution in principal by
reason of charges for property repairs, maintenance and foreclosure. FHLMC may
remit the amount due on account of its guaranty of collection of principal at
any time after default on an underlying mortgage loan, but not later than (i) 30
days following foreclosure sale, (ii) 30 days following payment of the claim by
any mortgage insurer or (iii) 30 days following the expiration of any right of
redemption, whichever occurs later, but in any event no later than one year
after demand has been made upon the mortgagor for accelerated payment of
principal. In taking actions regarding the collection of principal after default
on the mortgage loans underlying FHLMC Certificates, including the timing of any
demand for acceleration, FHLMC reserves the right to exercise its judgment with
respect to the mortgage loans in the same manner as for mortgage loans that it
has purchased but not sold. The length of time necessary for FHLMC to determine
that a mortgage loan should be accelerated varies with the particular
circumstances of each mortgagor and FHLMC has not adopted standards which
require that the demand be made within any specified period.
FHLMC Certificates are not guaranteed by the United States or by any
Federal Home Loan Bank and do not constitute debts or obligations of the United
States or any Federal Home Loan Bank. The obligations of FHLMC under its
guaranty are obligations solely of FHLMC and are not backed by, or entitled to,
the full faith and credit of the United States. If FHLMC were unable to satisfy
such obligations, distributions to holders of FHLMC Certificates would consist
solely of payments and other recoveries on the underlying mortgage loans and,
accordingly, monthly distributions to holders of FHLMC Certificates would be
affected by delinquent payments and defaults on such mortgage loans.
Registered holders of FHLMC Certificates are entitled to receive their
monthly pro rata share of all principal payments on the underlying mortgage
loans received by FHLMC, including any scheduled principal payments, full and
partial prepayments of principal and principal received by FHLMC by virtue of
condemnation, insurance, liquidation or foreclosure and repurchases of the
mortgage loans by FHLMC or the
45
<PAGE> 141
seller thereof. FHLMC is required to remit each registered FHLMC
certificateholder's pro rata share of principal payments on the underlying
mortgage loans, interest at the FHLMC pass-through rate and any other sums such
as prepayment fees, within 60 days of the date on which such payments are deemed
to have been received by FHLMC.
Under FHLMC's Cash Program, there is no limitation on the amount by which
interest rates on the mortgage loans underlying a FHLMC Certificate may exceed
the pass-through rate on the FHLMC Certificate. Under such program, FHLMC
purchases groups of whole mortgage loans from sellers at specified percentages
of their unpaid principal balances, adjusted for accrued or prepaid interest,
which when applied to the interest rate of the mortgage loans and participations
purchased results in the yield (expressed as a percentage) required by FHLMC.
The required yield, which includes a minimum servicing fee retained by the
servicer, is calculated using the outstanding principal balance. The range of
interest rates on the mortgage loans and participations in a FHLMC Certificate
group under the Cash Program will vary since mortgage loans and participations
are purchased and assigned to a FHLMC Certificate group based upon their yield
to FHLMC rather than on the interest rate on the underlying mortgage loans.
Under FHLMC's Guarantor Program, the pass-through rate on a FHLMC Certificate is
established based upon the lowest interest rate on the underlying mortgage
loans, minus a minimum servicing fee and the amount of FHLMC's management and
guaranty income as agreed upon between the seller and FHLMC.
FHLMC Certificates duly presented for registration of ownership on or
before the last business day of a month are registered effective as of the first
day of the month. The first remittance to a registered holder of a FHLMC
Certificate will be distributed so as to be received normally by the 15th day of
the second month following the month in which the purchaser became a registered
holder of such FHLMC Certificate. Thereafter, such remittance will be
distributed monthly to the registered holder so as to be received normally by
the 15th day of each month. The Federal Reserve Bank of New York maintains
book-entry accounts with respect to FHLMC Certificates sold by FHLMC on or after
January 2, 1985, and makes payments of principal and interest each month to the
registered holders thereof in accordance with such holders' instructions.
PRIVATE MORTGAGE-BACKED SECURITIES
Private Mortgage-Backed Securities may consist of (a) mortgage pass-through
certificates evidencing an undivided interest in a pool of mortgage loans or (b)
collateralized mortgage obligations secured by mortgage loans. Private
Mortgage-Backed Securities may include stripped mortgage-backed securities
representing an undivided interest in all or part of either the principal
distributions (but not the interest distributions) or the interest distributions
(but not the principal distributions) or in some specified portion of the
principal and interest distributions (but not all of such distributions) on
certain mortgage loans. Private Mortgage-Backed Securities will have been issued
pursuant to a pooling and servicing agreement, an indenture or similar agreement
(a "PMBS Agreement"). Unless otherwise specified in the related Prospectus
Supplement, the seller/servicer of the underlying mortgage loans will have
entered into the PMBS Agreement with the trustee under such PMBS Agreement (the
"PMBS Trustee"). The PMBS Trustee or its agent, or a custodian will possess the
mortgage loans underlying such Private Mortgage-Backed Security. Mortgage loans
underlying a Private Mortgage-Backed Security will be serviced by a servicer
(the "PMBS Servicer") directly or by one or more subservicers who may be subject
to the supervision of the PMBS Servicer. Private Mortgage-Backed Securities must
(i) either (a) have been previously registered under the Securities Act or (b)
if not so registered, held for at least the holding period required by Rule
144(k) under the Securities Act and (ii) be acquired in bona fide secondary
market transactions.
The issuer of the Private Mortgage-Backed Securities (the "PMBS Issuer")
will be a financial institution or other entity engaged generally in the
business of mortgage lending, a public agency or instrumentality of a state,
local or federal government, or a limited purpose corporation organized for the
purpose of, among other things, establishing trusts and acquiring and selling
housing loans to such trusts and selling beneficial interests in such trusts. If
so specified in the related Prospectus Supplement, the PMBS Issuer may be an
affiliate of the Depositor. The obligations of the PMBS Issuer will generally be
limited to certain representations and warranties with respect to the assets
conveyed by it to the related trust. Unless otherwise specified in the
46
<PAGE> 142
related Prospectus Supplement, the PMBS Issuer will not have guaranteed any of
the assets conveyed to the related trust or any of the Private Mortgage-Backed
Securities issued under the PMBS Agreement. Additionally, although the mortgage
loans underlying the Private Mortgage-Backed Securities may be guaranteed by an
agency or instrumentality of the United States, the Private Mortgage-Backed
Securities themselves will not be so guaranteed.
Distributions of principal and interest will be made on the Private
Mortgage-Backed Securities on the dates specified in the related Prospectus
Supplement. The Private Mortgage-Backed Securities may be entitled to receive
nominal or no principal distributions or nominal or no interest distributions.
Principal and interest distributions will be made on the Private Mortgage-Backed
Securities by the PMBS Trustee or the PMBS Servicer. The PMBS Issuer or the PMBS
Servicer may have the right to repurchase assets underlying the Private
Mortgage-Backed Securities after a certain date or under the circumstances
specified in the related Prospectus Supplement.
The mortgage loans underlying the Private Mortgage-Backed Securities may
consist of fixed rate, level payment, fully amortizing loans or graduated
payment mortgage loans, Buydown Loans, adjustable mortgage loans or loans having
balloon or other special payment features. Such mortgage loans may be secured by
single (one- to four-) family property or multifamily property or by an
assignment of the proprietary lease or occupancy agreement relating to a
specific dwelling within a Cooperative and the related shares issued by such
Cooperative.
The Prospectus Supplement for a Series of Bonds for which the Mortgage
Collateral includes Private Mortgage-Backed Securities will specify the
aggregate approximate principal amount and type of the Private Mortgage-Backed
Securities to be included in the Mortgage Collateral and, as to any such Private
Mortgage-Backed Securities comprising a significant part of the Mortgage
Collateral, to the extent such information is known to the Issuer, will in
general include the following: (i) certain characteristics of the mortgage loans
that comprise the underlying assets for the Private Mortgage-Backed Securities
including (A) the payment features of such mortgage loans, (B) the approximate
aggregate principal balance of underlying mortgage loans insured or guaranteed
by a governmental entity, (C) the servicing fee or range of servicing fees with
respect to the mortgage loans and (D) the minimum and maximum stated maturities
of the underlying mortgage loans at origination; (ii) the maximum original term
to stated maturity of the Private Mortgage-Backed Securities; (iii) the weighted
average term to stated maturity of the Private Mortgage-Backed Securities; (iv)
the pass-through or interest rate of the Private Mortgage-Backed Securities; (v)
the weighted average pass-through or interest rate of the Private
Mortgage-Backed Securities; (vi) the PMBS Issuer, the PMBS Servicer (if other
than the PMBS Issuer) and the PMBS Trustee for such Private Mortgage-Backed
Securities; (vii) certain characteristics of credit support, if any, such as
reserve funds, insurance policies, surety bonds, letters of credit or guaranties
relating to the mortgage loans underlying the Private Mortgage-Backed Securities
or to such Private Mortgage-Backed Securities themselves; (viii) the terms on
which the underlying mortgage loans for such Private Mortgage-Backed Securities
may, or are required to, be purchased prior to their stated maturity or the
stated maturity of the Private Mortgage-Backed Securities and the terms of any
redemption or other call feature; and (ix) the terms on which mortgage loans may
be substituted for those originally underlying the Private Mortgage-Backed
Securities.
SUBSTITUTION OF MORTGAGE COLLATERAL
Substitution of Mortgage Collateral (the "Substitute Collateral") will be
permitted in the event of breaches of representations and warranties with
respect to any original Mortgage Collateral or in the event the documentation
with respect to any Mortgage Collateral is determined by the Bond Trustee to be
incomplete. The period during which such substitution will be permitted
generally will be indicated in the Prospectus Supplement for a Series of Bonds.
The Prospectus Supplement for a Series of Bonds will describe the conditions
upon which Mortgage Collateral may be substituted for Mortgage Collateral
initially securing such Series.
47
<PAGE> 143
OPTIONAL PURCHASE OF DEFAULTED PLEDGED MORTGAGES
If so provided in the related Prospectus Supplement, the Master Servicer
and/or the Company may, at its option, purchase from the Issuer any Pledged
Mortgage which is delinquent in payment by more than the number of days
specified in such Prospectus Supplement, at a price specified in such Prospectus
Supplement.
BOND AND DISTRIBUTION ACCOUNTS
A separate Bond Account will be established with the Bond Trustee for each
Series of Bonds for receipt of (i) all interest and principal payments
(including, to the extent applicable, any required advances by the Master
Servicer and any Servicers) and all prepayments on the Mortgage Collateral
securing such Series required to be remitted to the Bond Trustee (including, to
the extent applicable, Insurance Proceeds required to be remitted to the Bond
Trustee and Liquidation Proceeds); (ii) the amount of cash, if any, withdrawn
from any related Reserve Fund; and (iii) if so specified in the related
Prospectus Supplement, the reinvestment income on all of the foregoing. On or
prior to the date specified in the related Prospectus Supplement (each, a
"Distribution Account Deposit Date"), the Master Servicer shall withdraw from
the Bond Account the Bond Distribution Amount for such Payment Date, to the
extent of funds available for such purpose on deposit therein, and will deposit
such amount in the Distribution Account.
The Bond Trustee will invest the funds in the Bond Account and the
Distribution Account in Permitted Investments maturing no later than the next
Payment Date for the related Series of Bonds. (Indenture, Section 8.02(b))
"Permitted Investments" may include (i) obligations of the United States or any
agency thereof, provided such obligations are backed by the full faith and
credit of the United States; (ii) general obligations of or obligations
guaranteed by any state of the United States or the District of Columbia
receiving the highest long-term debt rating of each applicable Rating Agency, or
such lower rating which will not result in a change in the rating then assigned
to each related Series of Bonds by each applicable Rating Agency, (iii)
commercial paper or finance company paper which is then receiving the highest
commercial or finance company paper rating of each applicable Rating Agency, or
such lower rating as will not result in a change in the rating then assigned to
each related Series of Bonds by each applicable Rating Agency; (iv) certificates
of deposit, demand or time deposits, or bankers' acceptances issued by any
depository institution or trust company incorporated under the laws of the
United States or of any state thereof and subject to supervision and examination
by federal and/or state banking authorities, provided that the commercial paper
and/or long term unsecured debt obligations of such depository institution or
trust company (or in the case of the principal depository institution in a
holding company system, the commercial paper or long-term unsecured debt
obligations of such holding company, but only if Moody's Investors Service, Inc.
("Moody's") is not an applicable Rating Agency) are then rated one of the two
highest long-term and the highest short-term ratings of each such Rating Agency
for such securities, or such lower ratings as will not result in a change in the
rating then assigned to each related Series of Bonds by each Rating Agency; (v)
demand or time deposits or certificates of deposit issued by any bank or trust
company or savings institution to the extent such deposits are fully insured by
the FDIC; (vi) guaranteed reinvestment agreements issued by any bank, insurance
company or other corporation containing, at the time of the issuance of such
agreements, such terms and conditions as will not result in a change in the
rating then assigned to each related Series of Bonds by each applicable Rating
Agency; (vii) repurchase obligations with respect to any security described in
clauses (i) and (ii) above, in either case entered into with a depository
institution or trust company (acting as principal) described in clause (iv)
above; (viii) securities (other than stripped bonds, stripped coupons or
instruments sold at a purchase price in excess of 115% of the face amount
thereof) bearing interest or sold at a discount issued by any corporation
incorporated under the laws of the United States or any state thereof which, at
the time of such investment, have one of the two highest ratings of each
applicable Rating Agency (except if the Rating Agency is Moody's, such rating
shall be the highest commercial paper rating of Moody's for any such
securities), or such lower rating as will not result in a change in the rating
then assigned to each related Series of Bonds by each applicable Rating Agency,
as evidenced by a signed writing delivered by each such Rating Agency; (ix)
interests in any money market fund which at the date of acquisition of the
interests in such fund and throughout the time such interests are held in such
fund has the highest applicable rating by each applicable Rating Agency or such
lower rating as will not result in a change in the rating then assigned to each
48
<PAGE> 144
related Series of Bonds by each such Rating Agency; and (x) short term
investment funds sponsored by any trust company or national banking association
incorporated under the laws of the United States or any state thereof which on
the date of acquisition has been rated by each applicable Rating Agency in their
respective highest applicable rating category or such lower rating as will not
result in a change in the rating then assigned to each related Series of Bonds
by each such Rating Agency; provided that no such instrument shall be a
Permitted Investment if such instrument evidences the right to receive interest
only payments with respect to the obligations underlying such instrument; and
provided, further, that no investment specified in clause (ix) or clause (x)
above shall be a Permitted Investment for any Pre-Funding Account or any related
Capitalized Interest Account (as defined herein). If a letter of credit is
deposited with the Bond Trustee, such letter of credit will be irrevocable, will
name the Bond Trustee, in its capacity as trustee for the Bondholders, as the
sole beneficiary and will be issued by a bank acceptable to each applicable
Rating Agency. (Indenture, Section 1.01)
Unless an Event of Default or an event which if not timely cured will
constitute an Event of Default with respect to a Series of Bonds has occurred
and is continuing, funds remaining in the related Bond Account following a
Payment Date for such Bonds (other than certain amounts not constituting
Available Funds if so specified in the related Prospectus Supplement or any
funds required to be deposited in a related Reserve Fund) will be subject to
withdrawal upon the order of the Issuer free from the lien of the Indenture.
PRE-FUNDING ACCOUNT
If so specified in the related Prospectus Supplement, the Master Servicer
will establish and maintain a Pre-Funding Account, in the name of the related
Bond Trustee on behalf of the related Bondholders, into which the Depositor will
deposit cash in an amount equal to the Pre-Funded Amount on the related Closing
Date. The Pre-Funding Account will be maintained with the Bond Trustee for the
related Series of Bond and is designed solely to hold funds to be applied by
such Bond Trustee during the Funding Period to pay to the Depositor the purchase
price for Subsequent Mortgage Collateral. Prior to inclusion in the Collateral
securing a Series of Bonds, in accordance with the provisions of the related
Indenture, the Subsequent Mortgage Collateral will be subject to review by the
same parties as reviewed the initial Mortgage Collateral. Specifically, the Bond
Trustee will be required to perform a document review and an independent firm
will certify the fair value of the Subsequent Mortgage Collateral. In addition,
the Issuer will be required to deliver to the Bond Trustee a legal opinion to
the effect that all Indenture requirements have been met for including the
Subsequent Mortgage Collateral in the Collateral.
Monies on deposit in the Pre-Funding Account will not be available to cover
losses on or in respect of the related Mortgage Collateral. The Pre-Funded
Amount will not exceed 50% of the initial aggregate principal amount of the
Bonds of the related Series. The Pre-Funded Amount will be used by the related
Bond Trustee to purchase Subsequent Mortgage Collateral from the Depositor from
time to time during the Funding Period. The Funding Period, if any, for a Series
of Bonds will begin on the related Closing Date and will end on the date
specified in the related Prospectus Supplement, which in no event will be later
than the date that is one year after the related Closing Date. Monies on deposit
in the Pre-Funding Account may be invested in Permitted Investments (as such
term is defined above under "-- Bond and Distribution Accounts") under the
circumstances and in the manner described in the related Agreement. Earnings on
investment of funds in the Pre-Funding Account will be deposited into the
related Bond Account or such other trust account as is specified in the related
Prospectus Supplement and losses will be charged against the funds on deposit in
the Pre-Funding Account. Any amounts remaining in the Pre-Funding Account at the
end of the Funding Period will be paid to the related Bondholders in the manner
and priority specified in the related Prospectus Supplement, as a prepayment of
principal of the related Bonds. Certain information with respect to the
Subsequent Mortgage Collateral will be filed with the Commission on Form 8-K
within fifteen days after the date such Subsequent Mortgage Collateral is
conveyed to the related Trust.
In addition, if so specified in the related Prospectus Supplement, on the
related Closing Date the Depositor will deposit in an account (the "Capitalized
Interest Account") cash in such amount as is necessary to cover shortfalls in
interest on the related Series of Bonds that may arise as a result of
utilization of the Pre-Funding Account as described above. The Capitalized
Interest Account shall be maintained with the Bond
49
<PAGE> 145
Trustee for the related Series of Bonds and is designed solely to cover the
above-mentioned interest shortfalls. Monies on deposit in the Capitalized
Interest Account will not be available to cover losses on or in respect of the
related Mortgage Collateral. To the extent that the entire amount on deposit in
the Capitalized Interest Account has not been applied to cover shortfalls in
interest on the related Series of Bonds by the end of the Funding Period, any
amounts remaining in the Capitalized Interest Account will be paid to the
Depositor.
CREDIT ENHANCEMENT
GENERAL
Credit enhancement may be provided with respect to one or more Classes of a
Series of Bonds or with respect to the related Mortgage Collateral for the
purpose of (i) maintaining timely payments or providing additional protection
against losses on the Collateral securing such Series of Bonds, (ii) paying
administrative expenses or (iii) establishing a minimum reinvestment rate on the
payments made in respect of such Collateral or principal payment rate on such
Collateral. Credit enhancement may be in the form of the subordination of one or
more Classes of such Series, the establishment of one or more Reserve Funds, use
of a Mortgage Pool Insurance Policy, a Special Hazard Insurance Policy,
Bankruptcy Bond, cash account, insurance policy, surety bond, guaranteed
investment contract, cross-collateralization, reinvestment income, guaranty,
letter of credit or derivative arrangement as described herein and in the
related Prospectus Supplement, or any combination of the foregoing. Unless
otherwise specified in the related Prospectus Supplement, no credit enhancement
will provide protection against all risks of loss or guarantee repayment of the
entire principal balance of the Bonds and interest thereon. If losses occur
which exceed the amount covered by credit enhancement or which are not covered
by the credit enhancement, Bondholders will bear their allocable share of any
deficiencies.
SUBORDINATION
If so specified in the related Prospectus Supplement, a Series of Bonds may
consist of one or more Classes of Senior Bonds and one or more Classes of
Subordinated Bonds. The rights of the holders of the Subordinated Bonds of a
Series (the "Subordinated Bondholders") to receive payments of principal and/or
interest (or any combination thereof) will be subordinated to such rights of the
holders of the Senior Bonds of the same Series (the "Senior Bondholders") to the
extent described in the related Prospectus Supplement. This subordination is
intended to enhance the likelihood of regular receipt by the Senior Bondholders
of the full amount of their scheduled payments of principal and/or interest. The
protection afforded to the Senior Bondholders of a Series by means of the
subordination feature will be accomplished by (i) the preferential right of such
holders to receive, prior to any payment being made on the related Subordinated
Bonds, the amounts of principal and/or interest due them on each Payment Date
out of the funds available for payment on such date in the related Distribution
Account and, to the extent described in the related Prospectus Supplement, by
the right of such holders to receive future payments that would otherwise have
been payable to the Subordinated Bondholders; or (ii) as otherwise described in
the related Prospectus Supplement. If so specified in the related Prospectus
Supplement, subordination may apply only in the event of certain types of losses
not covered by other forms of credit support, such as hazard losses not covered
by standard hazard insurance policies or losses due to the bankruptcy or fraud
of the borrower. The related Prospectus Supplement will set forth information
concerning, among other things, the amount of subordination of a Class or
Classes of Subordinated Bonds in a Series, the circumstances in which such
subordination will be applicable and the manner, if any, in which the amount of
subordination will decrease over time.
If so specified in the related Prospectus Supplement, delays in receipt of
scheduled payments on the Mortgage Collateral and losses with respect to the
Mortgage Collateral will be borne first by the various Classes of Subordinated
Bonds and thereafter by the various Classes of Senior Bonds, in each case under
the circumstances and subject to the limitations specified in such Prospectus
Supplement. The aggregate payments in respect of delinquent payments on the
Mortgage Collateral over the lives of the Bonds or at any time, the aggregate
losses in respect of Mortgage Collateral which must be borne by the Subordinated
Bonds by virtue of subordination and the amount of payments otherwise
distributable to the Subordinated
50
<PAGE> 146
Bondholders that will be distributable to Senior Bondholders on any Payment Date
may be limited as specified in the related Prospectus Supplement. If aggregate
payments in respect of delinquent payments on the Mortgage Collateral or
aggregate losses in respect of such Mortgage Collateral were to exceed the
amount specified in the related Prospectus Supplement, Senior Bondholders would
experience losses on the Bonds.
If so specified in the related Prospectus Supplement, various Classes of
Senior Bonds and Subordinated Bonds may themselves be subordinate in their right
to receive certain payments to other Classes of Senior and Subordinated Bonds,
respectively.
As between Classes of Senior Bonds and as between Classes of Subordinated
Bonds, payments may be allocated among such Classes (i) in accordance with a
schedule or formula, (ii) in relation to the occurrence of events or (iii)
otherwise, in each case as specified in the related Prospectus Supplement. As
between Classes of Subordinated Bonds, payments to Senior Bondholders on account
of delinquencies or losses and payments to the Reserve Fund will be allocated as
specified in the related Prospectus Supplement.
RESERVE FUNDS
If so specified in the related Prospectus Supplement, the Issuer will
deposit in one or more accounts to be established with the Bond Trustee (each, a
"Reserve Fund") cash, certificates of deposit, letters of credit, surety bonds,
guaranteed investment contracts or any combination thereof, which may be used by
the Bond Trustee to make payments on such Series of Bonds to the extent funds
are not otherwise available. Reserve Funds will be established if they are
deemed by the Issuer to be required to assure timely payment of principal of,
and interest on, its Series of Bonds or are otherwise required as a condition to
the rating of such Bonds by any Rating Agency, or if the Issuer chooses to
reduce the likelihood of a special redemption of such Bonds. The Bond Trustee
will invest any cash in any Reserve Fund in Permitted Investments maturing no
later than the dates specified in the related Prospectus Supplement. If a letter
of credit is deposited with the Bond Trustee, such letter of credit will be
irrevocable, will name the Bond Trustee, in its capacity as trustee for the
Bondholders, as the sole beneficiary and will be issued by a bank acceptable to
each Rating Agency. If a surety bond is deposited with the Bond Trustee, such
surety bond will represent an obligation of an insurance company or other
corporation whose credit standing is acceptable to each Rating Agency and will
provide that the Bond Trustee may exercise all of the rights of the Issuer under
such surety bond without the necessity of the taking of any action by the
Issuer. Following each Payment Date for such Series of Bonds, amounts may be
withdrawn from the related Reserve Funds and remitted to the Issuer free from
the lien of the Indenture under the conditions and to the extent specified in
the related Prospectus Supplement. Additional information concerning any Reserve
Fund securing a Series of Bonds, including without limitation the manner in
which such Reserve Fund shall be funded and the conditions under which the
amounts on deposit therein will be used to make payments to holders of Bonds of
a particular Class of the related Series will be set forth in the related
Prospectus Supplement.
MORTGAGE POOL INSURANCE POLICIES
If so specified in the related Prospectus Supplement, a separate mortgage
pool insurance policy or policies ("Mortgage Pool Insurance Policy") may be
obtained for a Series of Bonds secured by Pledged Mortgages and issued by the
insurer (the "Pool Insurer") named in such Prospectus Supplement. Each Mortgage
Pool Insurance Policy will, subject to the limitations described below, cover
loss by reason of default in payment on the related Pledged Mortgages in an
amount equal to a percentage specified in such Prospectus Supplement of the
aggregate principal balance of such Pledged Mortgages on the Cut-off Date which
are not covered as to their entire outstanding principal balances by Primary
Mortgage Insurance Policies. As more fully described below, the Master Servicer
will present claims thereunder to the Pool Insurer on behalf of itself, the Bond
Trustee and the Bondholders. The Mortgage Pool Insurance Policies, however, are
not blanket policies against loss, since claims thereunder may be made only
respecting particular defaulted Pledged Mortgages and only upon satisfaction of
certain conditions precedent described below. Unless otherwise specified in the
related Prospectus Supplement, the Mortgage Pool Insurance Policies will not
cover losses due to a failure to pay or denial of a claim under a Primary
Mortgage Insurance Policy.
51
<PAGE> 147
Unless otherwise specified in the related Prospectus Supplement, each
Mortgage Pool Insurance Policy will provide that no claims may be validly
presented unless (i) any required Primary Mortgage Insurance Policy is in effect
for the defaulted Pledged Mortgage and a claim thereunder has been submitted and
settled; (ii) hazard insurance on the related Mortgaged Property has been kept
in force and real estate taxes and other protection and preservation expenses
have been paid; (iii) if there has been physical loss or damage to the Mortgaged
Property, it has been restored to its physical condition (reasonable wear and
tear excepted) at the time of issuance of the policy; and (iv) the insured has
acquired good and merchantable title to the Mortgaged Property free and clear of
liens except certain permitted encumbrances. Upon satisfaction of these
conditions, the Pool Insurer will have the option either (a) to purchase the
Mortgaged Property at a price equal to the principal balance of the related
Pledged Mortgage plus accrued and unpaid interest at the Mortgage Rate to the
date of such purchase and certain expenses incurred by the Master Servicer on
behalf of the Bond Trustee and Bondholders or (b) to pay the amount by which the
sum of the principal balance of the defaulted Pledged Mortgage plus accrued and
unpaid interest at the Mortgage Rate to the date of payment of the claim and the
aforementioned expenses exceeds the proceeds received from an approved sale of
the Mortgaged Property, in either case net of certain amounts paid or assumed to
have been paid under the related Primary Mortgage Insurance Policy. If any
Mortgaged Property is damaged, and proceeds, if any, from the related standard
hazard insurance policy or the applicable Special Hazard Insurance Policy are
insufficient to restore the damaged property to a condition sufficient to permit
recovery under the Mortgage Pool Insurance Policy, the Master Servicer will not
be required to expend its own funds to restore the damaged property unless it
determines that (i) such restoration will increase the proceeds to Bondholders
on liquidation of the Pledged Mortgage after reimbursement of the Master
Servicer for its expenses and (ii) such expenses will be recoverable by it
through proceeds of the sale of the Mortgaged Property or proceeds of the
related Mortgage Pool Insurance Policy or any related Primary Mortgage Insurance
Policy.
Unless otherwise specified in the related Prospectus Supplement, no
Mortgage Pool Insurance Policy will insure (and many Primary Mortgage Insurance
Policies do not insure) against loss sustained by reason of a default arising
from, among other things, (i) fraud or negligence in the origination or
servicing of a Pledged Mortgage, including misrepresentation by the Mortgagor,
the originator or persons involved in the origination thereof, or (ii) failure
to construct a Mortgaged Property in accordance with plans and specifications. A
failure of coverage attributable to one of the foregoing events might result in
a breach of the related Seller's representations described above and, in such
event, might give rise to an obligation on the part of such Seller to repurchase
the defaulted Pledged Mortgage if the breach cannot be cured by such Seller. No
Mortgage Pool Insurance Policy will cover (and many Primary Mortgage Insurance
Policies do not cover) a claim in respect of a defaulted Pledged Mortgage
occurring when the servicer of such Pledged Mortgage, at the time of default or
thereafter, was not approved by the applicable insurer.
Unless otherwise specified in the related Prospectus Supplement, the
original amount of coverage under each Mortgage Pool Insurance Policy will be
reduced over the life of the related Bonds by the aggregate dollar amount of
claims paid less the aggregate of the net amounts realized by the Pool Insurer
upon disposition of all foreclosed properties. The amount of claims paid will
include certain expenses incurred by the Master Servicer as well as accrued
interest on delinquent Pledged Mortgages to the date of payment of the claim,
unless otherwise specified in the related Prospectus Supplement. Accordingly, if
aggregate net claims paid under any Mortgage Pool Insurance Policy reach the
original policy limit, coverage under that Mortgage Pool Insurance Policy will
be exhausted and any further losses will be borne by the Bondholders.
SPECIAL HAZARD INSURANCE POLICIES
If so specified in the related Prospectus Supplement, a separate Special
Hazard Insurance Policy may be obtained for a Series of Bonds secured by Pledged
Mortgages and will be issued by the insurer (the "Special Hazard Insurer") named
in such Prospectus Supplement. Each Special Hazard Insurance Policy will,
subject to limitations described below, protect holders of the related Bonds
from (i) loss by reason of damage to Mortgaged Properties caused by certain
hazards (including earthquakes and, to a limited extent, tidal waves and related
water damage or as otherwise specified in the related Prospectus Supplement) not
insured against under the standard form of hazard insurance policy for the
respective states in which the Mortgaged Properties
52
<PAGE> 148
are located or under a flood insurance policy (unless the Mortgaged Property is
located in a federally designated flood area) and (ii) loss caused by reason of
the application of the coinsurance clause contained in standard hazard insurance
policies. No Special Hazard Insurance Policy will cover losses occasioned by
fraud or conversion by the Bond Trustee or Master Servicer, war, insurrection,
civil war, certain governmental action, errors in design, faulty workmanship or
materials (except under certain circumstances), nuclear or chemical reaction,
flood (if the Mortgaged Property is located in a federally designated flood
area), nuclear or chemical contamination and certain other risks. The amount of
coverage under any Special Hazard Insurance Policy will be specified in the
related Prospectus Supplement. Each Special Hazard Insurance Policy will provide
that no claim may be paid unless hazard and, if applicable, flood insurance on
the property securing the Pledged Mortgage have been kept in force and other
protection and preservation expenses have been paid.
Subject to the foregoing limitations, and unless otherwise specified in the
related Prospectus Supplement, each Special Hazard Insurance Policy will provide
that where there has been damage to property securing a foreclosed Pledged
Mortgage (title to which has been acquired by the insured) and to the extent
such damage is not covered by the standard hazard insurance policy or flood
insurance policy, if any, maintained by the mortgagor or the Master Servicer,
the Special Hazard Insurer will pay the lesser of (i) the cost of repair or
replacement of such property or (ii) upon transfer of the property to the
Special Hazard Insurer, the unpaid principal balance of such Pledged Mortgage at
the time of acquisition of such property by foreclosure or deed in lieu of
foreclosure, plus accrued interest to the date of claim settlement and certain
expenses incurred by the Master Servicer with respect to such property. If the
unpaid principal balance of a Pledged Mortgage plus accrued interest and certain
expenses is paid by the Special Hazard Insurer, the amount of further coverage
under the related Special Hazard Insurance Policy will be reduced by such amount
less any net proceeds from the sale of the property. Any amount paid as the cost
of repair of such property will further reduce coverage by such amount. So long
as a Mortgage Pool Insurance Policy remains in effect, the payment by the
Special Hazard Insurer of the cost of repair or of the unpaid principal balance
of the related Pledged Mortgage plus accrued interest and certain expenses will
not affect the total insurance proceeds paid to Bondholders, but will affect the
relative amounts of coverage remaining under the related Special Hazard
Insurance Policy and Mortgage Pool Insurance Policy.
To the extent specified in the related Prospectus Supplement, the Master
Servicer may deposit cash, an irrevocable letter of credit or a guaranteed
investment contract in a special trust account to provide protection in lieu of
or in addition to that provided by a Special Hazard Insurance Policy. The amount
of any Special Hazard Insurance Policy or of the deposit to the special trust
account in lieu thereof relating to such Bonds may be reduced so long as any
such reduction will not result in a downgrading of the rating of such Bonds by
any applicable Rating Agency.
BANKRUPTCY BONDS
If so specified in the related Prospectus Supplement, a bankruptcy bond or
bonds (the "Bankruptcy Bond") may be obtained for a Series of Bonds secured by
Pledged Mortgages to cover losses resulting from proceedings under the federal
Bankruptcy Code with respect to a Pledged Mortgage will be issued by an insurer
named in such Prospectus Supplement. Each Bankruptcy Bond will cover, to the
extent specified in the related Prospectus Supplement, certain losses resulting
from a reduction by a bankruptcy court of scheduled payments of principal and
interest on a Pledged Mortgage or a reduction by such court of the principal
amount of a Pledged Mortgage and will cover certain unpaid interest on the
amount of such a principal reduction from the date of the filing of a bankruptcy
petition. The required amount of coverage under each Bankruptcy Bond will be set
forth in the related Prospectus Supplement. Coverage under a Bankruptcy Bond may
be cancelled or reduced by the Master Servicer if such cancellation or reduction
would not adversely affect the then current rating or ratings of the related
Bonds. See "CERTAIN LEGAL ASPECTS OF THE PLEDGED MORTGAGES -- Anti-Deficiency
Legislation and Other Limitations on Lenders" herein.
To the extent specified in the related Prospectus Supplement, the Master
Servicer may deposit cash, an irrevocable letter of credit or a guaranteed
investment contract in a special trust account to provide protection in lieu of
or in addition to that provided by a Bankruptcy Bond. The amount of any
Bankruptcy Bond or of the
53
<PAGE> 149
deposit to the special trust account in lieu thereof relating to such Bonds may
be reduced so long as any such reduction will not result in a downgrading of the
then current rating of such Bonds by any such Rating Agency.
BOND INSURANCE POLICIES, SURETY BONDS AND GUARANTIES
If specified in the related Prospectus Supplement, deficiencies in amounts
otherwise payable on Bonds of a Series or certain Classes thereof will be
covered by insurance policies and/or surety bonds provided by one or more
insurance companies or sureties. Such instruments may cover, with respect to one
or more Classes of Bonds of the related Series, timely payments of interest
and/or full payments of principal on the basis of a schedule of principal
payments set forth in or determined in the manner specified in the related
Prospectus Supplement. In addition, if specified in the related Prospectus
Supplement, a Series of Bonds may also be covered by insurance or guaranties for
the purpose of (i) maintaining timely payments or providing additional
protection against losses on the Mortgage Collateral pledged to secure such
Series, (ii) paying administrative expenses or (iii) establishing a minimum
reinvestment rate on the payments made in respect of such Mortgage Collateral or
principal payment rate on such Mortgage Collateral. Such arrangements may
include agreements under which Bondholders are entitled to receive amounts
deposited in various accounts held by the Bond Trustee upon the terms specified
in such Prospectus Supplement. A copy of any such instrument for a Series will
be filed with the Commission as an exhibit to a Current Report on Form 8-K to be
filed within 15 days of issuance of the Bonds of the related Series.
LETTER OF CREDIT
If so specified in the related Prospectus Supplement, credit enhancement
may be provided by a letter of credit. The letter of credit, if any, with
respect to a Series of Bonds will be issued by the bank or financial institution
specified in the related Prospectus Supplement (the "L/C Bank"). Under the
letter of credit, the L/C Bank will be obligated to honor drawings thereunder in
an aggregate fixed dollar amount, net of unreimbursed payments thereunder, equal
to the percentage specified in the related Prospectus Supplement of the
aggregate principal balance of the Mortgage Collateral pledged to secure the
related Series of Bonds on the related Cut-off Date or of one or more Classes of
Bonds (the "L/C Percentage"). If so specified in the related Prospectus
Supplement, the letter of credit may permit drawings in the event of losses not
covered by insurance policies or other credit support, such as losses arising
from damage not covered by standard hazard insurance policies, losses resulting
from the bankruptcy of a borrower and the application of certain provisions of
the federal Bankruptcy Code, or losses resulting from denial of insurance
coverage due to misrepresentations in connection with the origination of a
Pledged Mortgage. The amount available under the letter of credit will, in all
cases, be reduced to the extent of the unreimbursed payments thereunder. The
obligations of the L/C Bank under the letter of credit for each Series of Bonds
will expire at the date specified in the related Prospectus Supplement. A copy
of the letter of credit for a Series, if any, will be filed with the Commission
as an exhibit to a Current Report on Form 8-K to be filed within 15 days of
issuance of the Securities of the related Series.
OVER-COLLATERALIZATION
If so specified in the related Prospectus Supplement, credit enhancement
may consist of over-collateralization whereby the aggregate principal balance of
the related Mortgage Collateral exceeds the aggregate principal balance of the
Bonds of the related Series. Such over-collateralization may exist on the
related Closing Date or develop thereafter as a result of the application of a
portion of the interest payments on each Pledged Mortgage or Certificate, as the
case may be, as an additional payment in respect of principal to reduce the
principal balance of a certain Class or Classes of Bonds and, thus, accelerate
the rate of payment of principal on such Class or Classes of Bonds.
CROSS-COLLATERALIZATION
If so specified in the related Prospectus Supplement, separate groups of
Mortgage Collateral may be pledged to secure separate Classes of the related
Series of Bonds. In such case, credit support may be provided by a
cross-collateralization feature which requires that payments be made with
respect to Bonds secured by
54
<PAGE> 150
one or more groups of Mortgage Collateral prior to distributions to Subordinated
Bonds secured by one or more other groups of Mortgage Collateral.
Cross-collateralization may be provided by (i) the allocation of certain excess
amounts generated by one or more groups of Mortgage Collateral to one or more
other groups of Mortgage Collateral or (ii) the allocation of losses with
respect to one or more groups of Mortgage Collateral, to one or more other
groups of Mortgage Collateral. Such excess amounts will be applied and/or such
losses will be allocated to the Class or Classes of Subordinated Bonds of the
related Series then outstanding having the lowest rating assigned by any
applicable Rating Agency or the lowest payment priority, in each case to the
extent and in the manner more specifically described in the related Prospectus
Supplement. The Prospectus Supplement for a Series which includes a
cross-collateralization feature will describe the manner and conditions for
applying such cross-collateralization feature.
If so specified in the related Prospectus Supplement, the coverage provided
by one or more of the forms of credit enhancement described in this Prospectus
may apply concurrently to two or more separate Series of Bonds. If applicable,
the related Prospectus Supplement will identify the Series of Bonds to which
such credit enhancement relates and the manner of determining the amount of
coverage provided to such Series of Bonds thereby and of the application of such
coverage to the identified Series of Bonds.
MINIMUM PRINCIPAL PAYMENT AGREEMENT
If so specified in the related Prospectus Supplement, an Issuer may enter
into an agreement with an institution pursuant to which such institution will
provide such funds as may be necessary to enable such Issuer to make principal
payments on the Bonds of the related Series at a minimum rate set forth in such
Prospectus Supplement.
DERIVATIVE ARRANGEMENTS
If so specified in the related Prospectus Supplement, credit enhancement
may be provided with respect to one or more Classes of Bonds of a Series or with
respect to the Mortgage Collateral securing a Series of Bonds in the form of one
or more derivative arrangements. A derivative arrangement is a contract or
agreement, the price of which is directly dependent upon (i.e., "derived from")
the value of one or more underlying assets, including securities, equity
indices, debt instruments, commodities, other derivative instruments, or any
agreed upon pricing index or arrangement (e.g., the movement over time of the
Consumer Price Index or interest rates). Derivatives involve rights or
obligations based on the underlying asset, but do not necessarily result in a
transfer of the underlying asset. Derivative arrangements include swap
agreements, interest rate swaps, interest rate caps, interest rate floors,
interest rate collars and currency swap agreements. A "swap agreement" is a
contractual agreement providing for a series of exchanges of principal and/or
interest in the same or different currencies. At a more general level, the term
"swap agreement" includes the exchange of fixed-for-floating payments on a given
quantity of a specified commodity, security or other asset. An "interest rate
swap" is a swap agreement between two parties to engage in a series of exchanges
of interest payments on the same notional principal amount denominated in the
same currency based, respectively, on variable and fixed rates of interest. An
"interest rate cap" is an agreement providing for multi-period cash settled
options on interest rates. The cap purchaser receives a cash payment whenever
the reference rate exceeds the ceiling rate on a fixing date. An "interest rate
floor" is an agreement providing for a multi-period interest rate option that
provides a cash payment to the holder of the option whenever the reference rate
is below the floor on a fixing date. An "interest rate collar" is an agreement
providing for a combination of an interest rate cap and an interest rate floor
such that a cap is purchased and a floor is sold or vice versa. The effect of an
interest rate collar is to place upper and lower bounds on the cost of funds. A
"currency swap agreement" is a swap agreement between two parties for the
exchange of a future series of interest and principal payments in which one
party pays in one currency and the other party pays in a different currency. The
exchange rate is fixed over the life of the currency swap agreement.
The derivative arrangements described above will support the payments on
the Bonds to the extent and under the conditions specified in the related
Prospectus Supplement. Unless otherwise specified in the related Prospectus
Supplement, no credit enhancement will provide protection against all risks of
loss or guarantee repayment of the entire principal balance of the Bonds and
interest thereon. If losses occur which exceed the
55
<PAGE> 151
amount covered by credit enhancement or which are not covered by the credit
enhancement, Bondholders will bear their allocable share of any deficiencies.
SERVICING OF THE PLEDGED MORTGAGES
GENERAL
The Master Servicer of the Pledged Mortgages, if any, securing a Series of
Bonds will be responsible for servicing such Pledged Mortgages in accordance
with the terms set forth in a master servicing agreement (the "Master Servicing
Agreement") among the Issuer, the Master Servicer and the Bond Trustee. The
Master Servicer with respect to a Series of Bonds will be identified in the
related Prospectus Supplement. The Master Servicer will perform certain of its
servicing obligations under the Master Servicing Agreement through one or more
servicers (each, a "Servicer") pursuant to one or more mortgage servicing
agreements (each, a "Servicing Agreement"). Notwithstanding any such servicing
arrangements, unless otherwise provided in the related Prospectus Supplement,
the Master Servicer will remain liable for its servicing duties and obligations
under the Master Servicing Agreement.
No Servicing Agreement will contain any terms inconsistent with the related
Master Servicing Agreement. While each Servicing Agreement will typically be a
contract solely between Redwood Trust and the Servicer, Redwood Trust will
assign all of its rights under each Servicing Agreement to the Depositor under
the related Mortgage Loan Purchase Agreement and such rights will be assigned to
the Bond Trustee pursuant to the Indenture. The Master Servicing Agreement
relating to a Series of Bonds will provide that the Master Servicer and, if for
any reason such Master Servicer is no longer the Master Servicer of the related
Pledged Mortgages, the Bond Trustee or any successor Master Servicer must
recognize the Servicer's rights and obligations under such Servicing Agreement.
As an independent contractor, each Servicer will perform servicing functions for
the Pledged Mortgages including collection and remittance of principal and
interest payments, administration of mortgage escrow accounts, collection of
certain insurance claims and, if necessary, foreclosure.
The Master Servicer may permit Servicers to contract with subservicers to
perform some or all of the Servicer's servicing duties, but the Servicer will
not thereby be released from its obligations under the related Servicing
Agreement. The Master Servicer also may enter into servicing contracts directly
with an affiliate of a Servicer or permit a Servicer to transfer its servicing
rights and obligations to a third party. In such instances, the affiliate or
third party, as the case may be, will perform servicing functions comparable to
those normally performed by the Servicer as described above, and the Servicer
will not be obligated to perform such servicing functions. When used herein with
respect to servicing obligations, the term Servicer includes any such affiliate
or third party. The Master Servicer may perform certain supervisory functions
with respect to servicing by the Servicers directly or through an agent or
independent contractor.
On or before the related Closing Date, the Master Servicer will establish
one or more accounts (the "Custodial Account") into which each Servicer will
remit collections on the Pledged Mortgages serviced by it (net of its related
servicing compensation, amounts retained to pay certain insurance premiums and
amounts retained by such Servicer as reimbursement for certain advances it has
made). For purposes of the Master Servicing Agreement, the Master Servicer will
be deemed to have received any amounts with respect to the Pledged Mortgages
that are received by a Servicer regardless of whether such amounts are remitted
by the Servicer to the Master Servicer. The Master Servicer will have the right
under the Master Servicing Agreement to remove the Servicer servicing any
Pledged Mortgages in the event such Servicer defaults under its Servicing
Agreement and will exercise that right if the Master Servicer considers such
removal to be in the best interest of the Bondholders. In the event that the
Master Servicer removes a Servicer, the Master Servicer will continue to be
responsible for servicing the related Pledged Mortgages.
A form of Master Servicing Agreement has been filed as an exhibit to the
Registration Statement of which this Prospectus forms a part. The Master
Servicing Agreement with respect to a Series of Bonds secured by Pledged
Mortgages will be assigned to the Bond Trustee as security for such Series. The
following summaries describe certain provisions of the form of Master Servicing
Agreement. The summaries are
56
<PAGE> 152
qualified in their entirety by reference to the form of Master Servicing
Agreement. Where particular provisions or terms used in the form of Master
Servicing Agreement are referred to, the actual provisions (including
definitions of terms) are incorporated by reference as part of such summaries.
PAYMENTS ON PLEDGED MORTGAGES
Pursuant to the Master Servicing Agreement with respect to a Series of
Bonds, the Master Servicer will be required to establish and maintain a separate
Eligible Account or Eligible Accounts (collectively, the "Bond Account") into
which it will deposit or cause to be deposited on a daily basis, or such other
basis as may be specified in the related Prospectus Supplement, payments of
principal and interest (net of servicing compensation, amounts retained to pay
certain insurance premiums and amounts retained by the Master Servicer or any
Servicer as reimbursement for certain advances it has made) received with
respect to the related Pledged Mortgages. Such amounts will include principal
prepayments, certain Insurance Proceeds and Liquidation Proceeds and amounts
paid by the Servicer or the Company in connection with any optional purchase by
the Servicer or the Company of any defaulted Pledged Mortgages.
An "Eligible Account" is an account either (i) maintained with a depository
institution the short-term debt obligations of which (or in the case of a
depository institution that is the principal subsidiary of a holding company,
the short-term debt obligations of which, but only if Moody's is not an
applicable Rating Agency) are rated in the highest short-term rating category by
each applicable Rating Agency, (ii) an account or accounts the deposits in which
are fully insured by either the BIF or SAIF, (iii) an account or accounts the
deposits in which are insured by the BIF or SAIF to the limits established by
the FDIC, and the uninsured deposits in which are otherwise secured such that,
as evidenced by an opinion of counsel, the Bondholders have a claim with respect
to the funds in the Bond Account or a perfected first priority security interest
against any collateral securing such funds that is superior to the claims of any
other depositors or general creditors of the depository institution with which
the Bond Account is maintained, (iv) a trust account or accounts maintained with
the trust department of a federal or a state chartered depository institution or
trust company, acting in a fiduciary capacity or (v) an account or accounts
otherwise acceptable to each applicable Rating Agency. The collateral eligible
to secure amounts in the Bond Account is limited to Permitted Investments. A
Bond Account may be maintained as an interest bearing account or the funds held
therein may be invested pending each succeeding Payment Date in Permitted
Investments. If so specified in the related Prospectus Supplement, the Master
Servicer or its designee will be entitled to receive any such interest or other
income earned on funds in the Bond Account as additional compensation and will
be obligated to deposit in the Bond Account the amount of any loss immediately
as realized.
Pursuant to the Master Servicing Agreement, the Master Servicer will be
required to remit to the Bond Trustee (to the extent not previously remitted),
on or before each Distribution Account Deposit Date, the Bond Distribution
Amount for the related Payment Date for deposit in the Distribution Account for
such Series of Bonds maintained with the Bond Trustee.
Any amounts received by the Master Servicer as Insurance Proceeds or as
Liquidation Proceeds, net of any expenses and other amounts reimbursable to the
Master Servicer pursuant to the Master Servicing Agreement, will (unless applied
to the repair or restoration of a Mortgaged Property) be deemed to be payments
received with respect to the Pledged Mortgages securing the related Series of
Bonds and will be deposited in the related Bond Account.
Prior to each Payment Date for a Series of Bonds, the Master Servicer will
furnish to the Bond Trustee a statement setting forth certain information with
respect to payments received with respect to the Pledged Mortgages.
COLLECTION PROCEDURES
The Master Servicer, directly or through one or more Servicers, will make
reasonable efforts to collect all payments called for under the Pledged
Mortgages and will, consistent with each Master Servicing Agreement and any
Mortgage Pool Insurance Policy, Primary Mortgage Insurance Policy and Bankruptcy
Bond or alternative arrangements, follow such collection procedures as are
customary with respect to mortgage loans
57
<PAGE> 153
that are comparable to the Pledged Mortgages. Consistent with the above, the
Master Servicer or applicable Servicer may, in its discretion, (i) waive any
assumption fee, late payment or other charge in connection with a Pledged
Mortgage and (ii) to the extent not inconsistent with the coverage of such
Pledged Mortgage by a Mortgage Pool Insurance Pool Policy, Primary Mortgage
Insurance Policy or Bankruptcy Bond or alternative arrangements, if applicable,
arrange with a Mortgagor a schedule for the liquidation of delinquencies running
for no more than 180 days (unless a longer period is specified in the related
Prospectus Supplement) after the applicable due date for each payment. To the
extent the Master Servicer is obligated to make or to cause to be made advances,
such obligation will remain during any period of such an arrangement.
Unless otherwise specified in the related Prospectus Supplement, in any
case in which property securing a Pledged Mortgage has been, or is about to be,
conveyed by the Mortgagor, the Master Servicer will, to the extent it has
knowledge of such conveyance or proposed conveyance, exercise or cause to be
exercised its rights to accelerate the maturity of such Pledged Mortgage under
any due-on-sale clause applicable thereto, but only if the exercise of such
rights is permitted by applicable law and will not impair or threaten to impair
any recovery under any related Primary Mortgage Insurance Policy. If these
conditions are not met or if the Master Servicer reasonably believes it is
unable under applicable law to enforce such due-on-sale clause, the Master
Servicer will enter into or cause to be entered into an assumption and
modification agreement with the person to whom such property has been or is
about to be conveyed, pursuant to which such person becomes liable for repayment
of the Pledged Mortgage and, to the extent permitted by applicable law, the
Mortgagor also remains liable thereon. If a Mortgaged Property is sold or
transferred, the Master Servicer will be required promptly to notify the Bond
Trustee and the respective issuers of any hazard insurance policies, mortgagor
bankruptcy insurance and mortgage insurance policies to assure that all required
endorsements to each insurance policy are obtained and that coverage under each
such policy will remain in effect after the occurrence of such sale or transfer.
Any fee collected by or on behalf of the Master Servicer for entering into an
assumption agreement will be retained by or on behalf of the Master Servicer as
additional servicing compensation. See "CERTAIN LEGAL ASPECTS OF PLEDGED
MORTGAGES -- 'Due-on-Sale' Clauses" herein. In connection with any such
assumption, the terms of the related Pledged Mortgage may not be changed.
With respect to Cooperative Loans, any prospective purchaser will generally
have to obtain the approval of the board of directors of the relevant
Cooperative before purchasing the shares and acquiring rights under the related
proprietary lease or occupancy agreement. See "CERTAIN LEGAL ASPECTS OF PLEDGED
MORTGAGES" herein. This approval is usually based on the purchaser's income and
net worth and numerous other factors. Although the Cooperative's approval is
unlikely to be unreasonably withheld or delayed, the necessity of acquiring such
approval could limit the number of potential purchasers for those shares and
otherwise limit the ability to sell and realize the value of those shares.
In general, a "tenant-stockholder" (as defined in Code Section 216(b)(2))
of a corporation that qualifies as a "cooperative housing corporation" within
the meaning of Code Section 216(b)(1) is allowed a deduction for amounts paid or
accrued within his taxable year to the corporation representing his
proportionate share of certain interest expenses and certain real estate taxes
allowable as a deduction under Code Section 216(a) to the corporation under Code
Sections 163 and 164. In order for a corporation to qualify under Code Section
216(b)(1) for its taxable year in which such items are allowable as a deduction
to the corporation, such Section requires, among other things, that at least 80%
of the gross income of the corporation be derived from its tenant-stockholders
(as defined in Code Section 216(b)(2)). By virtue of this requirement, the
status of a corporation for purposes of Code Section 216(b)(1) must be
determined on a year-to-year basis. Consequently, there can be no assurance that
Cooperatives relating to the Cooperative Loans will qualify under such Section
for any particular year. In the event that such a Cooperative fails to qualify
for one or more years, the value of the collateral securing any related
Cooperative Loans could be significantly impaired because no deduction would be
allowable to tenant-stockholders under Code Section 216(a) with respect to those
years. In view of the significance of the tax benefits accorded
tenant-stockholders of a corporation that qualifies under Code Section
216(b)(1), the likelihood that such a failure would be permitted to continue
over a period of years appears remote.
58
<PAGE> 154
JUNIOR MORTGAGES
In the case of single family loans secured by junior liens on the related
Mortgaged Properties, the Master Servicer will be required to file (or cause to
be filed) of record a request for notice of any action by a superior lienholder
under the Senior Lien for the protection of the related Bond Trustee's interest,
where permitted by local law and whenever applicable state law does not require
that a junior lienholder be named as a party defendant in foreclosure
proceedings in order to foreclose such junior lienholder's equity of redemption.
The Master Servicer also will be required to notify any superior lienholder in
writing of the existence of the Pledged Mortgage and request notification of any
action (as described below) to be taken against the Mortgagor or the Mortgaged
Property by the superior lienholder. If the Master Servicer is notified that any
superior lienholder has accelerated or intends to accelerate the obligations
secured by the related Senior Lien, or has declared or intends to declare a
default under the mortgage or the promissory note secured thereby, or has filed
or intends to file an election to have the related Mortgaged Property sold or
foreclosed, then the Master Servicer will be required to take, on behalf of the
related Issuer, whatever actions are necessary to protect the interests of the
related Bondholders, and/or to preserve the security of the related Pledged
Mortgage. The Master Servicer will generally be required to advance the
necessary funds to cure the default or reinstate the superior lien, if such
advance is in the best interests of the related Bondholders and the Master
Servicer determines such advances are recoverable out of payments on or proceeds
of the related Pledged Mortgage.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The principal servicing compensation to be paid to the Master Servicer in
respect of its master servicing activities for each Series of Bonds will be
equal to the percentage per annum described in the related Prospectus Supplement
(which may vary under certain circumstances) of the outstanding principal
balance of each Pledged Mortgage securing such Series of Bonds and such
compensation will be retained by it from collections of interest on such Pledged
Mortgage (the "Master Servicing Fee"). As compensation for its servicing duties,
any Servicer or subservicer will generally be entitled to a monthly servicing
fee as described in the related Prospectus Supplement. In addition, the Master
Servicer, any Servicer or any subservicer will retain as additional compensation
all prepayment charges, assumption fees and late payment charges, to the extent
collected from Mortgagors, and any benefit that may accrue as a result of the
investment of funds in the applicable Bond Account (unless otherwise specified
in the related Prospectus Supplement).
The Master Servicer will pay or cause to be paid certain ongoing expenses
associated with each Series of Bonds and incurred by it in connection with its
responsibilities under the related Master Servicing Agreement, including,
without limitation, payment of any fee or other amount payable in respect of any
credit enhancement arrangements, payment of the fees and disbursements of the
Bond Trustee, any custodian appointed by the Bond Trustee, the certificate
registrar and any paying agent, and payment of expenses incurred in enforcing
the obligations of Servicers and Sellers. The Master Servicer will be entitled
to reimbursement of expenses incurred in enforcing the obligations of Servicers
under certain limited circumstances. In addition, as indicated in the preceding
section, the Master Servicer will be entitled to reimbursement of expenses
incurred by it in connection with any defaulted Pledged Mortgage as to which it
has determined that all recoverable Liquidation Proceeds and Insurance Proceeds
have been received (a "Liquidated Mortgage"), and in connection with the
restoration of Mortgaged Properties, such right of reimbursement being prior to
the rights of Bondholders to receive any related Liquidation Proceeds (including
Insurance Proceeds).
PREPAYMENTS
In general, when a borrower prepays a mortgage loan between due dates, the
borrower is required to pay interest on the amount prepaid only to the date of
prepayment and not thereafter. In the event such prepayments, together with
other prepayments (including for this purpose prepayments resulting from
refinancing or liquidations of the Pledged Mortgages or the mortgage loans
underlying the Certificates, as the case may be, due to defaults, casualties,
condemnations, repurchases by the Seller, the Issuer or Redwood Trust or
purchases thereof by the Master Servicer or the Company), result in a shortfall
in the amount of
59
<PAGE> 155
interest available on a Payment Date for the Bonds of a Series, the Master
Servicer may be required to cover the shortfall, but only if and to the extent
specified in the related Prospectus Supplement.
EVIDENCE AS TO COMPLIANCE
Each Master Servicing Agreement and Indenture will provide that on or
before a specified date in each year, a firm of independent public accountants
will furnish a statement to the Issuer and the Bond Trustee to the effect that,
on the basis of the examination by such firm conducted substantially in
compliance with the Uniform Single Attestation Program for Mortgage Bankers, the
Audit Program for Mortgages serviced for FHLMC or such other procedures as may
be specified in the related Prospectus Supplement, the servicing by or on behalf
of the Master Servicer of Pledged Mortgages under agreements substantially
similar to each other (including the related Master Servicing Agreement) was
conducted in compliance with such agreements except for any significant
exceptions or errors in records that, in the opinion of the firm, the Audit
Program for Mortgages serviced for FHLMC, the Uniform Single Attestation Program
for Mortgage Bankers or such other procedure, requires it to report. In
rendering its statement such firm may rely, as to matters relating to the direct
servicing of Pledged Mortgages by Servicers, upon comparable statements for
examinations conducted substantially in compliance with the Uniform Single
Attestation Program for Mortgage Bankers, the Audit Program for Mortgages
serviced for FHLMC or such other procedure, (rendered within one year of such
statement) of firms of independent public accountants with respect to the
related Servicer.
Each Master Servicing Agreement and Indenture will also provide for
delivery to the Issuer and the Bond Trustee, on or before a specified date in
each year, of an annual statement signed by two officers of the Master Servicer
to the effect that the Master Servicer has fulfilled its obligations under the
Master Servicing Agreement throughout the preceding year.
Copies of the annual accountants' statement and the statement of officers
of the Master Servicer may be obtained by Bondholders of the related Series
without charge upon written request to the Issuer at its principal executive
offices.
ADVANCES AND OTHER AMOUNTS PAYABLE BY MASTER SERVICER
Subject to any limitations set forth in the related Prospectus Supplement,
each Master Servicing Agreement will require the Master Servicer to advance on
or before each Payment Date (from its own funds, funds advanced by Servicers or
funds held in the Bond Account for future distribution to Bondholders), an
amount equal to the aggregate of payments of principal and interest that were
delinquent on the related Determination Date, subject to the Master Servicer's
determination that such advances will be recoverable out of late payments by
obligors on the Mortgage Collateral, Liquidation Proceeds, Insurance Proceeds or
otherwise. In the case of Cooperative Loans, the Master Servicer also will be
required to advance any unpaid maintenance fees and other charges under the
related proprietary leases as specified in the related Prospectus Supplement.
In making Advances, the Master Servicer will endeavor to maintain a regular
flow of scheduled interest and principal payments to Bondholders, rather than to
guarantee or insure against losses. If Advances are made by the Master Servicer
from cash being held for future distribution to Bondholders, the Master Servicer
will replace such funds on or before any future Payment Date to the extent that
funds in the applicable Bond Account on such Payment Date would be less than the
amount required to be available for distributions to Bondholders on such date.
Any Advances will be reimbursable to the Master Servicer out of recoveries on
the specific Mortgage Collateral with respect to which such Advances were made
(e.g., late payments made by the related obligors, any related Insurance
Proceeds, Liquidation Proceeds or proceeds of any Pledged Mortgage repurchased
pursuant to the related Master Servicing Agreement). In addition, Advances by
the Master Servicer (and any advances by a Servicer) also will be reimbursable
to the Master Servicer (or Servicer) from cash otherwise distributable to
Bondholders to the extent that the Master Servicer determines that any such
Advances previously made are not ultimately recoverable as described in the
immediately preceding sentence. The Master Servicer also will be obligated to
make Advances, to the extent recoverable out of Insurance Proceeds, Liquidation
Proceeds or otherwise, in respect of certain taxes and insurance
60
<PAGE> 156
premiums not paid by Mortgagors on a timely basis. Funds so advanced are
reimbursable to the Master Servicer to the extent permitted by the Master
Servicing Agreement. If specified in the related Prospectus Supplement, the
obligations of the Master Servicer to make Advances may be supported by a cash
advance reserve fund, a surety bond or a letter of credit, in each case as
described in such Prospectus Supplement.
RESIGNATION OF MASTER SERVICER
A Master Servicer may not resign from its obligations and duties under a
Master Servicing Agreement or assign or transfer such duties or obligations
except (i) upon a determination that its duties thereunder are no longer
permissible under applicable law or (ii) upon a sale of its servicing rights
with respect to the Pledged Mortgages with the prior written consents of the
Bond Trustee, the Issuer and any applicable Mortgage Insurer. No such
resignation will become effective until the Bond Trustee, as Stand-by Master
Servicer, or a Successor Master Servicer (as such terms are defined below) has
assumed the Master Servicer's obligations and duties under such Master Servicing
Agreement.
Each Master Servicing Agreement will provide that such a successor master
servicer (the "Successor Master Servicer") must be satisfactory to the Issuer,
the Bond Trustee and any applicable Mortgage Insurer, in the exercise of their
reasonable discretion and must be approved to act as a mortgage servicer for
FHLMC or FNMA.
STAND-BY SERVICER
If so specified in the related Prospectus Supplement, the Bond Trustee will
act as stand-by Master Servicer (the "Stand-by Master Servicer") with respect to
each Series of Bonds secured by Pledged Mortgages. As Stand-by Master Servicer,
the Bond Trustee will succeed to the rights and obligations of the Master
Servicer with respect to the Pledged Mortgages securing such Series upon a
default by the Master Servicer or upon resignation by the Master Servicer until
the appointment of a Successor Master Servicer.
SPECIAL SERVICING AGREEMENT
The Company may appoint a Special Servicer to undertake certain
responsibilities with respect to certain defaulted Pledged Mortgages securing a
Series. The Special Servicer may engage various independent contractors to
perform certain of its responsibilities, provided, however, the Special Servicer
remains fully responsible and liable for all its requirements under the special
servicing agreement (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, (i) a monthly
engagement fee applicable to each Pledged Mortgage, (ii) a special servicing
fee, or (iii) a performance fee applicable to each liquidated Pledged Mortgage,
in each case calculated as set forth in the related Prospectus Supplement.
CERTAIN MATTERS REGARDING THE MASTER SERVICER AND THE COMPANY
Each Master Servicing Agreement will provide that neither the Master
Servicer, the Company, the Owner Trustee nor any director, officer, employee or
agent of the Master Servicer, the Company or the Owner Trustee will be under any
liability to the related Bondholders for any action taken or for refraining from
the taking of any action in good faith pursuant to the Master Servicing
Agreement, or for errors in judgment; provided, however, that neither the Master
Servicer, the Company, the Owner Trustee nor any such person will be protected
against any liability that would otherwise be imposed by reason of willful
misfeasance, bad faith or negligence in the performance of duties thereunder or
by reason of reckless disregard of obligations and duties thereunder. Each
Master Servicing Agreement will further provide that the Master Servicer, the
Company, the Owner Trustee and any director, officer, employee or agent of the
Master Servicer, the Company or the Owner Trustee will be entitled to
indemnification by the related Issuer and will be held harmless against any
loss, liability or expense incurred in connection with any legal action relating
to the Master Servicing Agreement or the Bonds, other than any loss, liability
or expense related to any specific Mortgage Collateral (except any such loss,
liability or expense otherwise reimbursable pursuant to the Master Servicing
Agreement) and any loss, liability or expense incurred by reason of willful
misfeasance, bad faith or
61
<PAGE> 157
negligence in the performance of duties thereunder or by reason of reckless
disregard of obligations and duties thereunder. In addition, each Master
Servicing Agreement will provide that neither the Master Servicer, the Company
nor the Owner Trustee will be under any obligation to appear in, prosecute or
defend any legal action which is not incidental to its respective
responsibilities under the Master Servicing Agreement and which in its opinion
may involve it in any expense or liability. The Master Servicer, the Company or
the Owner Trustee may, however, in its discretion undertake any such action
which it may deem necessary or desirable with respect to the Master Servicing
Agreement and the rights and duties of the parties thereto and the interests of
the Bondholders thereunder. In such event, the legal expenses and costs of such
action and any liability resulting therefrom will be expenses, costs and
liabilities of the related Issuer, and the Master Servicer, the Company or the
Owner Trustee, as the case may be, will be entitled to be reimbursed therefor
out of funds otherwise distributable to Bondholders.
Any person into which the Master Servicer may be merged or consolidated, or
any person resulting from any merger or consolidation to which the Master
Servicer is a party, or any person succeeding to the business of the Master
Servicer, will be the successor of the Master Servicer under each Master
Servicing Agreement, provided that such person is qualified to sell mortgage
loans to, and service mortgage loans on behalf of, FNMA or FHLMC and further
provided that such merger, consolidation or succession does not adversely affect
the then current rating or ratings of the Bonds of such Series.
SERVICING DEFAULTS
Events of default under the Master Servicing Agreement (each, a "Servicing
Default") for a Series of Bonds will include (i) any failure of the Master
Servicer to deposit in the Bond Account or remit to the Bond Trustee any
required payment (other than an Advance) which continues unremedied for one
business day after the giving of written notice of such failure to the Master
Servicer by the Bond Trustee or the Issuer; (ii) any failure by the Master
Servicer to make an Advance as required under the Master Servicing Agreement,
unless cured as specified therein; (iii) any failure by the Master Servicer duly
to observe or perform in any material respect any of its other covenants or
agreements in the Master Servicing Agreement which continues unremedied for
thirty days after the giving of written notice of such failure to the Master
Servicer by the Bond Trustee or the Issuer; and (iv) certain events of
insolvency, readjustment of debt, marshalling of assets and liabilities or
similar proceeding and certain actions by or on behalf of the Master Servicer
indicating its insolvency, reorganization or inability to pay its obligations.
RIGHTS UPON SERVICING DEFAULT
If a Servicing Default under a Master Servicing Agreement shall have
occurred and be continuing, the Bond Trustee may terminate all of the rights and
obligations of the Master Servicer under such Master Servicing Agreement,
including the Master Servicer's rights to receive any Master Servicing Fees.
Upon such termination, the Bond Trustee, as Stand-by Master Servicer, or any
Successor Master Servicer duly appointed by the Bond Trustee will succeed to all
the responsibilities, duties and liabilities of the Master Servicer under such
Master Servicing Agreement and will be entitled to similar compensation
arrangements. Neither the Issuer nor the Bond Trustee shall have any right to
waive any Servicing Default, except under certain circumstances specified in the
Master Servicing Agreement.
AMENDMENT OF MASTER SERVICING AGREEMENT
A Master Servicing Agreement with respect to any Series of Bonds secured by
Pledged Mortgages may not be amended, changed, modified, terminated or
discharged, except by an instrument in writing signed by all parties thereto,
and with prior written notice to any applicable Mortgage Insurer.
THE INDENTURE
The following is a general summary of certain provisions of the Indenture
for each Series of Bonds not described elsewhere in this Prospectus. The
summaries are qualified in their entirety by reference to the provisions of the
Indenture. Where particular provisions or terms used in the Indenture are
referred to, the
62
<PAGE> 158
actual provisions (including definitions of terms) are incorporated by reference
as part of such summaries. The Indenture relating to each Series of Bonds will
be filed with the Securities and Exchange Commission within fifteen days of the
closing of the sale of such Series of Bonds.
GENERAL
The Indenture does not limit the amount of Bonds that can be issued
thereunder and provides that Bonds may be issued up to the aggregate principal
amount authorized from time to time by the Issuer.
MODIFICATION OF INDENTURE
With the consent of the holders of not less than 66 2/3% of the then
outstanding principal amount of the Class of Bonds of the related Series
specified in the related Prospectus Supplement to be the "Controlling Class",
the Bond Trustee and the Issuer may execute a supplemental indenture to add
provisions to, or change in any manner or eliminate any provisions of, the
Indenture with respect to the Bonds of such Series or modify (except as provided
below) in any manner the rights of the Bondholders.
Without the consent of the holder of each outstanding Bond affected,
however, no supplemental indenture shall (a) change the Stated Maturity of the
principal of, or any installment of interest on, any Bond or reduce the
principal amount thereof, the interest rate specified thereon or the redemption
price with respect thereto, or change the earliest date on which any Bond may be
redeemed at the option of the Issuer, or any place of payment where, or the coin
or currency in which, any affected Bond or any interest thereon is payable, or
impair the right to institute suit for the enforcement of the provisions of the
Indenture regarding payment, (b) reduce the percentage of the aggregate amount
of the outstanding Bonds, the consent of the holders of which is required for
any such supplemental indenture, or the consent of the holders of which is
required for any waiver of compliance with certain provisions of the Indenture
or certain defaults thereunder and their consequences provided for in the
Indenture, (c) modify the provisions of the Indenture specifying the
circumstances under which such a supplemental indenture may not change the
provisions of the Indenture without the consent of each outstanding Bond
affected thereby, or the provisions of the Indenture with respect to certain
remedies available in an Event of Default (as defined herein), except to
increase any percentage specified therein or to provide that certain other
provisions of the Indenture cannot be modified or waived without the consent of
the holder of each outstanding Bond affected thereby, (d) modify or alter the
provisions of the Indenture defining when Bonds are outstanding, (e) permit the
creation of any lien (other than certain permitted liens) ranking prior to or on
a parity with the lien of the Indenture with respect to any part of the property
subject to lien under the Indenture, or terminate the lien of the Indenture on
any property at any time subject thereto or deprive the holder of any Bond of
the security afforded by the lien of the Indenture (other than in connection
with a permitted substitution of Mortgage Collateral) or (f) modify any of the
provisions of the Indenture in such manner as to affect the calculation of the
debt service requirement for any Bond or the rights of the Bondholders to the
benefits of any provisions for the mandatory redemption of Bonds contained
therein. (Indenture, Section 9.02)
The Issuer and the Bond Trustee may also enter into supplemental
indentures, without obtaining the consent of Bondholders, to cure ambiguities or
make minor corrections, and to do such other things as would not adversely
affect the interests of Bondholders. (Indenture, Section 9.01)
EVENTS OF DEFAULT
An event of default (an "Event of Default") with respect to any Series of
Bonds is defined in the Indenture as being: (a) the failure (i) to pay any
principal of, or interest on, any Bond of such Series then due, (ii) if
applicable, to call for special redemption any Bonds that are required to be so
redeemed or (iii) to pay the redemption price of any Bonds called for
redemption; (b) a default in the observance of certain negative covenants in the
Indenture; (c) a default in the observance of any other covenant of the Issuer,
and the continuation of any such default for a period of 30 days after notice
thereof is given to the Issuer by the Bond Trustee or by the holders of more
than 50% in outstanding principal amount of the Controlling Class of Bonds of
such Series; (d) any representation or warranty made by the Issuer in the
Indenture or in any certificate
63
<PAGE> 159
delivered pursuant thereto being incorrect in a material respect as of the time
made, and the circumstances in respect of which such representation or warranty
is incorrect are not cured within 30 days after notice thereof is given to the
Issuer by the Bond Trustee or by the holders of more than 50% in outstanding
principal amount of the Controlling Class of Bonds of such Series; or (e)
certain events of bankruptcy, insolvency, receivership or reorganization of the
Issuer. (Indenture, Section 5.01)
RIGHTS UPON EVENTS OF DEFAULT
In case an Event of Default shall occur and be continuing with respect to a
Series of Bonds, the Bond Trustee or holders of more than 50% in outstanding
principal amount of the Controlling Class of Bonds of such Series may declare
the principal of such Series of Bonds to be due and payable. Such declaration
may under certain circumstances be rescinded by the holders of a majority in
principal amount of the outstanding Bonds of such Series. (Indenture, Section
5.02)
Upon an Event of Default the Bond Trustee may, in its discretion, sell the
Collateral for such Series, in which event the Bonds of such Series will be
payable pro rata, without regard to their Stated Maturities, or in such other
manner as is specified in the related Prospectus Supplement, out of the
collections on, or the proceeds from the sale of, such Collateral and will, to
the extent permitted by applicable law, bear interest at the interest rate
specified in the Indenture. (Indenture, Section 5.08) If so specified in the
related Prospectus Supplement, following an Event of Default, if a Series of
Bonds has been declared to be due and payable, the Bond Trustee may, in its
discretion, refrain from selling the Collateral, including the Mortgage
Collateral, for such Series and continue to apply all amounts received on the
Collateral to payments due on the Bonds of such Series in accordance with their
terms, notwithstanding the acceleration of the maturity of such Bonds.
(Indenture, Section 5.05)
In case an Event of Default shall occur and be continuing, the Bond Trustee
shall be under no obligation to expend or risk its own funds or otherwise incur
any financial liability in the performance of its duties under the Indenture if
it has reasonable grounds for believing that it has not been assured of adequate
security or indemnity. (Indenture, Section 6.01(e)) Subject to such provisions
for indemnification and certain limitations contained in the Indenture, the
holders of a majority in principal amount outstanding of the Controlling Class
of outstanding Bonds of a Series shall have the right to direct the time, method
and place of conducting any proceeding for any remedy available to the Bond
Trustee or exercising any trust or power conferred on the Bond Trustee with
respect to the Bonds of such Series; and the holders of a majority in principal
amount of the Controlling Class of Bonds of a Series then outstanding may, in
certain cases, waive any default with respect thereto, except a default in
payment of principal or interest or a default in respect of a covenant or
provision of the Indenture that cannot be modified without the consent of each
holder of Bonds affected. (Indenture, Sections 5.14 and 5.15)
No holder of Bonds will have the right to institute any proceeding with
respect to the Indenture, unless (a) such holder previously has given to the
Bond Trustee written notice of an Event of Default, (b) the holders of more than
50% in outstanding principal amount of the Controlling Class of Class of Bonds
of the Series have made written request upon the Bond Trustee to institute such
proceedings in its own name as Bond Trustee and have offered the Bond Trustee
indemnity in full, (c) the Bond Trustee has for 60 days neglected or refused to
institute any such proceeding and (d) no direction inconsistent with such
written request has been given to the Bond Trustee during such 60-day period by
the holders of a majority in principal amount of the outstanding Bonds of such
Series. (Indenture, Section 5.09)
CERTAIN COVENANTS OF THE ISSUER
The Issuer covenants in the Indenture, among other matters, that it will
not (a) sell, exchange or otherwise dispose of any portion of the Collateral for
a Series of Bonds except as expressly permitted by the Indenture or the Master
Servicing Agreement, (b) amend Sections 2.03 or 11.01 of the Issuer's Deposit
Trust Agreement without the consent of the holders of 66 2/3% in outstanding
principal amount of each Class of Bonds affected thereby or (c) incur, assume or
guarantee any indebtedness other than in connection with the issuance of the
Bonds. (Indenture, Section 3.09) Section 2.03 of the Issuer's Deposit Trust
Agreement
64
<PAGE> 160
provides that the trust shall not have the power to perform any act or engage in
any business whatsoever except to issue and administer the Bonds of a Series, to
receive and own the Collateral, to maintain and administer the Collateral, to
pledge the Collateral to support such Bonds pursuant to the Indenture and to
take certain other actions incidental thereto. Section 11.01 of the Issuer's
Deposit Trust Agreement prohibits the amendment of the Deposit Trust Agreement
if the Owner Trustee determines that such amendment will adversely affect any
right, duty or liability of, or immunity or indemnity in favor of, the Owner
Trustee under the Issuer's Deposit Trust Agreement, or will cause or result in
any conflict with or breach of any terms of, or default under, the charter
documents or bylaws of the Owner Trustee or any document to which the Owner
Trustee is a party.
ISSUER'S ANNUAL COMPLIANCE STATEMENT
The Issuer will be required to file annually with the Bond Trustee a
written statement as to fulfillment of its obligations under the Indenture.
(Indenture, Section 3.10)
BOND TRUSTEE'S ANNUAL REPORT
The Bond Trustee will be required to mail each year to all Bondholders a
brief report relating to its eligibility and qualifications to continue as the
Bond Trustee under the Indenture, any amounts advanced by it under the
Indenture, the amount, interest rate and maturity date of certain indebtedness
owing by the Issuer to the Bond Trustee in its individual capacity, the property
and funds physically held by the Bond Trustee as such, and any action taken by
it which materially affects the Bonds and which has not been previously
reported. (Indenture, Section 7.03)
SATISFACTION AND DISCHARGE OF INDENTURE
The Indenture will be discharged with respect to the Collateral securing
the Bonds of a Series upon the delivery to the Bond Trustee for cancellation of
all of the Bonds of such Series or, with certain limitations, upon deposit with
the Bond Trustee of funds sufficient for the payment in full of all of the Bonds
of such Series. (Indenture, Section 4.01)
REPORT BY BOND TRUSTEE TO BONDHOLDERS
On each Payment Date, the Bond Trustee will send a report to each
Bondholder setting forth the amount of such payment representing interest, the
amount thereof, if any, representing principal, the amount of any related
Advance and the outstanding principal amount of Bonds of each Class (the
aggregate principal amount of the Bonds of each Class in the case of holders of
Bonds on which payments of interest only are then being made) after giving
effect to the payments made on such Payment Date. (Indenture, Section 8.06)
THE BOND TRUSTEE
The Bond Trustee under each Indenture will be identified in the related
Prospectus Supplement.
CERTAIN LEGAL ASPECTS OF PLEDGED MORTGAGES
The following discussion contains general summaries of certain legal
aspects of mortgage loans. Because such legal aspects are governed primarily by
applicable state law (which laws may differ substantially from state to state),
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 Mortgaged
Properties may be located. The summaries are qualified in their entirety by
reference to the applicable federal and state laws governing the Pledged
Mortgages.
GENERAL
The Pledged Mortgages will consist of notes and either mortgages, deeds of
trust, security deeds or deeds to secure debts, depending upon the prevailing
practice in the state in which the underlying Mortgaged
65
<PAGE> 161
Property is located. Deeds of trust are used almost exclusively in California
instead of mortgages. A mortgage creates a lien upon the real property
encumbered by the mortgage, which lien is generally not prior to the lien for
real estate taxes and assessments. Priority between mortgages depends on their
terms and generally on the order of recording with a state or county office.
There are two parties to a mortgage: the mortgagor, who is the borrower and
owner of the mortgaged property; and the mortgagee, who is the lender. Under a
mortgage instrument, the mortgagor delivers to the mortgagee (i) a note or bond
evidencing the loan and (ii) the mortgage. Although a deed of trust is similar
to a mortgage, a deed of trust has three parties: the borrower-property owner,
called the trustor (similar to a mortgagor); a lender (similar to a mortgagee)
called the beneficiary; and a third-party grantee called the trustee. Under a
deed of trust, the borrower grants the property, irrevocably until the debt is
paid, in trust, generally with a power of sale, to the trustee to secure payment
of the obligation. A security deed and a deed to secure debt are special types
of deeds which indicate on their face that they are granted to secure an
underlying debt. By executing a security deed or deed to secure debt, the
grantor conveys title to, as opposed to merely creating a lien upon, the subject
property to the grantee until such time as the underlying debt is repaid. The
trustee's authority under a deed of trust, the mortgagee's authority under a
mortgage and the grantee's authority under a security deed or deed to secure a
debt are governed by law, and, with respect to some deeds of trust, the
directions of the beneficiary.
COOPERATIVES. Certain of the Pledged Mortgages may be Cooperative Loans.
The Cooperative owns all the real property that comprises the project, including
the land, separate dwelling units and all common areas. The Cooperative is
directly responsible for project management and, in most cases, payment of real
estate taxes and hazard and liability insurance. If there is a blanket mortgage
on the Cooperative and/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 occupant under proprietary leases or
occupancy agreements to which that 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 and its consequent
inability to make such final payment could lead to foreclosure by the mortgagee
providing the financing. A foreclosure in either event by the holder of the
blanket mortgage could eliminate or significantly diminish the value of any
collateral held by the lender who financed the purchase by an individual
tenant-stockholder of Cooperative shares or, in the case of any Mortgage
Collateral securing a Series of Bonds that includes Cooperative Loans, the
collateral securing the Cooperative Loans.
The Cooperative is owned by tenant-stockholders who, through ownership of
stock, shares or membership certificates in the corporation, receive proprietary
leases or occupancy agreements which confer exclusive rights to occupy specific
units. Generally, a tenant-stockholder of a Cooperative must make a monthly
payment to the Cooperative representing such tenant-stockholder's pro rata share
of the Cooperative's payments for its blanket mortgage, real property taxes,
maintenance expenses and other capital or ordinary expenses. An ownership
interest in a Cooperative and accompanying rights is financed through a
Cooperative share loan evidenced by a promissory note and secured by a security
interest in the occupancy agreement or proprietary lease and in the related
Cooperative shares. The lender takes possession of the share certificate and a
counterpart of the proprietary lease or occupancy agreement, and a financing
statement covering the proprietary lease or occupancy agreement and the
Cooperative shares if 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 Cooperative
shares.
66
<PAGE> 162
JUNIOR MORTGAGES
Certain of the Pledged Mortgages may be secured by junior mortgages or
deeds of trust, which are junior to senior mortgages or deeds of trust which are
not part of the Mortgage Collateral. The rights of the Bondholders as the
holders of a junior deed of trust or a junior mortgage are subordinate in lien
priority and in payment priority to those of the holder of the senior mortgage
or deed of trust, including the prior rights of the senior mortgagee or
beneficiary to receive and apply hazard insurance and condemnation proceeds and,
upon default of the mortgagor, to cause a foreclosure on the property. Upon
completion of the foreclosure proceedings by the holder of the senior mortgage
or the sale pursuant to the deed of trust, the junior mortgagee's or junior
beneficiary's lien will be extinguished unless the junior lienholder satisfies
the defaulted senior loan or asserts its subordinate interest in a property in
foreclosure proceedings. See " -- Foreclosure/Repossession" below.
Furthermore, the terms of the junior mortgage or deed of trust are
subordinate to the terms of the senior mortgage or deed of trust. In the event
of a conflict between the terms of the senior mortgage or deed of trust and the
junior mortgage or deed of trust, the terms of the senior mortgage or deed of
trust will govern generally. Upon a failure of the mortgagor or trustor to
perform any of its obligations, the senior mortgagee or beneficiary, subject to
the terms of the senior mortgage or deed of trust, may have the rights to
perform the obligation itself. Generally, all sums so expended by the mortgagee
or beneficiary become part of the indebtedness secured by the mortgage or deed
of trust. To the extent a senior mortgagee expends such sums, such sums will
generally have priority over all sums due under the junior mortgage.
FORECLOSURE/REPOSSESSION
DEED OF TRUST. 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 certain states,
such foreclosure also may be accomplished by judicial action in the manner
provided for foreclosure of mortgages. In addition to any notice requirements
contained in a deed of trust, in some states, such as California, the trustee
must record a notice of default and send a copy to the borrower-trustor and 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, including California, the borrower-trustor has the right to reinstate
the loan at any time following default until shortly before the trustee's sale.
In general, the borrower, or any other person having a junior encumbrance on the
real estate, may, during a statutorily prescribed reinstatement period, cure a
monetary default by paying the entire amount in arrears plus other designated
costs and expenses incurred in enforcing the obligation. Generally, state law
controls the amount of foreclosure expenses and costs, including attorney's
fees, which may be recovered by a lender. After the reinstatement period has
expired without the default having been cured, the borrower or junior lienholder
no longer has the right to reinstate the loan and must pay the loan in full to
prevent the scheduled foreclosure sale. 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, including California, published for a specific period
of time in one or more newspapers. In addition, some state laws require that a
copy of the notice of sale be posted on the property and sent to all parties
having an interest of record in the real property. In California, the entire
process from recording a notice of default to a non-judicial sale usually takes
four to five months.
MORTGAGES. Foreclosure of a mortgage is generally accomplished by judicial
action. The action is initiated by the service of legal pleadings upon all
parties having an interest in the real property. Delays in completion of the
foreclosure may occasionally result from difficulties in locating necessary
parties. Judicial foreclosure proceedings are often not contested by any of the
parties. When the mortgagee's right to foreclosure is contested, the legal
proceedings necessary to resolve the issue can be time consuming. After the
completion of a judicial foreclosure proceeding, the court generally issues a
judgment of foreclosure and appoints a referee or other court officer to conduct
the sale of the property. In some states, mortgages may also be foreclosed by
advertisement, pursuant to a power of sale provided in the mortgage.
67
<PAGE> 163
Although foreclosure sales are typically public sales, frequently no third
party purchaser bids in excess of the lender's lien because of the difficulty of
determining the exact status of title to the property, the possible
deterioration of the property during the foreclosure proceedings and a
requirement that the purchaser pay for the property in cash or by cashier's
check. Thus the foreclosing lender often purchases the property from the trustee
or referee for an amount equal to the principal amount outstanding under the
loan, accrued and unpaid interest and the expenses of foreclosure in which event
the mortgagor's debt will be extinguished, or the lender may purchase for a
lesser amount in order to preserve its right against a borrower to seek a
deficiency judgment in states where such judgment is available. Thereafter,
subject to the right of the borrower in some states to remain in possession
during the redemption period, the lender will assume the burden of ownership,
including obtaining hazard insurance and making such repairs at its own expense
as are necessary to render the property suitable for sale. The lender will
commonly obtain the services of a real estate broker and pay the broker's
commission in connection with the sale of the property. Depending upon market
conditions, the ultimate proceeds of the sale of the property may not equal the
lender's investment in the property. See "SECURITY FOR THE BONDS" herein.
A junior mortgagee may not foreclose on the property securing a junior
mortgage unless it forecloses subject to the senior mortgages, in which case it
must either pay the entire amount due on the senior mortgages to the senior
mortgagees prior to or at the time of the foreclosure sale or undertake the
obligation to make payments on the senior mortgages in the event the mortgagor
is in default thereunder, in either event adding the amounts expended to the
balance due on the junior loan, and may be subrogated to the rights of the
senior mortgagees. In addition, in the event that the foreclosure of a junior
mortgage triggers the enforcement of a "due-on-sale" clause, the junior
mortgagee may be required to pay the full amount of the senior mortgages to the
senior mortgagees. Accordingly, with respect to those mortgage loans which are
junior mortgage loans, if the lender purchases the property, the lender's title
will be subject to all senior liens and claims and certain governmental liens.
The proceeds received by the referee or trustee from the sale are applied first
to the costs, fees and expenses of sale and then in satisfaction of the
indebtedness secured by the mortgage or deed of trust under which the sale was
conducted. Any remaining proceeds are generally payable to the holders of junior
mortgages or deeds of trust and other liens and claims in order of their
priority, whether or not the borrower is in default. Any additional proceeds are
generally payable to the mortgagor or trustor. The payment of the proceeds to
the holders of junior mortgages may occur in the foreclosure action of the
senior mortgagee or may require the institution of separate legal proceeds.
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 certificate of incorporation and
bylaws, as well as the proprietary lease or occupancy agreement, and may be
cancelled by the Cooperative for failure by the tenant-stockholder to pay rent
or other obligations or charges owed by such tenant-stockholder, including
mechanics' liens against the cooperative apartment building incurred by such
tenant-stockholder. The proprietary lease or occupancy agreement generally
permits the Cooperative to terminate such lease or agreement in the event an
obligor fails to make payments or defaults in the performance of covenants
required thereunder. Typically, the lender and the Cooperative enter into a
recognition agreement which establishes the rights and obligations of both
parties in the event of a default by the tenant-stockholder on its obligations
under the proprietary lease or occupancy agreement. A default by the
tenant-stockholder under the proprietary lease or occupancy agreement will
usually constitute a default under the security agreement between the lender and
the tenant-stockholder.
The recognition agreement generally provides that, in the event that the
tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the Cooperative will take no action to terminate such
68
<PAGE> 164
lease or agreement until the lender has been provided with an opportunity to
cure the default. The recognition agreement typically provides that if the
proprietary lease or occupancy agreement is terminated, the Cooperative will
recognize the lender's lien against proceeds from the sale of the Cooperative
apartment, subject, however, to the Cooperative's right to sums due under such
proprietary lease or occupancy agreement. The total amount owed to the
Cooperative by the tenant-stockholder, which the lender generally cannot
restrict and does not monitor, could reduce the value of the collateral below
the outstanding principal balance of the Cooperative Loan and accrued and unpaid
interest thereon.
Recognition agreements also provide that in the event of a foreclosure on a
Cooperative Loan, the lender must obtain the approval or consent of the
Cooperative as required by the proprietary lease before transferring the
Cooperative shares or assigning the proprietary lease. Generally, the lender is
not limited in any rights it may have to dispossess the tenant-stockholders.
In some states, foreclosure on the Cooperative shares is accomplished by a
sale in accordance with the provisions of Article 9 of the Uniform Commercial
Code (the "UCC") and the security agreement relating to those shares. Article 9
of the UCC requires that a sale be conducted in a "commercially reasonable"
manner. Whether a foreclosure sale has been conducted in a "commercially
reasonable" manner will depend on the facts in each case. In determining
commercial reasonableness, a court will look to the notice given the debtor and
the method, manner, time, place and terms of the foreclosure. Generally, a sale
conducted according to the usual practice of banks selling similar collateral
will be considered reasonably conducted.
Article 9 of the UCC provides that the proceeds of the sale will be applied
first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to reimbursement
is subject to the right of the 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. See " -- Anti-Deficiency Legislation and Other
Limitations on Lenders" below.
In the case of foreclosure on a building which was converted from a rental
building to a building owned by a Cooperative under a non-eviction plan, some
states require that a purchaser at a foreclosure sale take the property subject
to rent control and rent stabilization laws which apply to certain tenants who
elected to remain in the building but who did not purchase shares in the
Cooperative when the building was so converted.
RIGHTS OF REDEMPTION
In some states, after sale pursuant to a deed of trust or foreclosure of a
mortgage, the borrower and certain foreclosed junior lienholders are given a
statutory period in which to redeem the property from the foreclosure sale. In
certain other states, including California, this right of redemption applies
only to sales following judicial foreclosure, and not to sales pursuant to a
non-judicial power of sale. In most states where the right of redemption is
available, statutory redemption may occur upon a payment of the foreclosure
purchase price, accrued interest and taxes. In some states, the right to redeem
is an equitable right. The effect of a right of redemption is to diminish the
ability of the lender to sell the foreclosed property. The exercise of a right
of redemption would defeat the title of any purchaser at a foreclosure sale, or
of any purchaser from the lender subsequent to judicial foreclosure or sale
under a deed of trust. Consequently, the practical effect of the redemption
right is to force the lender to retain the property and pay the expenses of
ownership until the redemption period has run.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Certain states have imposed statutory restrictions that limit the remedies
of a beneficiary under a deed of trust or a mortgagee under a mortgage. In some
states, including California, 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 is a personal
judgment against the former borrower equal in most cases to the difference
between the amount due to the lender and the current fair market value of the
property at the time of the foreclosure sale. As a result of these prohibitions,
it is anticipated that in most instances the
69
<PAGE> 165
Master Servicer will utilize the non-judicial foreclosure remedy and will not
seek deficiency judgments against defaulting mortgagors.
Some state statutes may require the beneficiary or mortgagee to exhaust the
security afforded under a deed of trust or mortgage by foreclosure in an attempt
to satisfy the full debt before bringing a personal action against the borrower.
In certain other states, the lender has the option of bringing a personal action
against the borrower on the debt without first exhausting such security;
however, in some of these states, the lender, following judgment on such
personal action, may be deemed to have elected a remedy and may be precluded
from exercising remedies with respect to the security. Consequently, the
practical effect of the election requirement, when applicable, is that lenders
will usually proceed first against the security rather than bringing a personal
action against the borrower.
In some states, exceptions to the anti-deficiency statutes are provided for
in certain instances where the value of the lender's security has been impaired
by acts or omissions of the borrower, for example, in the event of waste of the
property. Finally, other statutory provisions limit any deficiency judgment
against the former borrower following a foreclosure sale to the excess of the
outstanding debt over the fair market value of the property at the time of the
public sale. The purpose of these statutes is generally to prevent a beneficiary
or a mortgagee from obtaining a large deficiency judgment against the former
borrower as a result of low or no bids at the foreclosure sale.
In addition to anti-deficiency and related legislation, numerous other
federal and state statutory provisions, including the federal bankruptcy laws,
the federal Soldiers' and Sailors' Civil Relief Act of 1940 and state laws
affording relief to debtors, may interfere with or affect the ability of the
secured mortgage lender to realize upon its security. For example, in a
proceeding under the federal Bankruptcy Code, a lender may not foreclose on a
mortgaged property without the permission of the bankruptcy court. In certain
instances, a rehabilitation plan proposed by the debtor may reduce the secured
indebtedness to the value of the mortgaged property as of the date of the
commencement of the bankruptcy, rendering the lender a general unsecured
creditor for the difference, and also may reduce the monthly payments due under
such mortgage loan, change the rate of interest and alter the mortgage loan
repayment schedule. The effect of any such proceedings under the federal
Bankruptcy Code, including but not limited to any automatic stay, could result
in delays in receiving payments on the Pledged Mortgages securing a Series of
Bonds and possible reductions in the aggregate amount of such payments.
The federal 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 mortgage 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 the loans.
Generally, Article 9 of the UCC governs foreclosure on Cooperative shares
and the related proprietary lease or occupancy agreement. Some courts have
interpreted section 9-504 of the UCC 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.
ENVIRONMENTAL RISKS
Real property pledged as security to a lender may be subject to unforeseen
environmental risks. Under the laws of certain states, contamination of a
property may give rise to a lien on the property to assure the payment of the
costs of clean-up. In several states, such a lien has priority over the lien of
an existing mortgage against such property. In addition, under the federal
Comprehensive Environmental Response, Compensation and Liability Act of 1980
("CERCLA"), the United States Environmental Protection Agency ("EPA") may impose
a lien on property where the EPA has incurred cleanup costs. However, a CERCLA
lien is subordinate to pre-existing, perfected security interests.
70
<PAGE> 166
Under the laws of some states, and under CERCLA, it is conceivable that a
secured lender may be held liable as an "owner or operator" for the costs of
addressing releases or threatened releases of hazardous substances at a
Mortgaged Property even though the environmental damage or threat was caused by
a prior or current owner or operator or a third-party. CERCLA imposes liability
for such costs on any and all "responsible parties," including "owners or
operators." However, CERCLA excludes from the definition of "owner or operator"
a secured creditor "who without participating in the management of the
facility," holds indicia of ownership primarily to protect its security interest
(the "secured creditor exclusion"). Thus, if a lender's activities begin to
encroach on the actual management of a contaminated facility or property, the
lender may incur liability as an "owner or operator" under CERCLA. Similarly, if
a lender forecloses and takes title to a contaminated facility or property, the
lender may incur CERCLA liability in various circumstances, including, but not
limited to, when it holds the facility or property as an investment (including
leasing the facility or property to a third party), or fails to market the
property in a timely fashion.
Whether actions taken by a lender would constitute participation in the
management of a mortgaged property, or the business of a borrower, so as to
render the secured creditor exemption unavailable to a lender has been a matter
of judicial interpretation of the statutory language, and court decisions have
been inconsistent. In 1990, the Court of Appeals for the Eleventh Circuit
suggested that the mere capacity of the lender to influence a borrower's
decisions regarding disposal of hazardous substances was sufficient
participation in the management of the borrower's business to deny the
protection of the secured creditor exemption to the lender.
This ambiguity appears to have been resolved by the enactment of the Asset
Conservation, Lender Liability and Deposit Insurance Protection Act of 1996,
which was signed into law by President Clinton on September 30, 1996. The new
legislation provides that in order to be deemed to have participated in the
management of a mortgaged property, a lender must actually participate in the
operational affairs of the property or the borrower. The legislation also
provides that participation in the management of the property does not include
"merely having the capacity to influence, or unexercised right to control"
operations. Rather, a lender will lose the protection of the secured creditor
exemption only if it exercises decision-making control over the day-to-day
management of all operational functions of the mortgaged property.
If a lender is or becomes liable, it can bring an action for contribution
against any other "responsible parties," including a previous owner or operator,
who created the environmental hazard, but those persons or entities may be
bankrupt or otherwise judgment proof. The costs associated with environmental
cleanup may be substantial. It is conceivable that such costs arising from the
circumstances set forth above would become a liability of the Issuer and
occasion a loss to Bondholders.
CERCLA does not apply to petroleum products, and the secured creditor
exclusion does not govern liability for cleanup costs under federal laws other
than CERCLA, in particular Subtitle I of the federal Resource Conservation and
Recovery Act ("RCRA"), which regulates underground petroleum storage tanks
(except heating oil tanks). The EPA has adopted a lender liability rule for
underground storage tanks under Subtitle I of RCRA. Under such rule, a holder of
a security interest in an underground storage tank or real property containing
an underground storage tank is not considered an operator of the underground
storage tank as long as petroleum is not added to, stored in or dispensed from
the tank. In addition, under the Asset Conservation, Lender Liability and
Deposit Insurance Protection Act of 1996, the protections accorded to lenders
under CERCLA are also accorded to the holders of security interests in
underground storage tanks. It should be noted, however, that liability for
cleanup of petroleum contamination may be governed by state law, which may not
provide for any specific protection for secured creditors.
Except as otherwise specified in the applicable Prospectus Supplement, at
the time the Pledged Mortgages or the mortgage loans underlying the
Certificates, as the case may be, were originated, no environmental assessment
or a very limited environmental assessment of the Mortgage Properties or the
real property constituting security for such mortgage loans, respectively, was
conducted.
71
<PAGE> 167
DUE-ON-SALE CLAUSES
Unless otherwise provided in the related Prospectus Supplement, each
Pledged Mortgage will contain a due-on-sale clause which will generally provide
that if the mortgagor or obligor sells, transfers or conveys the Mortgaged
Property, the loan may be accelerated by the mortgagee. In recent years, court
decisions and legislative actions have placed substantial restriction on the
right of lenders to enforce such clauses in many states. For instance, the
California Supreme Court in August 1978 held that due-on-sale clauses were
generally unenforceable. However, the Garn-St Germain Depository Institutions
Act of 1982 (the "Garn-St Germain Act"), subject to certain exceptions, preempts
state constitutional, statutory and case law prohibiting the enforcement of
due-on-sale clauses. As a result, due-on-sale clauses have become generally
enforceable except in those states whose legislatures exercised their authority
to regulate the enforceability of such clauses with respect to mortgage loans
that were (i) originated or assumed during the "window period" under the Garn-St
Germain Act which ended in all cases not later than October 15, 1982, and (ii)
originated by lenders other than national banks, federal savings institutions
and federal credit unions. FHLMC has taken the position in its published
mortgage servicing standards that, out of a total of eleven "window period
states," five states (Arizona, Michigan, Minnesota, New Mexico and Utah) have
enacted statutes extending, for various terms and for varying periods, the
prohibition on enforcement of due-on-sale clauses with respect to certain
categories of window period loans. Also, the Garn-St Germain Act does
"encourage" lenders to permit assumption of loans at the original rate of
interest or at some other rate less than the average of the original rate and
the market rate.
As to loans secured by an owner-occupied residence, the Garn-St Germain Act
sets forth nine specific instances in which a mortgagee covered by the Garn-St
Germain Act may not exercise its rights under a due-on-sale clause,
notwithstanding the fact that a transfer of the property may have occurred. The
inability to enforce a due-on-sale clause may result in transfer of the related
Mortgaged Property to an uncreditworthy person, which could increase the
likelihood of default or may result in a mortgage bearing an interest rate below
the current market rate being assumed by a new home buyer, which may affect the
average life of the Pledged Mortgages and the number of Pledged Mortgages which
may extend to maturity.
ENFORCEABILITY OF PREPAYMENT CHARGES AND LATE PAYMENT FEES
Forms of notes, mortgages and deeds of trust used by lenders may contain
provisions obligating the borrower to pay a late charge if payments are not
timely made, and in some circumstances may provide for prepayment fees or
penalties if the obligation is paid prior to maturity. In certain states, there
are or may be specific limitations upon the late charges which a lender may
collect from a borrower for delinquent payments. Certain states also limit the
amounts that a lender may collect from a borrower as an additional charge if the
loan is prepaid.
Under certain state laws, prepayment charges may not be imposed after a
certain period of time following the origination of mortgage loans with respect
to prepayments on loans secured by liens encumbering owner-occupied residential
properties. Since many of the Mortgaged Properties will be owner-occupied, it is
anticipated that prepayment charges may not be imposed with respect to many of
the Pledged Mortgages. The absence of such a restraint on prepayment,
particularly with respect to Fixed Rate Pledged Mortgages having higher interest
rates, may increase the likelihood of refinancing or other early retirement of
such loans or contracts. Late charges and prepayment fees are typically retained
by servicers as additional servicing compensation.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980, enacted in March 1980 ("Title V"), provides that state usury
limitations shall not apply to certain types of residential first mortgage loans
originated by certain lenders after March 31, 1980. The Office of Thrift
Supervision, as successor to the Federal Home Loan Bank Board, is authorized to
issue rules and regulations and to publish interpretations governing
implementation of Title V. The statute authorized the states to reimpose
interest rate limits by adopting, before April 1, 1983, a law or constitutional
provision which expressly rejects an application
72
<PAGE> 168
of the federal law. In addition, even where Title V is not so rejected, any
state is authorized by the law to adopt a provision limiting discount points or
other charges on mortgage loans covered by Title V. Certain states have taken
action to reimpose interest rate limits and/or to limit discount points or other
charges.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT
Generally, under the terms of the Soldiers' and Sailors' Civil Relief Act
of 1940, as amended (the "Relief Act"), a borrower who enters military service
after the origination of such borrower's mortgage loan (including a borrower who
is a member of the National Guard or is in reserve status at the time of the
origination of the mortgage loan and is later called to active duty) may not be
charged interest above an annual rate of 6% during the period of such borrower's
active duty status, unless a court orders otherwise upon application of the
lender. It is possible that such interest rate limitation could have an effect,
for an indeterminate period of time, on the ability of the Master Servicer to
collect full amounts of interest on certain of the Pledged Mortgages. Any
shortfall in interest collections resulting from the application of the Relief
Act could result in losses to the holders of the Bonds. In addition, the Relief
Act imposes limitations which would impair the ability of the Master Servicer to
foreclose on an affected Pledged Mortgage during the borrower's period of active
duty status. Thus, in the event that such a Pledged Mortgage goes into default,
there may be delays and losses occasion by the inability to realize upon the
Mortgaged Property in a timely fashion.
SUBORDINATE FINANCING
When the mortgagor encumbers mortgaged property with one or more junior
liens, the senior lender is subjected to additional risk. First, the mortgagor
may have difficulty servicing and repaying multiple loans. In addition, if the
junior loan permits recourse to the mortgagor (as junior loans often do) and the
senior loan does not, a mortgagor may be more likely to repay sums due on the
junior loan than those on the senior loan. Second, acts of the senior lender
that prejudice the junior lender or impair the junior lender's security may
create a superior equity in favor of the junior lender. For example, if the
mortgagor and the senior lender agree to an increase in the principal amount of
or the interest rate payable on the senior loan, the senior lender may lose its
priority to the extent an existing junior lender is harmed or the mortgagor is
additionally burdened. Third, if the mortgagor defaults on the senior loan
and/or any junior loan or loans, the existence of junior loans and actions taken
by junior lenders can impair the security available to the senior lender and can
interfere with or delay the taking of action by the senior lender. Moreover, the
bankruptcy of a junior lender may operate to stay foreclosure or similar
proceeds by the senior lender.
FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the anticipated material federal income tax
consequences of the purchase, ownership and disposition of the Bonds. This
summary has been reviewed by Giancarlo & Gnazzo, A Professional Corporation, tax
counsel to the Company and the Issuer, and, to the extent that it states legal
conclusions, represents the opinion of such tax counsel, subject to the
limitations and qualifications set forth herein and in the applicable Prospectus
Supplement. The summary is based on the Internal Revenue Code of 1986, as
amended (the "Code"), regulations, rulings and decisions in effect as of the
date of this Prospectus, all of which are subject to change. The summary also
takes into account regulations issued on February 2, 1994, regarding the
taxation of debt instruments with original issue discount (the "OID
Regulations"). The summary does not purport to address federal income tax
consequences applicable to all categories of investors, some of which may be
subject to special rules. In addition, the summary is limited to investors who
will hold the Bonds as "capital assets" (generally, property held for
investment) as defined in Section 1221 of the Code. Investors should consult
their own tax advisors in determining the federal, state, local and any other
tax consequences to them of the purchase, ownership and disposition of the
Bonds. As applied to any particular Bond, the summary is subject to further
discussion or change as provided in the related Prospectus Supplement.
73
<PAGE> 169
CLASSIFICATION OF THE ISSUER AND THE BONDS
No regulations, published rulings or judicial decisions discuss the
characterization for federal income tax purposes of securities with terms
substantially the same as the Bonds. Upon the issuance of each Series of Bonds,
however, Giancarlo & Gnazzo, A Professional Corporation, tax counsel to the
Issuer, will advise the Issuer that in its opinion such Bonds will be treated
for federal income tax purposes as indebtedness and not as an ownership interest
in the Collateral, or an equity interest in the Issuer or in a separate
association taxable as a corporation.
Under the taxable mortgage pool ("TMP") rules in the Code, certain entities
that issue debt secured by real estate mortgages are subject to special tax
treatment that can result in entity level federal income taxation. An entity
will be classified as a TMP if it does not make an election to be classified as
a "real estate mortgage investment conduit" (a "REMIC") and (i) substantially
all of its assets consist of debt obligations and more than 50% of such debt
obligations are real estate mortgages or interests therein, (ii) the entity
issues debt obligations with two or more maturities and (iii) payments on the
debt obligations issued by it bear a relationship to payments received on the
debt obligations owned by it. In certain situations, pools of assets within an
entity can also be treated as separate TMPs.
The Company does not intend to make an election for any Issuer to be
classified as a REMIC. Further, the Company intends to structure all issuances
of Bonds, unless otherwise specified in the related Prospectus Supplement, so as
to not constitute a TMP. However, it is possible that the Issuer or a portion of
the Issuer relating to a specific pool of Mortgage Collateral and the Bonds
related thereto could be treated as a TMP. If an Issuer was classified as a TMP,
it is anticipated that it would nonetheless qualify as a "qualified REIT
subsidiary" (within the meaning of Section 856 (i) of the Code) and thus would
not be subject to entity level federal income taxes. If so, only Redwood Trust
or its shareholders would be required to include in income any "excess inclusion
income" generated by the TMP. On the other hand, if the Issuer was classified as
a TMP but did not maintain its status as a "qualified REIT subsidiary", it would
not be permitted to be included in the consolidated federal income tax return of
any other corporation and its net income would be subject to entity level
federal income taxes. Each Prospectus Supplement will specify whether or not the
Issuer for that Series of Bonds is expected to be classified as a TMP. No
assurance can be given that any Issuer classified as a TMP will continue to
qualify as a "qualified REIT subsidiary" or that Redwood Trust will continue to
qualify as a REIT for federal income tax purposes.
Because the Bonds will be treated as indebtedness of the Issuer for federal
income tax purposes, (i) Bonds 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 Code Section 7701(a)(19)(C)(v),
(ii) interest on Bonds 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 Code Section 856(c)(3)(B), and
Bonds will not constitute "real estate assets" or "Government securities" within
the meaning of Code Section 856(c)(5)(A), and (iii) Bonds held by a regulated
investment company will not constitute "Government securities" within the
meaning of Code Section 851(b)(4)(A)(i).
INTEREST AND ORIGINAL ISSUE DISCOUNT
GENERAL. The Prospectus Supplement for each Series of Bonds will disclose
whether any Class of such Bonds is anticipated to be issued with "original issue
discount" within the meaning of Code Section 1273(a). Interest on any Class of
Bonds other than original issue discount will be includible in income by the
Holder thereof in accordance with such Holder's applicable method of accounting.
Holders of any Class of Bonds having original issue discount must generally
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 such
income. Each Issuer will indicate on the face of each Bond issued by it
information concerning the application of the original issue discount rules to
such Bond and certain other information that may be required. The Issuer will
report annually to the Internal Revenue Service (the "IRS") and to holders of
record of such Bonds information with respect to the original issue discount
accruing on such Bonds during the reporting period.
74
<PAGE> 170
Rules governing original issue discount are set forth in Code Sections 1271
through 1273, 1275 and 1281 through 1283. In addition, the discussion of federal
income tax consequences set forth below is based in part on the OID Regulations.
The Code or the OID Regulations either do not address, or are subject to varying
interpretations with respect to, several issues relevant to obligations, such as
the Bonds, that are subject to prepayment. Therefore, there is some uncertainty
as to the manner in which the original issue discount rules of the Code will be
applied to the Bonds.
ORIGINAL ISSUE DISCOUNT DEFINED. In general, each Bond will be treated as
a single installment obligation for purposes of determining the original issue
discount includible in a Bondholder's income. The amount of original issue
discount on such a Bond is the excess of the stated redemption price at maturity
of the Bond over its issue price. The issue price of a Bond is the initial
offering price to the public at which a substantial amount of the Bonds of that
Class are first sold to the public (excluding bond houses, brokers, underwriters
or wholesalers), generally as set forth on the cover page of the Prospectus
Supplement for a Series of Bonds. (The portion of the initial offering price
which consists of interest accrued on the Bonds from the date of issuance to the
Closing Date may, at the option of the Bondholder, be subtracted from the issue
price of the Bonds and treated as an offset of interest received on the first
Payment Date.) The stated redemption price at maturity of a Bond is equal to the
total of all payments to be made on the Bond other than "qualified stated
interest payments." "Qualified stated interest payments" are payments on the
Bonds which are paid at least annually and are based on either a fixed rate or a
"qualified variable rate." Under the OID Regulations, interest is treated as
payable at a "qualified variable rate" and not as contingent interest if,
generally, (i) such interest is unconditionally payable at least annually, (ii)
the issue price of the Bond does not exceed the total noncontingent principal
payments and (iii) interest is based on a "qualified floating rate," an
"objective rate," or a combination of "qualified floating rates" that do not
operate in a manner that significantly accelerates or defers interest payments
on such Bond. Generally, the stated redemption price at maturity of a Bond
(other than a Deferred Interest Bond or a Payment Lag Bond, as defined below) is
its stated principal amount; the stated redemption price at maturity of a
Deferred Interest Bond is the sum of all payments (regardless of how
denominated) scheduled to be received on such Bond under the Tax Prepayment
Assumption (as defined below). Any payment of interest that is not a qualified
stated interest payment is a "contingent interest payment." The related
Prospectus Supplement will discuss whether the payments of interest on a Bond
are qualified stated interest payments and the treatment for federal income tax
purposes of any contingent interest payments.
DE MINIMIS ORIGINAL ISSUE DISCOUNT. Notwithstanding the general definition
of original issue discount above, any original issue discount with respect to a
Bond will be considered to be zero if such discount is less than 0.25% of the
stated redemption price at maturity of the Bond multiplied by its weighted
average life (a "de minimis" amount). The weighted average life of a Bond for
this purpose is the sum of the following amounts (computed for each payment
included in the stated redemption price at maturity of the Bond): (i) the number
of complete years (rounded down for partial years) from the Closing Date until
the date on which each such payment is scheduled to be made under the Tax
Prepayment Assumption, multiplied by (ii) a fraction, the numerator of which is
the amount of the payment, and the denominator of which is the Bond's stated
redemption price at maturity. Bondholders generally must report de minimis
original issue discount pro rata as principal payments are received, and such
income will be capital gain if the Bond is held as a capital asset. However,
accrual method holders may elect to accrue all interest on a Bond, including de
minimis original issue discount and market discount and as adjusted by any
premium, under a constant yield method.
ACCRUAL OF ORIGINAL ISSUE DISCOUNT. The amount and rate of accrual of
original issue discount must be calculated based on a reasonable assumed
prepayment rate for the Pledged Mortgages, the mortgage loans underlying the
Certificates and/or other Mortgage Collateral securing the Bonds (the "Tax
Prepayment Assumption") and to prescribe a method for adjusting the amount and
rate of accrual of such discount. However, if such mortgage loans prepay at a
rate slower than the Tax Prepayment Assumption, no deduction for original issue
discount previously accrued, based on the Tax Prepayment Assumption, is allowed.
The Tax Prepayment Assumption will be determined in the manner prescribed by
regulations that have not yet been issued. It is anticipated that the
regulations will require that the Tax Prepayment Assumption be the prepayment
assumption that is used in determining the initial offering price of such Bonds.
The related
75
<PAGE> 171
Prospectus Supplement for each Series of Bonds will specify the Tax Prepayment
Assumption determined by the Issuer for the purposes of determining the amount
and rate of accrual of original issue discount. No representation is made that
the Mortgage Collateral will prepay at the Tax Prepayment Assumption or at any
other rate.
Generally, a Bondholder must include in gross income the sum of the "daily
portions," as determined below, of the original issue discount that accrues on a
Bond for each day the Bondholder holds that Bond, including the purchase date
but excluding the disposition date. In the case of an original holder of a Bond,
a calculation will be made of the portion of the original issue discount that
accrues during each successive period (or shorter period from date of original
issue) (an "accrual period") that ends on the day in the calendar year
corresponding to each of the Payment Dates on the Bonds (or the date prior to
each such date). This will be done, in the case of each full accrual period, by
adding (A) the present value at the end of the accrual period of all remaining
payments to be received (based on (i) the yield to maturity of the Bond at the
issue date, (ii) events (including actual prepayments) that have occurred prior
to the end of the accrual period, and (iii) the Tax Prepayment Assumption) and
(B) any payments received during such accrual period, other than payments of
qualified stated interest, and subtracting from that total the "adjusted issue
price" of the Bonds at the beginning of such accrual period. The adjusted issue
price of a Bond at the beginning of the initial accrual period is its issue
price; the adjusted issue price of a Bond at the beginning of a subsequent
accrual period is the adjusted issue price at the beginning of the immediately
preceding accrual period plus the amount of original issue discount allocable to
the accrual period and reduced by the amount of any payment other than a payment
of qualified stated interest made at the end of or during that accrual period.
The original issue discount accrued during such accrual period will then be
divided by the number of days in the period to determine the daily portion of
original issue discount for each day in the period. With respect to an initial
accrual period shorter than a full accrual period, the daily portions of
original issue discount must be determined according to any reasonable method,
provided that such method is consistent with the method used to determine yield
on the Bonds.
With respect to any Bond that is a Variable Rate Debt Instrument, the sum
of the daily portions of original issue discount that is includible in the
holder's gross income is determined under the same principles described above,
with the following modifications: the yield to maturity on the Bonds should be
calculated as if the interest index remained at its value as of the issue date
of such Bonds. Because the proper method of adjusting accruals of OID on a
Variable Rate Debt Instrument as a result of prepayments is uncertain, holders
of such instruments should consult their own tax advisors regarding the
appropriate treatment of such Bonds for federal income tax purposes.
Purchasers of Bonds with the above key features for which the period
between the Closing Date and the first Payment Date does not exceed the Payment
Date Interval would nevertheless pay upon purchase of the Bonds an additional
amount of accrued interest as compared with the accrued interest that would be
paid if interest accrued from Payment Date to Payment Date. This accrued
interest (together with any accrued interest with respect to which the
Bondholder chooses not to treat as an offset to interest paid on the first
Payment Date, as described above) should be treated for federal income tax
purposes as part of the initial purchase price of the Bonds. Bonds described in
this paragraph issued or purchased at a discount would be treated as being
issued or purchased at a smaller discount or at a premium, and such Bonds issued
or purchased at a premium would be treated as being issued or purchased at a
larger premium.
SUBSEQUENT PURCHASERS. A subsequent purchaser of a Deferred Interest Bond
or a subsequent purchaser of any other Bond issued with original issue discount
who purchases the Bond at a cost less than the remaining stated redemption price
at maturity, will also be required to include in gross income for all days
during his or her taxable year on which such Bond is held, the sum of the daily
portions of original issue discount on the Bond. In computing the daily portions
of original issue discount with respect to a Bond for such a subsequent
purchaser, however, the daily portion for any day shall be reduced by the amount
that would be the daily portion for such day (computed in accordance with the
rules set forth above) multiplied by a fraction, the numerator of which is the
amount, if any, by which the price paid by such holder for the Bond exceeds its
adjusted issue price (the "acquisition premium"), and the denominator of which
is the amount by which the remaining stated redemption price at maturity exceeds
the adjusted issue price.
76
<PAGE> 172
PREMIUM
A holder who purchases a Bond at a cost greater than its stated redemption
price at maturity generally will be considered to have purchased the Bond at a
premium, which it may elect to amortize as an offset to interest income on such
Bond (and not as a separate deduction item) on a constant yield method. Although
no regulations addressing the computation of premium accrual on securities
similar to the Bonds have been issued, the legislative history of the Tax Reform
Act of 1986 indicates that premium is to be accrued in the same manner as market
discount. Accordingly, it appears that the accrual of premium on a Class of
Bonds of a Series will be calculated using the prepayment assumption used in
pricing such Class. If a holder makes an election to amortize premium on a Bond,
such election will apply to all taxable debt instruments (including all REMIC
regular interests and all pass-through certificates representing ownership
interests in a trust holding debt obligations) held by the holder at the
beginning of the taxable year in which the election is made, and to all taxable
debt instruments acquired thereafter by such holder, and will be irrevocable
without the consent of the Internal Revenue Service. Purchasers who pay a
premium for the Bonds should consult their tax advisers regarding the election
to amortize premium and the method to be employed.
ELECTION TO TREAT ALL INTEREST AS ORIGINAL ISSUE DISCOUNT
The OID Regulations permit a holder of a Bond to elect to accrue all
interest, discount (including de minimis market or original issue discount) and
premium in income as interest, based on a constant yield method for Bonds
acquired on or after April 4, 1994. If such an election were to be made with
respect to a Bond with market discount, the holder of the Bond would be deemed
to have made an election to include in income currently market discount with
respect to all other debt instruments having market discount that such holder of
the Bonds acquires during the year of the election or thereafter. Similarly, a
holder of a Bond that makes this election for a Bond that is acquired at a
premium will be deemed to have made an election to amortize bond premium with
respect to all debt instruments having amortizable bond premium that such holder
owns or acquires. The election to accrue interest, discount and premium on a
constant yield method with respect to a Bond is irrevocable.
REALIZED LOSSES
Bondholders generally are required to accrue interest and original issue
discount with respect to the Bonds without giving effect to any reductions in
distributions attributable to defaults or delinquencies on the Mortgage
Collateral until it can be established that any such reductions ultimately will
not be recoverable. Although a holder of a Bond will eventually be entitled to
recognize a loss or reduce income attributable to the Bonds if distribution
reductions are ultimately not recovered, the law is unclear with respect to the
timing and the character thereof and mismatches may result that further compound
the economic losses associated with reduced distributions on the Bonds.
SALE OR REDEMPTION
If a Bond is sold, the seller will recognize gain or loss equal to the
difference between the amount realized on the sale and the seller's adjusted
basis in the Bond. Such adjusted basis generally will equal the cost of the Bond
to the seller, increased by any original issue discount and market discount
included in the seller's gross income with respect to the Bond and reduced by
payments, other than payments of qualified stated interest, previously received
by the seller and by any amortized premium. If a Bondholder is a bank, thrift or
similar institution described in Section 582(c) of the Code, gain or loss
realized on the sale or exchange of a Bond will be taxable as ordinary income or
loss. Any such gain or loss recognized by any other seller will be capital gain
or loss, provided that the Bond is held by the seller as a "capital asset"
(generally, property held for investment) within the meaning of Code Section
1221.
MARKET DISCOUNT
The Bonds are subject to the market discount provisions of Code Sections
1276 through 1278. These rules provide that if a subsequent holder of a Bond
purchases it at a market discount, some or all of any
77
<PAGE> 173
principal payment or of any gain recognized upon the disposition of the Bond
will be taxable as ordinary interest income. Market discount on a Bond means the
excess, if any, of (1) the sum of its issue price and the aggregate amount of
original issue discount includible in the gross income of all holders of the
Bond prior to the acquisition by the subsequent holder (presumably adjusted to
reflect prior principal payments), over (2) the price paid by the holder for the
Bond. Market discount on a Bond will be considered to be zero if such discount
is less than .25% of the stated redemption price at maturity of such Bond
multiplied by its weighted average life, which presumably would be calculated in
a manner similar to weighted average life (described above), taking into account
distributions (including prepayments) prior to the date of acquisition of such
Bond by the subsequent purchaser. If market discount on a Bond is treated as
zero under this rule, the actual amount of such discount must be allocated to
the remaining principal distributions on such Bond and when each such
distribution is made, gain equal to the discount allocated to such distribution
will be recognized.
Any principal payment (whether a scheduled payment or a prepayment) or any
gain on the disposition of a market discount bond is to be treated as ordinary
income to the extent that it does not exceed the accrued market discount at the
time of such payment or disposition. The amount of accrued market discount for
purposes of determining the tax treatment of subsequent principal payments or
dispositions of the Bonds is to be reduced by the amount so treated as ordinary
income.
The Tax Reform Act of 1986 grants authority to the U.S. Treasury to issue
regulations providing for the computation of accrued market discount on debt
instruments, the principal of which is payable in more than one installment.
Until such time as regulations are issued by the U.S. Treasury, certain rules
described in the legislative history accompanying the Tax Reform Act of 1986
will apply. Under those rules, the holder of a market discount bond may elect to
accrue market discount either on the basis of a constant interest rate or using
one of the following methods. For bonds 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. For bonds 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. For purposes of calculating
market discount under any of the above methods in the case of instruments (such
as the Bonds) that provide for payments that may be accelerated by reason of
prepayments of other obligations securing such instruments, the same prepayment
assumption applicable to calculating the accrual of original issue discount
shall apply. Regulations are to provide similar rules for computing the accrual
of amortizable bond premium on instruments payable in more than one principal
installment. As an alternative to the inclusion of market discount in income on
the foregoing basis, the holder may elect to include such market discount in
income currently as it accrues on all market discount instruments acquired by
such holder in that taxable year or thereafter. In addition, accrual method
holders may elect to accrue all interest on a Bond, including de minimis
original issue discount and market discount and as adjusted by any premium,
under a constant yield method.
A subsequent holder of a Bond who acquired the Bond at a market discount
also may be required to defer, until the maturity date of the Bond or the
earlier disposition of the Bond in a taxable transaction, the deduction of a
portion of the amount of interest that the holder paid or accrued during the
taxable year on indebtedness incurred or maintained to purchase or carry the
Bond in excess of the aggregate amount of interest (including original issue
discount) includible in his or her gross income for the taxable year with
respect to such Bond. The amount of such net interest expense deferred in a
taxable year may not exceed the amount of market discount accrued on the Bond
for the days during the taxable year on which the subsequent holder held the
Bond, and the amount of such deferred deduction to be taken into account in the
taxable year in which the Bond is disposed of in a transaction in which gain or
loss is not recognized in whole or in part is limited to the amount of gain
recognized on the disposition. This deferral rule does not apply to a holder
that 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.
78
<PAGE> 174
Because the regulations described above with respect to market discounts
and premiums have not been issued, it is impossible to predict what effect those
regulations might have on the tax treatment of a Bond purchased at a discount or
premium in the secondary market.
WITHHOLDING WITH RESPECT TO CERTAIN FOREIGN INVESTORS
Pursuant to Code Sections 871(h), 881(c), 1441(c)(9) and 1442(a), interest
and original issue discount income received with respect to the Bonds by
Bondholders who are nonresident alien individuals, foreign corporations or other
non-United States persons unrelated to the Issuer ("foreign persons") generally
will not be subject to the 30% withholding tax imposed by Code Sections 1441 and
1442 on certain income of foreign persons, provided the procedural requirements
of Code Section 871(h)(5) are met. The 30% withholding tax will apply, however,
in certain situations where contingent interest is paid or the IRS determines
that withholding is required in order to prevent tax evasion by United States
persons.
If the 30% withholding tax is applicable, interest payments made to
Bondholders who are foreign persons will be subject to withholding. In addition,
a tax equal to 30% of the original issue discount accrued with respect to a Bond
since the last payment of interest thereon will be withheld from each interest
payment made to a foreign person. The Code provides, for purposes of determining
the amount of original issue discount subject to the withholding tax on foreign
persons, that original issue discount shall accrue at a constant interest rate
pursuant to the rules applicable to United States persons described above,
rather than on a straight-line basis as under previous law.
Bondholders to whom withholding with respect to foreign persons applies
also will be subject to a 30% tax on a portion of the gain, if any, recognized
upon the payment by the Issuer of principal on a Bond or upon the sale or
exchange of a Bond. Code Sections 871 and 881 provide, for purposes of
determining the amount of original issue discount subject to the withholding
tax, that the 30% tax will apply to the amount of gain not in excess of the
original issue discount that accrued, on a constant interest basis, while the
foreign person held the Bond (reduced by the accrued original issue discount on
account of which the tax had already been withheld).
The 30% withholding tax imposed on a foreign person is subject to reduction
or elimination under applicable tax treaties and does not apply if the interest,
original issue discount or gain treated as ordinary income, as the case may be,
is effectively connected with the conduct by such foreign person of a trade or
business within the United States. Foreign persons who hold a Bond should
consult their tax advisors regarding their qualification for reduced rate of, or
exemption from, withholding and the procedure for obtaining such a reduction or
exemption.
BACKUP WITHHOLDING
Federal income tax law provides for "backup withholding" of tax at a rate
of 31% in certain circumstances on "reportable payments," which include payments
of principal, interest and original issue discount (determined in any case as if
the Bondholder were the original holder of the Bond), but not market discount,
on a Bond and of the proceeds of the disposition of a Bond. Persons subject to
the requirement to backup withhold include, in certain circumstances, the
Issuer, the paying agent of the Issuer, a person who collects a payment of
interest or original issue discount as a custodian or nominee on behalf of the
Bondholder, and a "broker" (as defined in applicable Treasury regulations)
through which the Bondholder receives the proceeds of the retirement or other
disposition of a Bond. Backup withholding applies only if the Bondholder, among
other things, (1) fails to furnish a social security number or other taxpayer
identification number ("TIN") to the person subject to the requirement to backup
withhold, (2) furnishes an incorrect TIN to such person, (3) fails to report
properly interest or dividends or (4) under certain circumstances, fails to
provide to such person a certified statement, signed under penalty of perjury,
that the TIN furnished is the correct number and that such Bondholder is not
subject to backup withholding.
Backup withholding will not apply, however, with respect to certain
payments made to Bondholders, including payments to certain exempt recipients
(such as corporations and tax-exempt organizations) and to certain foreign
persons. Bondholders should consult their tax advisors regarding their
qualification for exemption from backup withholding and the procedure for
obtaining such an exemption.
79
<PAGE> 175
Each Issuer will report to the Bondholders and the IRS for each calendar
year the amount of any "reportable payments" by the Issuer during such year and
the amount of tax withheld, if any, with respect to payments on the Bonds issued
by it.
DUE TO THE COMPLEXITY OF THE FEDERAL INCOME TAX RULES APPLICABLE TO
BONDHOLDERS AND THE CONSIDERABLE UNCERTAINTY THAT EXISTS WITH RESPECT TO MANY
ASPECTS OF THOSE RULES, POTENTIAL INVESTORS SHOULD CONSULT THEIR OWN TAX
ADVISORS REGARDING THE TAX TREATMENT OF THE ACQUISITION, OWNERSHIP, AND
DISPOSITION OF THE BONDS.
STATE TAX CONSIDERATIONS
In addition to the federal income tax consequences described above under
"FEDERAL INCOME TAX CONSEQUENCES," potential investors should consider the state
income tax consequences of the acquisition, ownership, and disposition of the
Bonds. State income tax law may differ substantially from the corresponding
federal law, and this discussion does not purport to describe any aspect of the
income tax laws of any state. Therefore, potential investors should consult
their own tax advisors with respect to the various state tax consequences of an
investment in the Bonds.
LEGAL INVESTMENT
The Prospectus Supplement for each Series of Bonds will specify which, if
any, of the Classes of Bonds offered thereby will constitute "mortgage related
securities" for purposes of SMMEA. Classes of Bonds that qualify as "mortgage
related securities" will be legal investments for persons, trusts, corporations,
partnerships, associations, business trusts and business entities (including
depository institutions, life insurance companies and pension funds) created
pursuant to or existing under the laws of the United States or any state
(including the District of Columbia and Puerto Rico) whose authorized
investments are subject to state regulation to the same extent as, under
applicable law, obligations issued by or guaranteed as to principal and interest
by the United States or any such entities. Under SMMEA, if a state enacts
legislation prior to October 4, 1991 specifically limiting the legal investment
authority of any of such entities with respect to "mortgage related securities,"
the Bonds will constitute legal investments for entities subject to such
legislation only to the extent provided therein. Approximately twenty-one states
adopted such legislation prior to the October 4, 1991 deadline. SMMEA provides,
however, that in no event will the enactment of any such legislation affect the
validity of any contractual commitment to purchase, hold or invest in Bonds, or
require the sale or other disposition of Bonds, so long as such contractual
commitment was made or such Bonds were acquired prior to the enactment of such
legislation.
SMMEA also amended the legal investment authority of federally-chartered
depository institutions as follows: federal savings and loan associations and
federal savings banks may invest in, sell or otherwise deal in Bonds without
limitations as to the percentage of their assets represented thereby, federal
credit unions may invest in mortgage related securities, and national banks may
purchase Bonds for their own account without regard to the limitations generally
applicable to investment securities set forth in 12 U.S.C. 24 (Seventh), subject
in each case to such regulations as the applicable federal authority may
prescribe. In this connection, federal credit unions should review the National
Credit Union Administration ("NCUA") Letter to Credit Unions No. 96, as modified
by Letter to Credit Unions No. 108, which includes guidelines to assist federal
credit unions in making investment decisions for mortgage related securities,
and the NCUA's regulation "Investment and Deposit Activities" (12 C.F.R. Part
703) (whether or not the Class of Bonds under consideration for purchase
constitutes a "mortgage related security").
All depository institutions considering an investment in the Bonds (whether
or not the Class of Bonds under consideration for purchase constitutes a
"mortgage related security") should review the Federal Financial Institutions
Examination Council's Supervisory Policy Statement on Securities Activities (to
the extent adopted by their respective regulators) (the "Policy Statement"),
setting forth, in relevant part, certain securities trading and sales practices
deemed unsuitable for an institution's investment portfolio, and
80
<PAGE> 176
guidelines for (and restrictions on) investing in mortgage derivative products,
including "mortgage related securities" that are "high-risk mortgage securities"
as defined in the Policy Statement. According to the Policy Statement, such
"high-risk mortgage securities" include securities such as Bonds not entitled to
distributions allocated to principal or interest, or Subordinated Bonds. Under
the Policy Statement, it is the responsibility of each depository institution to
determine, prior to purchase (and at stated intervals thereafter), whether a
particular mortgage derivative product is a "high-risk mortgage security," and
whether the purchase (or retention) of such a product would be consistent with
the Policy Statement.
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines, or agreements generally
governing investments made by a particular investor, including, but not limited
to, "prudent investor" provisions, percentage-of-assets limits and provisions
that may restrict or prohibit investment in securities that are not "interest
bearing" or "income paying."
There may be other restrictions on the ability of certain investors,
including depository institutions, either to purchase Bonds or to purchase Bonds
representing more than a specified percentage of the investor's assets.
Investors should consult their own legal advisors in determining whether and to
what extent the Bonds constitute legal investments for such investors.
ERISA MATTERS
GENERAL
The Employee Retirement Income Security Act of 1974, as amended ("ERISA")
and section 4975 of the Code impose certain restrictions on employee benefit
plans subject to ERISA or plans or arrangements subject to Section 4975 of the
Code ("Plans") and on persons who are parties in interest or disqualified
persons ("parties in interest") with respect to such Plans. Certain employee
benefit plans, such as governmental plans and church plans (if no election has
been made under section 410(d) of the Code), are not subject to the restrictions
of ERISA, and assets of such plans may be invested in the Bonds without regard
to the ERISA considerations described below, subject to other applicable federal
and state law. However, any such governmental or church plan which is qualified
under section 401(a) of the Code and exempt from taxation under section 501(a)
of the Code is subject to the prohibited transaction rules set forth in section
503 of the Code. Any Plan fiduciary which proposes to cause a Plan to acquire
any of the Bonds should consult with its counsel with respect to the potential
consequences under ERISA, and the Code, of the Plan's acquisition and ownership
of the Bonds. Investments by Plans are also subject to ERISA's general fiduciary
requirements, including the requirement of investment prudence and
diversification and the requirement that a Plan's investments be made in
accordance with the documents governing the Plan.
PROHIBITED TRANSACTIONS
GENERAL. Section 406 of ERISA prohibits parties in interest with respect
to a Plan from engaging in certain transactions (including loans) involving a
Plan and its assets unless a statutory or administrative exemption applies to
the transaction. Section 4975 of the Code imposes certain excise taxes (or, in
some cases, a civil penalty may be assessed pursuant to section 502(i) of ERISA)
on parties in interest which engage in non-exempt prohibited transactions.
PLAN ASSET REGULATION. The United States Department of Labor ("Labor") has
issued final regulations concerning the definition of what constitutes the
assets of a Plan for purposes of ERISA and the prohibited transaction provisions
of the Code (the "Plan Asset Regulation"). The Plan Asset Regulation describes
the circumstances under which the assets of an entity in which a Plan invests
will be considered to be "plan assets" such that any person who exercises
control over such assets would be subject to ERISA's fiduciary standards. Under
the Plan Asset Regulation, generally when a Plan invests in another entity, the
Plan's assets do not include, solely by reason of such investment, any of the
underlying assets of the entity. However, the Plan Asset Regulation provides
that, if a Plan acquires an "equity interest" in an entity that is neither a
"publicly-offered security" (as defined therein) nor a security issued by an
investment company registered under the Investment Company Act of 1940, the
assets of the entity will be treated as assets of the Plan
81
<PAGE> 177
investor unless certain exceptions apply. If the Bonds were deemed to be equity
interests and no statutory, regulatory or administrative exemption applies, the
Issuer could be considered to hold plan assets by reason of a Plan's investment
in the Bonds. Such plan assets would include an undivided interest in any assets
held by the Issuer. In such an event, the Bond Trustee and other persons, in
providing services with respect to the Issuer's assets, may be parties in
interest with respect to such Plans, subject to the fiduciary responsibility
provisions of Title I of ERISA, including the prohibited transaction provisions
of section 406 of ERISA, and section 4975 of the Code with respect to
transactions involving the Issuer's assets. Under the Plan Asset Regulation, the
term "equity interest" is defined as any interest in an entity other than an
instrument that is treated as indebtedness under "applicable local law" and
which has no "substantial equity features." Although the Plan Assets Regulation
is silent with respect to the question of which law constitutes "applicable
local law" for this purpose, Labor has stated that this determination should be
made under the state law governing interpretation of the instrument in question.
In the preamble to the Plan Assets Regulation, Labor declined to provide a
precise definition of what features are equity features or the circumstances
under which such features would be considered "substantial," noting that the
question of whether a plan's interest has substantial equity features is an
inherently factual one, but that in making a determination it would be
appropriate to take into account whether the equity features are such that a
Plan's investment would be a practical vehicle for the indirect provision of
investment management services. If the Bonds are deemed to be equity interests
in the Issuer and no statutory, regulatory or administrative exemption applies,
the Issuer could be considered to hold plan assets by reason of a Plan's
investment in the Bonds. Those exemptions potentially include Prohibited
Transaction Class Exemption ("PTCE") 90-1, regarding investments by insurance
company pooled separate accounts, PTCE 91-38, regarding investments by bank
collective investment funds, PTCE 84-14, regarding transactions effected by a
"qualified professional asset manager," PTCE 95-60, regarding investments by
insurance company general accounts, or PTCE 96-23, regarding transactions
effected by an "in-house asset manager".
REVIEW BY PLAN FIDUCIARIES. Any Plan fiduciary considering whether to
purchase any Bonds on behalf of a Plan should consult with its counsel regarding
the applicability of the fiduciary responsibility and prohibited transaction
provisions of ERISA and the Code to such investment. Among other things, before
purchasing any Bonds, a fiduciary of a Plan should make its own determination as
to whether the Issuer, as obligor on the Bonds, is a party in interest with
respect to the Plan, the availability of the exemptive relief provided in the
Plan Asset Regulations and the availability of any other prohibited transaction
exemptions.
RATING
It is a condition to the issuance of the Bonds of each Series offered
hereby and by the Prospectus Supplement that they shall have been rated in one
of the four highest rating categories by the nationally recognized statistical
rating agency or agencies (each, a "Rating Agency") specified in the related
Prospectus Supplement.
Any such rating would be based on, among other things, the adequacy of the
value of the Mortgage Collateral securing a Series of Bonds and any credit
enhancement with respect to such Class and will reflect such Rating Agency's
assessment solely of the likelihood that holders of a Class of Bonds will
receive payments to which such Bondholders are entitled under the related Bond.
Such rating will not constitute an assessment of the likelihood that principal
prepayments on the related Mortgage Collateral will be made, the degree to which
the rate of such prepayments might differ from that originally anticipated or
the likelihood of early optional termination of the Series of Bonds. Such rating
should not be deemed a recommendation to purchase, hold or sell Bonds, inasmuch
as it does not address market price or suitability for a particular investor.
Each security rating should be evaluated independently of any other security
rating. Such rating will not address the possibility that prepayment at higher
or lower rates than anticipated by an investor may cause such investor to
experience a lower than anticipated yield or that an investor purchasing a
security at a significant premium might fail to recoup its initial investment
under certain prepayment scenarios.
There is also no assurance that any such rating will remain in effect for
any given period of time or that it may not be lowered or withdrawn entirely by
the applicable Rating Agency in the future if in its judgment
82
<PAGE> 178
circumstances in the future so warrant. In addition to being lowered or
withdrawn due to any erosion in the adequacy of the value of the Mortgage
Collateral securing a Series of Bonds or any credit enhancement with respect to
a Series of Bonds, such rating might also be lowered or withdrawn among other
reasons, because of an adverse change in the financial or other condition of a
credit enhancement provider or a change in the rating of such credit enhancement
provider's long term debt.
The amount, type and nature of credit enhancement, if any, established with
respect to a Series of Bonds will be determined on the basis of criteria
established by each Rating Agency rating Classes of such Series of Bonds. Such
criteria are sometimes based upon an actuarial analysis of the behavior of
mortgage loans in a larger group. Such analysis is often the basis upon which
each Rating Agency determines the amount of credit enhancement required with
respect to each such Class. There can be no assurance that the historical data
supporting any such actuarial analysis will accurately reflect future experience
nor any assurance that the data derived from a large actuarial analysis will
accurately reflect future experience nor any assurance that the data derived
from a large pool of mortgage loans accurately predicts the delinquency,
foreclosure or loss experience of any particular pool of Mortgage Collateral. No
assurance can be given that values of any Mortgaged Properties or mortgaged
properties securing the mortgage loans underlying any Certificates, as the case
may be, have remained or will remain at their levels on the respective dates of
origination of the related mortgage loans. If the residential real estate
markets should experience an overall decline in property values such that the
outstanding principal balances of the Mortgage Collateral securing a particular
Series of Bonds and any secondary financing on the related Mortgaged Properties
become equal to or greater than the value of the Mortgaged Properties or
mortgaged properties securing the mortgage loans underlying any Certificates, as
the case may be, the rates of delinquencies, foreclosures and losses could be
higher than those now generally experienced in the mortgage lending industry. In
addition, adverse economic conditions (which may or may not affect real property
values) may affect the timely payment by mortgagors of scheduled payments of
principal and interest on the Mortgage Collateral and, accordingly, the rates of
delinquencies, foreclosures and losses with respect to any Mortgage Collateral
securing a particular Series of Bonds. To the extent that such losses are not
covered by credit enhancement, such losses will be borne, at least in part, by
the holders of one or more Classes of Bonds.
PLAN OF DISTRIBUTION
The Issuer may sell the Bonds offered hereby either directly or through an
underwriter or underwriters or through underwriting syndicates managed by an
underwriter or underwriters. The Prospectus Supplement for each Series will set
forth the terms of the offering of such Series and of each Class within such
Series, including the name or names of the underwriters, the proceeds to and
their use by the Issuer, 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 Bonds will be determined.
The Bonds of a Series may be acquired by 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 any underwriters will be
subject to certain conditions precedent, and such underwriters will be severally
obligated to purchase all the Bonds of a Series described in the related
Prospectus Supplement, if any are purchased. If Bonds of a Series are offered
other than through underwriters, the related Prospectus Supplement will contain
information regarding the nature of such offering and any agreements to be
entered into between the Issuer and purchasers of Bonds of such Series.
The place and time of delivery for the Bonds of a Series in respect of
which this Prospectus is delivered will be set forth in the related Prospectus
Supplement.
83
<PAGE> 179
LEGAL MATTERS
The validity of the Bonds will be passed upon for the Issuer by Tobin &
Tobin, a professional corporation, San Francisco, California. Certain tax
matters will be passed upon by Giancarlo & Gnazzo, A Professional Corporation,
San Francisco, California. Brown & Wood LLP, New York, New York will act as
counsel for the underwriters.
84
<PAGE> 180
INDEX OF CERTAIN DEFINITIONS
Set forth below is a list of certain terms used in this Prospectus,
together with the pages on which the terms are defined herein.
<TABLE>
<S> <C>
Advance.............................................................................. 16
Agency Securities.................................................................... 1, 4
Assumed Reinvestment Rate............................................................ 31
Available Funds...................................................................... 6, 31
Balloon payments..................................................................... 9, 39
Bankruptcy Bond...................................................................... 14, 53
Basic Principal Payment.............................................................. 6
Belgian Cooperative.................................................................. 36
Beneficial owner..................................................................... 34
Bond Account......................................................................... 12, 57
Bond Distribution Amount............................................................. 12
Bond Insurance Policy................................................................ 14
Bond Owners.......................................................................... 34
Bond Trustee......................................................................... 4, 26
Bond Value........................................................................... 7
Bond Values.......................................................................... 6
Bondholders.......................................................................... 4
Bonds................................................................................ 1, 4
Book-Entry Bonds..................................................................... 34
Buydown Fund......................................................................... 39
Buydown Loans........................................................................ 39
Capitalized Interest Account......................................................... 49
CEDEL Participants................................................................... 36
CERCLA............................................................................... 20, 70
Certificates......................................................................... 1, 4
Closing Date......................................................................... 12
Code............................................................................5, 18, 26, 73
Collateral........................................................................... 37
Collateral Group..................................................................... 32
Commission........................................................................... 2
Company.............................................................................. 1, 5, 26
Controlling Class.................................................................... 63
Conventional Loans................................................................... 33
Cooperative Loans.................................................................... 9, 41
Cooperatives......................................................................... 9, 41
Custodial Account.................................................................... 56
Cut-off Date......................................................................... 14
Deferred Interest Bonds.............................................................. 30
Definitive Bond...................................................................... 35
Depositor............................................................................ 5, 26
Detailed Description................................................................. 38
Distribution Account................................................................. 12
Distribution Account Deposit Date.................................................... 12, 48
DTC.................................................................................. 22, 34
Due Period........................................................................... 6
</TABLE>
85
<PAGE> 181
<TABLE>
<S> <C>
Eligible Substitute Pledged Mortgage................................................. 41
EPA.................................................................................. 70
ERISA................................................................................ 17, 81
Euroclear Operator................................................................... 36
Euroclear Participants............................................................... 36
European Depositaries................................................................ 34
Event of Default..................................................................... 63
Exchange Act......................................................................... 3
FHA Loans............................................................................ 42
FHLMC................................................................................ 1, 4
FHLMC Act............................................................................ 44
FHLMC Certificates................................................................... 10, 41
Financial Intermediary............................................................... 35
Fixed Rate Pledged Mortgages......................................................... 1, 4
Floating Rate Bonds.................................................................. 31
Floating Rate Pledged Mortgages...................................................... 1, 4
FNMA................................................................................. 1, 4
FNMA Certificates.................................................................... 10, 41
Funding Period....................................................................... 13, 25
Garn-St Germain Act.................................................................. 72
GNMA................................................................................. 1, 4
GNMA Certificates.................................................................... 10, 41
GNMA I Certificate................................................................... 42
GNMA II Certificate.................................................................. 42
GNMA Issuer.......................................................................... 42
Guaranteed Mortgage Pass-Through Certificates........................................ 10, 41
Guaranty Agreement................................................................... 42
Housing Act.......................................................................... 42
Indenture............................................................................ 26
Insurance Proceeds................................................................... 37
IRS.................................................................................. 74
Issuer............................................................................... 1, 26
L/C Bank............................................................................. 15, 54
L/C Percentage....................................................................... 15, 54
Labor................................................................................ 81
Liquidated Mortgage.................................................................. 59
Liquidation Proceeds................................................................. 37
Lockout periods...................................................................... 10, 39
Master Servicer...................................................................... 5
Master Servicing Agreement........................................................... 5, 56
Master Servicing Fee................................................................. 59
Moody's.............................................................................. 48
Morgan............................................................................... 36
Mortgage Collateral.................................................................. 1, 4
Mortgage Note........................................................................ 9
Mortgage Pool Insurance Policy....................................................... 14, 51
Mortgage Rate........................................................................ 9
Mortgaged Property................................................................... 10, 38
Mortgagor............................................................................ 29
</TABLE>
86
<PAGE> 182
<TABLE>
<S> <C>
NCUA................................................................................. 80
OID Regulations...................................................................... 73
Owner Trustee........................................................................ 5, 26
Parties in interest.................................................................. 81
Payment Date......................................................................... 5
Permitted Investments................................................................ 48
Plan Asset Regulation................................................................ 81
Plans................................................................................ 81
Pledged Mortgages.................................................................... 1, 4
PMBS Agreement....................................................................... 46
PMBS Issuer.......................................................................... 11, 46
PMBS Servicer........................................................................ 12, 46
PMBS Trustee......................................................................... 12, 46
Policy Statement..................................................................... 80
Pool Insurer......................................................................... 51
Pre-Funded Amount.................................................................... 25
Pre-Funding Account.................................................................. 13, 25
Primary Mortgage Insurance Policy.................................................... 38
Private Mortgage-Backed Securities................................................... 4
PTCE................................................................................. 82
Purchase Price....................................................................... 29
Qualified REIT subsidiary............................................................ 26
Rating Agency........................................................................ 7, 82
RCRA................................................................................. 71
Record Date.......................................................................... 5
Redwood Trust........................................................................ 5, 26
REIT................................................................................. 17, 26
Relevant Depositary.................................................................. 34
Relief Act........................................................................... 73
Remittance Date...................................................................... 39
Reserve Fund......................................................................... 51
Rules................................................................................ 35
Securities Act....................................................................... 2
Seller............................................................................... 27
Senior Bondholders................................................................... 13, 50
Senior Bonds......................................................................... 4
Senior Liens......................................................................... 40
Servicer............................................................................. 5, 56
Servicers............................................................................ 40
Servicing Agreement.................................................................. 56
Servicing Default.................................................................... 62
SMMEA................................................................................ 17
Special Hazard Insurance Policy...................................................... 14
Special Hazard Insurer............................................................... 52
Special Servicer..................................................................... 5
Special Servicing Agreement.......................................................... 61
Spread............................................................................... 6
Stand-by Master Servicer............................................................. 61
Subordinated Bondholders............................................................. 13, 50
</TABLE>
87
<PAGE> 183
<TABLE>
<S> <C>
Subordinated Bonds................................................................... 4
Subsequent Mortgage Collateral....................................................... 25
Substitute Collateral................................................................ 47
Successor Master Servicer............................................................ 61
Tax Prepayment Assumption............................................................ 75
Terms and Conditions................................................................. 36
TIN.................................................................................. 79
Title V.............................................................................. 72
UCC.................................................................................. 69
VA Loans............................................................................. 42
</TABLE>
88
<PAGE> 184
======================================================
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS SUPPLEMENT OR THE
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON. THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO NOT CONSTITUTE
AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES
OFFERED HEREBY, NOR AN OFFER OF BONDS IN ANY STATE OR JURISDICTION IN WHICH, OR
TO ANY PERSON TO WHOM, SUCH OFFER WOULD BE UNLAWFUL. THE DELIVERY OF THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS AT ANY TIME DOES NOT IMPLY THAT THE
INFORMATION CONTAINED HEREIN OR THEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
ITS DATE; HOWEVER, IF ANY MATERIAL CHANGE OCCURS WHILE THIS PROSPECTUS
SUPPLEMENT OR THE PROSPECTUS IS REQUIRED BY LAW TO BE DELIVERED, THIS PROSPECTUS
SUPPLEMENT OR THE PROSPECTUS WILL BE AMENDED OR SUPPLEMENTED ACCORDINGLY.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUPPLEMENT
Incorporation of Certain Documents by
Reference............................... S-3
Summary................................... S-4
Risk Factors.............................. S-12
The Issuer................................ S-16
Description of the Bonds.................. S-16
Credit Enhancement........................ S-27
Security for the Bonds.................... S-28
Servicing of the Pledged Mortgages........ S-36
Use of Proceeds........................... S-39
Federal Income Tax Consequences........... S-39
ERISA Matters............................. S-39
Method of Distribution.................... S-40
Legal Matters............................. S-40
Ratings................................... S-41
Index of Defined Terms.................... S-42
PROSPECTUS
Prospectus Supplement..................... 2
Available Information..................... 2
Incorporation of Certain Documents by
Reference............................... 3
Summary................................... 4
Risk Factors.............................. 19
Introduction.............................. 26
The Issuer................................ 26
Use of Proceeds........................... 27
Mortgage Loan Program..................... 27
Description of the Bonds.................. 30
Security for the Bonds.................... 37
Credit Enhancement........................ 50
Servicing of the Pledged Mortgages........ 56
The Indenture............................. 62
Certain Legal Aspects of Pledged
Mortgages............................... 65
Federal Income Tax Consequences........... 73
State Tax Considerations.................. 80
Legal Investment.......................... 80
ERISA Matters............................. 81
Rating.................................... 82
Plan of Distribution...................... 83
Legal Matters............................. 84
Index of Certain Definitions.............. 85
</TABLE>
======================================================
======================================================
SEQUOIA MORTGAGE TRUST
19__ - ________
COLLATERALIZED
MORTGAGE
BONDS
-------------------------------------------
PROSPECTUS SUPPLEMENT
-------------------------------------------
[UNDERWRITER]
, 199
======================================================
<PAGE> 185
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.*
<TABLE>
<S> <C>
SEC Registration Fee.......................................... $ 909,090.91
Printing and Engraving Expenses............................... 30,000.00
Accounting Fees and Expenses.................................. 30,000.00
Legal Fees and Expenses....................................... 100,000.00
Trustee Fees and Expenses..................................... 20,000.00
Blue Sky Fees and Expenses.................................... 10,000.00
Rating Agency Fees............................................ 160,000.00
Miscellaneous................................................. 15,909.09
-----------
Total............................................... $1,275,000.00
===========
</TABLE>
- ---------------
* All amounts except the SEC Registration Fee are estimates of expenses incurred
in connection with the issuance and distribution of a Series of Bonds in an
aggregate principal amount assumed for these purposes to be equal to
$500,000,000 of Bonds registered hereby.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the General Corporation Law of Delaware empowers a
corporation to indemnify any person who was or is a party or is threatened to be
made a party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative (other than an action
by or in the right of the corporation) by reason of the fact that he is or was a
director, officer, employee or agent of the corporation, or is or was serving at
the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise.
Depending on the character of the proceeding, a corporation may indemnify
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred in connection with such action,
suit or proceeding if the person indemnified acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his or her conduct was unlawful. In the case of an
action by or in the right of the corporation, no indemnification may be made in
respect of any claim, issue or matter as to which such person shall have been
adjudged to be liable to the corporation unless and only to the extent that the
Court of Chancery or the court in which such action or suit was brought shall
determine upon application that, despite the adjudication of liability but in
view of all the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which the Court of Chancery or other
such court shall deem proper. Section 145 further provides that to the extent a
director, officer, employee or agent of a corporation has been successful on the
merits or otherwise in the defense of any action, suit or proceeding referred to
above or in the defense of any claim, issue or matter therein, he or she shall
be indemnified against expenses (including attorneys' fees) actually and
reasonably incurred by him in connection therewith.
The Certificate of Incorporation and Bylaws of the Company provide, in
effect, that, to the extent and under the circumstances permitted by Section 145
of the General Corporation Law of Delaware, the Company shall indemnify any
person who was or is a party or is threatened to be made a party to any action,
suit or proceeding of the type described above by reason of the fact that he or
she is or was a director, officer, employee or agent of the Company.
The Underwriting Agreement for any Series of Bonds may provide that the
Company and Redwood Trust will indemnify the related Underwriter or Underwriters
against, or make contributions to such Underwriter or Underwriters with respect
to, certain liabilities, including liabilities under the Securities Act of 1933.
II-1
<PAGE> 186
ITEM 16. EXHIBITS.
<TABLE>
<C> <S>
1.1 Form of Underwriting Agreement.*
4.1 Form of Indenture in substantially the form to be entered into between each Issuer and
the Bond Trustee.
4.2 Form of Deposit Trust Agreement in substantially the form to be entered into between
Sequoia Mortgage Funding Corporation and the Owner Trustee creating each Issuer.
4.3 Form of Master Servicing Agreement in substantially the form to be entered into among
each Issuer, the Bond Trustee and each Master Servicer.*
5.1 Opinion of Tobin & Tobin regarding legality.*
8.1 Opinion of Giancarlo & Gnazzo regarding certain tax matters.
23.1 Consent of Tobin & Tobin (included in Exhibit 5.1).*
23.2 Consent of Giancarlo & Gnazzo (included in Exhibit 8.1).
24.1 Power of Attorney (included on page II-4).
25.1 Statement of Eligibility and Qualification of Trustee under the Trust Indenture Act of
1939 for First Union National Bank of North Carolina.
</TABLE>
- ---------------
* Previously filed.
ITEM 17. UNDERTAKINGS.
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of this Registration Statement (or the most recent
post-effective amendment hereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in this Registration Statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high and of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in
the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective Registration Statement.
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in this Registration Statement
or any material change to such information in this Registration
Statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 that is incorporated by reference in this Registration
Statement shall be
II-2
<PAGE> 187
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
(d) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the Registrant pursuant to Rule 424(b)(l) or
(4) or 497(h) under the Securities Act of 1933 shall be deemed to be part
of this Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new Registration Statement relating to
the securities offered therein, and the offering of such Securities at that
time shall be deemed to be the initial bona fide offering thereof.
(e) The undersigned Registrant hereby undertakes to file an application for
the purpose of determining the eligibility of the trustee to act under
subsection (a) of Section 310 of the Trust Indenture Act in accordance with the
rules and regulations prescribed by the Securities and Exchange Commission under
Section 305(b)(2) of the Trust Indenture Act.
II-3
<PAGE> 188
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Amendment No. 2 to
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of San Francisco, State of California, on May 14,
1997.
SEQUOIA MORTGAGE FUNDING CORPORATION*
By /s/ DOUGLAS B. HANSEN
-----------------------------------------
Name: Douglas B. Hansen
Title: President
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints George E. Bull III, Douglas B. Hansen,
Frederick H. Borden and Vickie L. Rath, and each of them, his or her true and
lawful attorneys-in-fact and agents, with full power of substitution and
resubstitution, for and in his or her name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective amendments)
to this Registration Statement, and to file the same, with all exhibits thereto,
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as might or could be done in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them, or their
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to Registration Statement has been signed by the following persons in the
capacities as officers and directors of the Company and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- ----------------------------------------------- ---------------------------------- -------------
<C> <S> <C>
/s/ GEORGE G. BULL III Chairman of the Board of Directors May 14, 1997
- ----------------------------------------------- (Principal Executive Officer)
George G. Bull III
/s/ DOUGLAS B. HANSEN President and Director (Principal May 14, 1997
- ----------------------------------------------- Financial Officer)
Douglas B. Hansen
/s/ FREDERICK H. BORDEN Secretary and Director May 14, 1997
- -----------------------------------------------
Frederick H. Borden
/s/ JOHN CONNOLLY IV Director May 14, 1997
- -----------------------------------------------
John Connolly IV
/s/ CRAIG A. SEVERANCE Director May 14, 1997
- -----------------------------------------------
Craig A. Severance
/s/ VICKIE L. RATH Treasurer (Principal Accounting May 14, 1997
- ----------------------------------------------- Officer)
Vickie L. Rath
</TABLE>
- ---------------
* For itself and on behalf of each trust acting as an Issuer hereunder.
II-4
<PAGE> 189
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
- --------
<C> <S>
1.1 -- Form of Underwriting Agreement.*
4.1 -- Form of Indenture in substantially the form to be entered into between each Issuer
and the Bond Trustee.
4.2 -- Form of Deposit Trust Agreement in substantially the form to be entered into between
Sequoia Mortgage Funding Corporation and the Owner Trustee creating each Issuer.
4.3 -- Form of Master Servicing Agreement in substantially the form to be entered into
among each Issuer, the Bond Trustee and each Master Servicer.*
5.1 -- Opinion of Tobin & Tobin regarding legality.*
8.1 -- Opinion of Giancarlo & Gnazzo regarding certain tax matters.
23.1 -- Consent of Tobin & Tobin (included in Exhibit 5.1).*
23.2 -- Consent of Giancarlo & Gnazzo (included in Exhibit 8.1).
24.1 -- Power of Attorney (included on page II-4).
25.1 -- Statement of Eligibility and Qualification of Trustee under the Trust Indenture Act
of 1939 for First Union National Bank of North Carolina.
</TABLE>
- ---------------
* Previously filed.
<PAGE> 1
EXHIBIT 4.1
SEQUOIA MORTGAGE TRUST 199_-_,
Issuer
and
_________________________________,
Trustee
INDENTURE
Dated as of _____________ __, 199__
Relating to
SEQUOIA MORTGAGE TRUST 199_-_
COLLATERALIZED MORTGAGE BONDS
<PAGE> 2
Cross-reference sheet showing the location in the indenture of
the provisions inserted pursuant to Sections 310 through 318(a) inclusive of
the Trust Indenture Act of 1939.
<TABLE>
<CAPTION>
TIA Indenture Section
--- -----------------
<S> <C> <C>
Section 310
(a) (1) . . . . . . . . . . . . . . . . . . . . . . . . . 6.08
(a) (2) . . . . . . . . . . . . . . . . . . . . . . . . . 6.09
(a) (3) . . . . . . . . . . . . . . . . . . . . . . . . . 6.14(2)
(a) (4) . . . . . . . . . . . . . . . . . . . . . . . . . Not Applicable
(a) (5) . . . . . . . . . . . . . . . . . . . . . . . . . 6.08
(b) . . . . . . . . . . . . . . . . . . . . . . . . . 6.08
. . . . . . . . . . . . . . . . . . . . . . . . . 6.10
. . . . . . . . . . . . . . . . . . . . . . . . . 11.05
(c) . . . . . . . . . . . . . . . . . . . . . . . . . Not Applicable
Section 311
(a) . . . . . . . . . . . . . . . . . . . . . . . . . 6.13
(b) . . . . . . . . . . . . . . . . . . . . . . . . . 6.13
Section 312
(a) . . . . . . . . . . . . . . . . . . . . . . . . . 7.01(a)
. . . . . . . . . . . . . . . . . . . . . . . . . 7.02(a)
(b) . . . . . . . . . . . . . . . . . . . . . . . . . 7.02(b)
(c) . . . . . . . . . . . . . . . . . . . . . . . . . 7.02(c)
Section 313
(a) . . . . . . . . . . . . . . . . . . . . . . . . . 7.03(a)
(b) . . . . . . . . . . . . . . . . . . . . . . . . . 7.03(a)
(c) . . . . . . . . . . . . . . . . . . . . . . . . . 7.03(a)
. . . . . . . . . . . . . . . . . . . . . . . . . 11.05
(d) . . . . . . . . . . . . . . . . . . . . . . . . . 7.03(b)
Section 314
(a) . . . . . . . . . . . . . . . . . . . . . . . . . 7.04
. . . . . . . . . . . . . . . . . . . . . . . . . 11.05
. . . . . . . . . . . . . . . . . . . . . . . . . 3.10
(b) (1) . . . . . . . . . . . . . . . . . . . . . . . . . 2.12(c)(viii)
(b) (2) . . . . . . . . . . . . . . . . . . . . . . . . . 3.06
(c) (1) . . . . . . . . . . . . . . . . . . . . . . . . . 2.12(d)
. . . . . . . . . . . . . . . . . . . . . . . . . 4.01
. . . . . . . . . . . . . . . . . . . . . . . . . 11.01
</TABLE>
i
<PAGE> 3
<TABLE>
<CAPTION>
TIA Indenture Section
--- -----------------
<S> <C> <C> <C>
(c) (2) . . . . . . . . . . . . . . . . . . . . . . . . . 2.12(c)(ii)
. . . . . . . . . . . . . . . . . . . . . . . . . 4.01
. . . . . . . . . . . . . . . . . . . . . . . . . 11.01
(c) (3) . . . . . . . . . . . . . . . . . . . . . . . . . 1.01
. . . . . . . . . . . . . . . . . . . . . . . . . 2.12(f)
(d) (1) . . . . . . . . . . . . . . . . . . . . . . . . . 1.01
. . . . . . . . . . . . . . . . . . . . . . . . . 8.12
(d) (2) . . . . . . . . . . . . . . . . . . . . . . . . . 1.01
. . . . . . . . . . . . . . . . . . . . . . . . . Not Applicable
(d) (3) . . . . . . . . . . . . . . . . . . . . . . . . . 1.01
. . . . . . . . . . . . . . . . . . . . . . . . . 2.12(f)
(e) . . . . . . . . . . . . . . . . . . . . . . . . . 11.01
Section 315
(a) . . . . . . . . . . . . . . . . . . . . . . . . . 6.01(b)
. . . . . . . . . . . . . . . . . . . . . . . . . 6.01(c)(1)
(b) . . . . . . . . . . . . . . . . . . . . . . . . . 6.02
. . . . . . . . . . . . . . . . . . . . . . . . . 11.05
(c) . . . . . . . . . . . . . . . . . . . . . . . . . 6.01(a)
(d) . . . . . . . . . . . . . . . . . . . . . . . . . 6.01(c)
(d) (1) . . . . . . . . . . . . . . . . . . . . . . . . . 6.01(b)
(d) (2) . . . . . . . . . . . . . . . . . . . . . . . . . 6.01(c)(2)
(d) (3) . . . . . . . . . . . . . . . . . . . . . . . . . 6.01(c)(3)
(e) . . . . . . . . . . . . . . . . . . . . . . . . . 5.16
Section 316
(a) (1) (A) . . . . . . . . . . . . . . . . . . . . . . . . 5.14
. . . . . . . . . . . . . . . . . . . . . . . . . 8.01
(a) (1) (B) . . . . . . . . . . . . . . . . . . . . . . . . 5.02
. . . . . . . . . . . . . . . . . . . . . . . . . 5.15
(a) (2) . . . . . . . . . . . . . . . . . . . . . . . . . Not Applicable
(b) . . . . . . . . . . . . . . . . . . . . . . . . . 5.10
(c) . . . . . . . . . . . . . . . . . . . . . . . . . Not Applicable
Section 317
(a) (1) . . . . . . . . . . . . . . . . . . . . . . . . . 5.03
(a) (2) . . . . . . . . . . . . . . . . . . . . . . . . . 5.06
(b) . . . . . . . . . . . . . . . . . . . . . . . . . 3.03
Section 318
(a) . . . . . . . . . . . . . . . . . . . . . . . . . 11.07
</TABLE>
ii
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
PARTIES
PRELIMINARY STATEMENT
GRANTING CLAUSE
ARTICLE I
DEFINITIONS
<S> <C>
SECTION 1.01. General Definitions . . . . . . . . . . . . . . I-1
"Accountant" . . . . . . . . . . . . . . . . . . . . . . . . . . . I-1
"Accrual Date" . . . . . . . . . . . . . . . . . . . . . . . . . . I-1
"Act" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-1
"Adjusted Net Mortgage Rate" . . . . . . . . . . . . . . . . . . . I-2
"Adjustment Date" . . . . . . . . . . . . . . . . . . . . . . . . I-2
"Advance" . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-2
"Affiliate" . . . . . . . . . . . . . . . . . . . . . . . . . . . I-2
"Agent" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-2
"Appraised Value" . . . . . . . . . . . . . . . . . . . . . . . . I-2
"Assignments" . . . . . . . . . . . . . . . . . . . . . . . . . . I-2
"Authenticating Agent" . . . . . . . . . . . . . . . . . . . . . . I-3
"Authorized Officer" . . . . . . . . . . . . . . . . . . . . . . . I-3
"Available Funds" . . . . . . . . . . . . . . . . . . . . . . . . I-4
"Bank" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-4
"Bankruptcy Code" . . . . . . . . . . . . . . . . . . . . . . . . I-4
"Beneficial Owner" . . . . . . . . . . . . . . . . . . . . . . . . I-4
"Bond Account" . . . . . . . . . . . . . . . . . . . . . . . . . . I-4
"Bond Distribution Amount" . . . . . . . . . . . . . . . . . . . . I-4
"Bond Payment Amount" . . . . . . . . . . . . . . . . . . . . . . I-4
"Bondholder" or "Holder" . . . . . . . . . . . . . . . . . . . . . I-4
"Bond Insurance Policy" . . . . . . . . . . . . . . . . . . . . . I-4
"Bond Insurer" . . . . . . . . . . . . . . . . . . . . . . . . . . I-5
"Bond Interest Rate" . . . . . . . . . . . . . . . . . . . . . . . I-5
"Bond Register" and "Bond Registrar" . . . . . . . . . . . . . . . I-5
"Bonds" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-5
"Book Entry Bonds" . . . . . . . . . . . . . . . . . . . . . . . . I-5
</TABLE>
i
<PAGE> 5
<TABLE>
<CAPTION>
Page
<S> <C>
"Business Day" . . . . . . . . . . . . . . . . . . . . . . . . . . I-5
"Certificate Interest Rate" . . . . . . . . . . . . . . . . . . . I-5
"Class" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-5
"Class B-1 Interest Carryover Shortfall" . . . . . . . . . . . . . I-5
"Class B-1 Interest Payment Amount" . . . . . . . . . . . . . . . I-6
"Class B-1 Percentage" . . . . . . . . . . . . . . . . . . . . . . I-6
"Class B-1 Principal Amount" . . . . . . . . . . . . . . . . . . . I-6
"Class B-1 Principal Carryover Shortfall" . . . . . . . . . . . . I-6
"Class B-1 Principal Payment Amount" . . . . . . . . . . . . . . . I-6
"Class B-2 Bond Interest Rate" . . . . . . . . . . . . . . . . . . I-7
"Class B-2 Interest Carryover Shortfall" . . . . . . . . . . . . . I-7
"Class B-2 Interest Payment Amount" . . . . . . . . . . . . . . . I-7
"Class B-2 Percentage" . . . . . . . . . . . . . . . . . . . . . . I-7
"Class B-2 Principal Amount" . . . . . . . . . . . . . . . . . . . I-8
"Class B-2 Principal Carryover Shortfall" . . . . . . . . . . . . I-8
"Class B-2 Principal Payment Amount" . . . . . . . . . . . . . . . I-8
"Class Interest Shortfall" . . . . . . . . . . . . . . . . . . . . I-8
"Class Principal Amount" . . . . . . . . . . . . . . . . . . . . . I-9
"Closing Date" . . . . . . . . . . . . . . . . . . . . . . . . . . I-9
"Code" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-9
"Combined Prepayment Percentage" . . . . . . . . . . . . . . . . . I-9
"Commission" . . . . . . . . . . . . . . . . . . . . . . . . . . . I-9
"Controlling Class" . . . . . . . . . . . . . . . . . . . . . . . I-9
"Cooperative Loan" . . . . . . . . . . . . . . . . . . . . . . . . I-9
"Cooperative Shares" . . . . . . . . . . . . . . . . . . . . . . . I-9
"Corporate Trust Office" . . . . . . . . . . . . . . . . . . . . . I-9
"Cut-Off Date" . . . . . . . . . . . . . . . . . . . . . . . . . . I-9
"Debt Service Reduction" . . . . . . . . . . . . . . . . . . . . . I-9
"Default" . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-10
"Defaulted Pledged Mortgage" . . . . . . . . . . . . . . . . . . . I-10
"Deficient Valuation" . . . . . . . . . . . . . . . . . . . . . . I-10
"Definitive Bonds" . . . . . . . . . . . . . . . . . . . . . . . . I-10
"Deleted Pledged Mortgage" . . . . . . . . . . . . . . . . . . . . I-10
"Denomination" . . . . . . . . . . . . . . . . . . . . . . . . . . I-10
"Depositor" . . . . . . . . . . . . . . . . . . . . . . . . . . . I-10
"Depository" . . . . . . . . . . . . . . . . . . . . . . . . . . . I-10
"Depository Participants" . . . . . . . . . . . . . . . . . . . . I-10
"Deposit Trust Agreement" . . . . . . . . . . . . . . . . . . . . I-10
"Determination Date" . . . . . . . . . . . . . . . . . . . . . . . I-11
"Distribution Account" . . . . . . . . . . . . . . . . . . . . . . I-11
"Distribution Account Deposit Date" . . . . . . . . . . . . . . . I-11
</TABLE>
ii
<PAGE> 6
<TABLE>
<CAPTION>
Page
<S> <C>
"Due Date" . . . . . . . . . . . . . . . . . . . . . . . . . . . I-11
"Duff & Phelps" . . . . . . . . . . . . . . . . . . . . . . . . I-11
"Eligible Account" . . . . . . . . . . . . . . . . . . . . . . . I-11
"Escrow Account" . . . . . . . . . . . . . . . . . . . . . . . . I-12
"Event of Default" . . . . . . . . . . . . . . . . . . . . . . . I-12
"Expense Rate" . . . . . . . . . . . . . . . . . . . . . . . . . I-12
"FDIC" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-12
"FHLMC" . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-12
"FIRREA" . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-12
"Fitch" . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-12
"FNMA" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-13
"Grant" . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-13
"Highest Lawful Rate" . . . . . . . . . . . . . . . . . . . . . I-13
"Holder" . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-13
"Indenture" or "this Indenture" . . . . . . . . . . . . . . . . I-13
"Independent" . . . . . . . . . . . . . . . . . . . . . . . . . I-14
"Index" . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-14
"Indirect Participant" . . . . . . . . . . . . . . . . . . . . . I-14
"Individual Bond" . . . . . . . . . . . . . . . . . . . . . . . I-14
"Insurance Policy" . . . . . . . . . . . . . . . . . . . . . . . I-14
"Insurance Proceeds" . . . . . . . . . . . . . . . . . . . . . . I-15
"Insured Expenses" . . . . . . . . . . . . . . . . . . . . . . . I-15
"Interest Accrual Period" . . . . . . . . . . . . . . . . . . . I-15
"Interest Conversion Date" . . . . . . . . . . . . . . . . . . . I-15
"Interest Payment Amount" . . . . . . . . . . . . . . . . . . . I-15
"Invested Amount" . . . . . . . . . . . . . . . . . . . . . . . I-15
"Investor Certificate" . . . . . . . . . . . . . . . . . . . . . I-15
"Investor Percentage" . . . . . . . . . . . . . . . . . . . . . I-15
"Investor Prepayment Percentage" . . . . . . . . . . . . . . . . I-15
"Issuer" . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-15
"Issuer Order" and "Issuer Request" . . . . . . . . . . . . . . I-16
"Letter Agreement" . . . . . . . . . . . . . . . . . . . . . . . I-16
"Liquidated Pledged Mortgage" . . . . . . . . . . . . . . . . . I-16
"Liquidation Proceeds" . . . . . . . . . . . . . . . . . . . . . I-16
"Loan-to-Value Ratio" . . . . . . . . . . . . . . . . . . . . . I-16
"Margin" . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-16
"Master Servicer" . . . . . . . . . . . . . . . . . . . . . . . I-16
"Master Servicing Agreement" . . . . . . . . . . . . . . . . . . I-17
"Master Servicing Fee" . . . . . . . . . . . . . . . . . . . . . I-17
"Master Servicing Fee Rate" . . . . . . . . . . . . . . . . . . I-17
"Maturity" . . . . . . . . . . . . . . . . . . . . . . . . . . . I-17
</TABLE>
iii
<PAGE> 7
<TABLE>
<CAPTION>
Page
<S> <C>
"Maximum Rate" . . . . . . . . . . . . . . . . . . . . . . . . . I-17
"Moody's" . . . . . . . . . . . . . . . . . . . . . . . . . . . I-17
"Mortgage" . . . . . . . . . . . . . . . . . . . . . . . . . . . I-17
"Mortgage Documents" . . . . . . . . . . . . . . . . . . . . . . I-18
"Mortgage Note" . . . . . . . . . . . . . . . . . . . . . . . . I-18
"Mortgage Rate" . . . . . . . . . . . . . . . . . . . . . . . . I-18
"Mortgaged Property" . . . . . . . . . . . . . . . . . . . . . . I-18
"Mortgagor" . . . . . . . . . . . . . . . . . . . . . . . . . . I-18
"Net Mortgage Rate" . . . . . . . . . . . . . . . . . . . . . . I-18
"Net Interest Shortfalls" . . . . . . . . . . . . . . . . . . . I-18
"Nonrecoverable Advance" . . . . . . . . . . . . . . . . . . . . I-18
"Officers' Certificate" . . . . . . . . . . . . . . . . . . . . I-19
"Officer's Certificate of the Master Servicer" . . . . . . . . . I-19
"Operative Agreements" . . . . . . . . . . . . . . . . . . . . . I-19
"Opinion of Counsel" . . . . . . . . . . . . . . . . . . . . . . I-19
"Optional Redemption Date" . . . . . . . . . . . . . . . . . . . I-19
"Optional Redemption Record Date" . . . . . . . . . . . . . . . I-19
"Original Class B-1 Principal Amount" . . . . . . . . . . . . . I-19
"Original Class B-2 Principal Amount" . . . . . . . . . . . . . I-19
"Original Invested Amount" . . . . . . . . . . . . . . . . . . . I-19
"Original Pledged Mortgages" . . . . . . . . . . . . . . . . . . I-19
"Original Senior Class Principal Amount" . . . . . . . . . . . . I-19
"Original Subordination Amount" . . . . . . . . . . . . . . . . I-19
"OTS" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-20
"Outstanding" . . . . . . . . . . . . . . . . . . . . . . . . . I-20
"Outstanding Pledged Mortgage" . . . . . . . . . . . . . . . . . I-21
"Owner" . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-21
"Owner Trustee" . . . . . . . . . . . . . . . . . . . . . . . . I-21
"Paying Agent" . . . . . . . . . . . . . . . . . . . . . . . . . I-21
"Payment Date" . . . . . . . . . . . . . . . . . . . . . . . . . I-21
"Payment Date Statement" . . . . . . . . . . . . . . . . . . . . I-21
"Periodic Rate Cap" . . . . . . . . . . . . . . . . . . . . . . I-21
"Permitted Encumbrance" . . . . . . . . . . . . . . . . . . . . I-21
"Permitted Investments" . . . . . . . . . . . . . . . . . . . . I-22
"Person" . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-25
"Pledged Accounts" . . . . . . . . . . . . . . . . . . . . . . . I-25
"Pledged Mortgage Schedule" . . . . . . . . . . . . . . . . . . I-25
"Pledged Mortgages" . . . . . . . . . . . . . . . . . . . . . . I-25
"Pool Stated Principal Balance" . . . . . . . . . . . . . . . . I-25
"Predecessor Bonds" . . . . . . . . . . . . . . . . . . . . . . I-25
</TABLE>
iv
<PAGE> 8
<TABLE>
<CAPTION>
Page
<S> <C>
"Prepayment Interest Shortfall" . . . . . . . . . . . . . . . . I-25
"Prepayment Period" . . . . . . . . . . . . . . . . . . . . . . I-26
"Primary Mortgage Insurance Policy" . . . . . . . . . . . . . . I-26
"Principal Prepayment" . . . . . . . . . . . . . . . . . . . . . I-26
"Principal Prepayment in Full" . . . . . . . . . . . . . . . . . I-26
"Proceeding" . . . . . . . . . . . . . . . . . . . . . . . . . . I-26
"Proprietary Lease" . . . . . . . . . . . . . . . . . . . . . . I-26
"Prospectus Supplement" . . . . . . . . . . . . . . . . . . . . I-26
"Purchase Price" . . . . . . . . . . . . . . . . . . . . . . . . I-26
"Rating Agency" . . . . . . . . . . . . . . . . . . . . . . . . I-26
"Realized Loss" . . . . . . . . . . . . . . . . . . . . . . . . I-27
"Record Date" . . . . . . . . . . . . . . . . . . . . . . . . . I-27
"Redemption Date" . . . . . . . . . . . . . . . . . . . . . . . I-27
"Redemption Price" . . . . . . . . . . . . . . . . . . . . . . . I-28
"Refinancing Pledged Mortgage" . . . . . . . . . . . . . . . . . I-28
"Relief Act" . . . . . . . . . . . . . . . . . . . . . . . . . . I-28
"Relief Act Reductions" . . . . . . . . . . . . . . . . . . . . I-28
"REO Property" . . . . . . . . . . . . . . . . . . . . . . . . . I-28
"Replacement Pledged Mortgage" . . . . . . . . . . . . . . . . . I-28
"Request for Release" . . . . . . . . . . . . . . . . . . . . . I-29
"Responsible Officer" . . . . . . . . . . . . . . . . . . . . . I-29
"S&P" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-29
"SAIF" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-29
"Sale" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-29
"Scheduled Payment" . . . . . . . . . . . . . . . . . . . . . . I-29
"Securities Act" . . . . . . . . . . . . . . . . . . . . . . . . I-30
"Seller/Servicer Guide" . . . . . . . . . . . . . . . . . . . . I-30
"Senior Bond Interest Rate" . . . . . . . . . . . . . . . . . . I-30
"Senior Bonds" . . . . . . . . . . . . . . . . . . . . . . . . . I-30
"Senior Class Principal Amount" . . . . . . . . . . . . . . . . I-30
"Senior Interest Payment Amount" . . . . . . . . . . . . . . . . I-30
"Senior Interest Shortfall" . . . . . . . . . . . . . . . . . . I-30
"Senior Percentage" . . . . . . . . . . . . . . . . . . . . . . I-30
"Senior Principal Payment Amount" . . . . . . . . . . . . . . . I-30
"Servicer" . . . . . . . . . . . . . . . . . . . . . . . . . . . I-31
"Servicer Advance" . . . . . . . . . . . . . . . . . . . . . . . I-31
"Servicing Advances" . . . . . . . . . . . . . . . . . . . . . . I-31
"Servicing Agreement" . . . . . . . . . . . . . . . . . . . . . I-31
"Servicing Default" . . . . . . . . . . . . . . . . . . . . . . I-31
"Servicing Fee" . . . . . . . . . . . . . . . . . . . . . . . . I-32
</TABLE>
v
<PAGE> 9
<TABLE>
<CAPTION>
Page
<S> <C>
"Servicing Fee Rate" . . . . . . . . . . . . . . . . . . . . . . . . . . . I-32
"Servicing Officer" . . . . . . . . . . . . . . . . . . . . . . . . . . . I-32
"Stated Maturity" . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-32
"Stated Principal Balance" . . . . . . . . . . . . . . . . . . . . . . . . I-32
"Subordinated Bond Interest Rate" . . . . . . . . . . . . . . . . . . . . I-32
"Subordinated Bonds" . . . . . . . . . . . . . . . . . . . . . . . . . . . I-32
"Substitution Adjustment Amount" . . . . . . . . . . . . . . . . . . . . . I-32
"Successor Master Servicer" . . . . . . . . . . . . . . . . . . . . . . . I-33
"Trust Estate" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-33
"Trust Indenture Act" or "TIA" . . . . . . . . . . . . . . . . . . . . . . I-33
"Trustee" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-33
"Trustee Fee" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-33
"Trustee Fee Rate" . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-33
"Trustee Mortgage File" . . . . . . . . . . . . . . . . . . . . . . . . . I-33
"Withdrawal Date" . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-33
ARTICLE II
THE BONDS
SECTION 2.01. Forms Generally . . . . . . . . . . . . . . . . . . . . II-1
SECTION 2.02. Forms of Bonds and Certificate of Authentication . . . II-1
SECTION 2.03. Bonds Issuable in Classes; Provisions with Respect
to Principal and Interest Payments . . . . . . . . . . II-2
SECTION 2.04. Denominations . . . . . . . . . . . . . . . . . . . . . II-5
SECTION 2.05. Execution, Authentication, Delivery and Dating . . . . II-5
SECTION 2.06. Temporary Bonds . . . . . . . . . . . . . . . . . . . . II-6
SECTION 2.07. Registration, Registration of Transfer and Exchange . . II-6
SECTION 2.08. Mutilated, Destroyed, Lost or Stolen Bonds . . . . . . II-7
SECTION 2.09. Payments of Principal and Interest . . . . . . . . . . II-8
SECTION 2.10. Persons Deemed Owners . . . . . . . . . . . . . . . . . II-10
SECTION 2.11. Cancellation . . . . . . . . . . . . . . . . . . . . . II-10
SECTION 2.12. Authentication and Delivery of Bonds . . . . . . . . . II-10
SECTION 2.13. Matters Relating to Book Entry Bonds . . . . . . . . . II-15
SECTION 2.14. Termination of Book Entry System . . . . . . . . . . . II-16
SECTION 2.15. Additional Bonds . . . . . . . . . . . . . . . . . . . II-17
</TABLE>
vi
<PAGE> 10
ARTICLE III
COVENANTS
<TABLE>
Page
<S> <C> <C>
SECTION 3.01. Payment of Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III-1
SECTION 3.02. Maintenance of Office or Agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . III-1
SECTION 3.03. Money for Bond Payments to Be Held in Trust . . . . . . . . . . . . . . . . . . . . . . III-1
SECTION 3.04. Corporate Existence of Owner Trustee . . . . . . . . . . . . . . . . . . . . . . . . . III-4
SECTION 3.05. Protection of Trust Estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III-4
SECTION 3.06. Opinions as to Trust Estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III-6
SECTION 3.07. Performance of Obligations; Master Servicing Agreement . . . . . . . . . . . . . . . . III-6
SECTION 3.08. Investment Company Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III-7
SECTION 3.09. Negative Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III-7
SECTION 3.10. Annual Statement as to Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . III-9
SECTION 3.11. Recording of Assignments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III-9
SECTION 3.12. Limitation of Liability of . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III-9
ARTICLE IV
SATISFACTION AND DISCHARGE
SECTION 4.01. Satisfaction and Discharge of Indenture . . . . . . . . . . . . . . . . . . . . . . . . IV-1
SECTION 4.02. Application of Trust Money . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-2
ARTICLE V
DEFAULTS AND REMEDIES
SECTION 5.01. Event of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V-1
SECTION 5.02. Acceleration of Maturity; Rescission and Annulment . . . . . . . . . . . . . . . . . . . . V-3
SECTION 5.03. Collection of Indebtedness and Suits for Enforcement by Trustee . . . . . . . . . . . . . V-4
SECTION 5.04. Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V-5
SECTION 5.05. [Reserved] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V-5
</TABLE>
vii
<PAGE> 11
<TABLE>
Page
<S> <C> <C>
SECTION 5.06. Trustee May File Proofs of Claim . . . . . . . . . . . . . . . . . . . . . . . . . . . . V-7
SECTION 5.07. Trustee May Enforce Claims without Possession of Bonds . . . . . . . . . . . . . . . . . V-8
SECTION 5.08. Application of Money Collected . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V-8
SECTION 5.09. Limitation on Suits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V-8
SECTION 5.10. Unconditional Rights of Bondholders to Receive Principal and Interest . . . . . . . . . . V-9
SECTION 5.11. Restoration of Rights and Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . V-10
SECTION 5.12. Rights and Remedies Cumulative . . . . . . . . . . . . . . . . . . . . . . . . . . . . V-10
SECTION 5.13. Delay or Omission Not Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V-10
SECTION 5.14. Control by Bondholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V-10
SECTION 5.15. Waiver of Past Defaults . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V-11
SECTION 5.16. Undertaking for Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V-11
SECTION 5.17. Waiver of Stay or Extension Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . V-12
SECTION 5.18. Sale of Trust Estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V-12
SECTION 5.19. Action on Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V-14
ARTICLE VI
THE TRUSTEE
SECTION 6.01. Duties of Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI-1
SECTION 6.02. Notice of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI-2
SECTION 6.03. Rights of Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI-3
SECTION 6.04. Not Responsible for Recitals or Issuance of Bonds . . . . . . . . . . . . . . . . . . . VI-5
SECTION 6.05. May Hold Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI-5
SECTION 6.06. Money Held in Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI-5
SECTION 6.07. Compensation and Reimbursement . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI-5
SECTION 6.08. Eligibility; Disqualification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI-6
SECTION 6.09. Trustee's Capital and Surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI-7
SECTION 6.10. Resignation and Removal; Appointment of Successor . . . . . . . . . . . . . . . . . . . VI-7
SECTION 6.11. Acceptance of Appointment by Successor . . . . . . . . . . . . . . . . . . . . . . . . VI-8
SECTION 6.12. Merger, Conversion, Consolidation or Succession to Business of Trustee . . . . . . . . VI-9
SECTION 6.13. Preferential Collection of Claim Against Issuer . . . . . . . . . . . . . . . . . . . . VI-9
</TABLE>
viii
<PAGE> 12
<TABLE>
Page
<S> <C> <C>
SECTION 6.14. Co-trustees and Separate Trustees . . . . . . . . . . . . . . . . . . . . . . . . . . . VI-9
SECTION 6.15. Authenticating Agents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI-11
SECTION 6.16. Review of Mortgage Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI-12
SECTION 6.17. Payment of Certain Insurance Premiums . . . . . . . . . . . . . . . . . . . . . . . . . VI-13
SECTION 6.18. Substitution of Insurance Policies, Etc.; Notification of Rating Agencies . . . . . . . VI-13
ARTICLE VII
BONDHOLDERS' LISTS AND REPORTS
SECTION 7.01. Issuer to Furnish Trustee Names and Addresses of Bondholders . . . . . . . . . . . . . VII-1
SECTION 7.02. Preservation of Information; Communications to Bondholders . . . . . . . . . . . . . . VII-1
SECTION 7.03. Reports by Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VII-1
SECTION 7.04. Reports by Issuer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VII-2
SECTION 7.05. Notice to the Rating Agencies [and to Bond Insurer.] . . . . . . . . . . . . . . . . . VII-2
</TABLE>
ix
<PAGE> 13
<TABLE>
ARTICLE VIII
ACCOUNTS, PAYMENTS OF INTEREST AND PRINCIPAL, AND RELEASES
Page
<S> <C> <C>
SECTION 8.01. Collection of Moneys . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VIII-1
SECTION 8.02. Distribution Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VIII-1
SECTION 8.03. General Provisions Regarding Pledged Accounts . . . . . . . . . . . . . . . . . . . . VIII-2
SECTION 8.04. Purchases of Defective Pledged Mortgages . . . . . . . . . . . . . . . . . . . . . . VIII-3
SECTION 8.05. Grant of Replacement Pledged Mortgage . . . . . . . . . . . . . . . . . . . . . . . . VIII-5
SECTION 8.06. Reports by Trustee to Bondholders . . . . . . . . . . . . . . . . . . . . . . . . . . VIII-5
SECTION 8.07. Reports by Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VIII-7
SECTION 8.08. Trust Estate; Release and Delivery of Mortgage Documents . . . . . . . . . . . . . . VIII-8
SECTION 8.09. Amendments to the Master Servicing Agreement . . . . . . . . . . . . . . . . . . . . VIII-9
SECTION 8.10. Servicers and Master Servicer as Agents and Bailees of Trustee . . . . . . . . . . . VIII-9
SECTION 8.11. Opinion of Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VIII-10
SECTION 8.12. Release of Pledged Mortgages . . . . . . . . . . . . . . . . . . . . . . . . . . . . VIII-10
ARTICLE IX
SUPPLEMENTAL INDENTURES
SECTION 9.01. Supplemental Indentures Without Consent of Bondholders . . . . . . . . . . . . . . . . IX-1
SECTION 9.02. Supplemental Indentures With Consent of Bondholders . . . . . . . . . . . . . . . . . . IX-2
SECTION 9.03. Execution of Supplemental Indentures . . . . . . . . . . . . . . . . . . . . . . . . . IX-4
SECTION 9.04. Effect of Supplemental Indentures . . . . . . . . . . . . . . . . . . . . . . . . . . . IX-4
SECTION 9.05. Conformity with Trust Indenture Act . . . . . . . . . . . . . . . . . . . . . . . . . . IX-4
SECTION 9.06. Reference in Bonds to Supplemental Indentures . . . . . . . . . . . . . . . . . . . . . IX-5
</TABLE>
x
<PAGE> 14
<TABLE>
Page
<S> <C> <C>
SECTION 9.07. Amendments to Deposit Trust Agreement or Master Servicing Agreement . . . . . . . . . . IX-5
ARTICLE X
REDEMPTION OF BONDS
SECTION 10.01. Special Redemption; Redemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . X-1
SECTION 10.02. Form of Redemption Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . X-1
SECTION 10.03. Bonds Payable on Optional Redemption Date . . . . . . . . . . . . . . . . . . . . . . . X-2
</TABLE>
xi
<PAGE> 15
Page
ARTICLE XI
MISCELLANEOUS
<TABLE>
<S> <C> <C>
SECTION 11.01. Compliance Certificates and Opinions . . . . . . . . . . . . . . . . . . . . . . . . . XI-1
SECTION 11.02. Form of Documents Delivered to Trustee . . . . . . . . . . . . . . . . . . . . . . . . XI-1
SECTION 11.03. Acts of Bondholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XI-3
SECTION 11.04. Notices, etc. to Trustee and Issuer . . . . . . . . . . . . . . . . . . . . . . . . . XI-3
SECTION 11.05. Notices and Reports to Bondholders; Waiver of Notices . . . . . . . . . . . . . . . . XI-4
SECTION 11.06. Rules by Trustee and Agents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XI-5
SECTION 11.07. Conflict with Trust Indenture Act . . . . . . . . . . . . . . . . . . . . . . . . . . XI-5
SECTION 11.08. Effect of Headings and Table of Contents . . . . . . . . . . . . . . . . . . . . . . . XI-5
SECTION 11.09. Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XI-5
SECTION 11.10. Separability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XI-5
SECTION 11.11. Benefits of Indenture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XI-6
SECTION 11.12. Legal Holidays . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XI-6
SECTION 11.13. Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XI-6
SECTION 11.14. Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XI-6
SECTION 11.15. Recording of Indenture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XI-6
SECTION 11.16. Issuer Obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XI-6
SECTION 11.17. Inspection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XI-7
SECTION 11.18. Usury . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XI-7
SECTION 11.19. No Petition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XI-8
ARTICLE XII
THE BOND INSURER
SECTION 12.01. Certain Matters Regarding the Bond Insurer and The Bond Insurance Policy . . . . . . . XII-1
TESTIMONIUM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1
SIGNATURES AND SEALS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1
</TABLE>
xii
<PAGE> 16
Page
ACKNOWLEDGMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-3
SCHEDULE A - Schedule of Pledged Mortgages . . . . . . . . . . . . . . . . A-1
EXHIBIT I - Letter Agreement with the Depository
EXHIBIT II - Form of Senior Bond
EXHIBIT III - Form of Class B-1 Bond
EXHIBIT IV - Form of Class B-2 Bond
EXHIBIT V - Form of Bond Insurance Policy
xiii
<PAGE> 17
PARTIES
INDENTURE, dated as of ___________ ___, 199__ (as amended or
supplemented from time to time as permitted hereby, the "Indenture"), between
Sequoia Mortgage Trust 199_-_ (herein, together with its permitted successors
and assigns, called the "Issuer"), a statutory business trust created under the
Deposit Trust Agreement (as defined herein), and _____________________________,
a _____________ corporation, as trustee (together with its permitted successors
in the trusts hereunder, the "Trustee").
PRELIMINARY STATEMENT
The Issuer has duly authorized the execution and delivery of
this Indenture to provide for its Collateralized Mortgage Bonds, (the "Bonds"),
issuable as provided in this Indenture. All covenants and agreements made by
the Issuer herein are for the benefit and security of the Holders of the Bonds.
The Issuer is entering into this Indenture, and the Trustee is accepting the
trusts created hereby, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged.
All things necessary to make this Indenture a valid agreement
of the Issuer in accordance with its terms have been done.
GRANTING CLAUSE
The Issuer hereby Grants to the Trustee, for the exclusive
benefit of the Holders of the Bonds [and the Bond Insurer], all of the Issuer's
right, title and interest in and to (a) the Pledged Mortgages identified in
Schedule A to this Indenture, including the related Mortgage Documents, which
the Issuer has caused to be delivered to the Trustee herewith, and all interest
and principal received or receivable by the Issuer on or with respect to the
Pledged Mortgages after the Cut-Off Date and all interest and principal
payments on the Pledged Mortgages received prior to the Cut-off Date in respect
of installments of interest and principal due thereafter, but not including
payments of interest and principal due and payable on the Pledged Mortgages on
or before the Cut-off Date, and all
1
<PAGE> 18
other proceeds received in respect of such Pledged Mortgages, (b) the Issuer's
rights under the Master Servicing Agreement, (c) the Insurance Policies, (d)
all cash, instruments or other property held or required to be deposited in the
Bond Account or the Distribution Account (exclusive of any earnings on
investments made with funds deposited in the Distribution Account or the Bond
Account) and (e) all proceeds of the conversion, voluntary or involuntary, of
any of the foregoing into cash or other liquid assets, including, without
limitation, all Insurance Proceeds, Liquidation Proceeds and condemnation
awards. Such Grants are made, however, in trust, to secure the Bonds equally
and ratably without prejudice, priority or distinction between any Bond and any
other Bond by reason of difference in time of issuance or otherwise, and to
secure (i) the payment of all amounts due on the Bonds in accordance with their
terms, (ii) the payment of all other sums payable under this Indenture with
respect to the Bonds and (iii) compliance with the provisions of this
Indenture, all as provided in this Indenture. All terms used in the foregoing
granting clauses that are defined in Section 1.01 are used with the meanings
given in said Section.
The Trustee acknowledges such Grant, accepts the trusts
hereunder in accordance with the provisions of this Indenture and agrees to
perform the duties herein required to the best of its ability to the end that
the interests of the Holders of the Bonds [and the Bond Insurer] may be
adequately and effectively protected.
[The Trustee agrees that it will hold any proceeds of any
claim made upon the Bond Insurance Policy, solely for the use and benefit of
the Bondholders in accordance with the terms hereof and of the Bond Insurance
Policy.]
2
<PAGE> 19
ARTICLE I
DEFINITIONS
SECTION 1.01. GENERAL DEFINITIONS.
Except as otherwise specified or as the context may otherwise
require, the following terms have the respective meanings set forth below for
all purposes of this Indenture, and the definitions of such terms are
applicable to the singular as well as to the plural forms of such terms and to
the masculine as well as to the feminine and neuter genders of such terms.
Whenever reference is made herein to an Event of Default or a Default known to
the Trustee or of which the Trustee has notice or knowledge, such reference
shall be construed to refer only to an Event of Default or Default of which the
Trustee is deemed to have notice or knowledge pursuant to Section 6.01(d). All
other terms used herein which are defined in the Trust Indenture Act (as
hereinafter defined), either directly or by reference therein, have the
meanings assigned to them therein.
"ACCOUNTANT": A Person engaged in the practice of accounting
who (except when this Indenture provides that an Accountant must be
Independent) may be employed by or affiliated with the Issuer or an Affiliate
of the Issuer.
"ACCRUAL DATE": The date upon which interest begins accruing
on the Bonds, such date being ____________ ___, 199__.
"ACT": With respect to any Bondholder, as defined in Section
11.03.
I-1
<PAGE> 20
"ADJUSTED NET MORTGAGE RATE": As to each Pledged Mortgage and
at any time, the per annum rate equal to the Mortgage Rate less the sum of the
Master Servicing Fee Rate and the related Servicing Fee Rate.
"ADJUSTMENT DATE": As to any Pledged Mortgage, the date on
which the related Mortgage Rate adjusts [annually] after a period of ___
year[s] following origination, in accordance with the terms of the related
Mortgage Note.
"ADVANCE": The payment required to be made by the Master
Servicer with respect to any Payment Date pursuant to Section 4 of the Master
Servicing Agreement, the amount of any such payment being equal to the
aggregate of the payments of principal and interest (net of the Master
Servicing Fee and the applicable Servicing Fee and net of any net income in the
case of any REO Property) on the Pledged Mortgages that were due on the related
Due Date and not received as of the close of business on the related
Determination Date, less the aggregate amount of any such delinquent payments
that the Master Servicer has determined would constitute a Nonrecoverable
Advance if advanced.
"AFFILIATE": With respect to any Person, any other Person
controlling or controlled by or under common control with such specified
Person. For the purposes of this definition, "control" when used with respect
to any specified Person means the power to direct the management and policies
of such Person, directly or indirectly, whether through the ownership of voting
securities, by contract or otherwise; and the terms "controlling" and
"controlled" have meanings correlative to the foregoing.
I-2
<PAGE> 21
"AGENT": Any Bond Registrar, Paying Agent or Authenticating
Agent.
"APPRAISED VALUE": With respect to any Pledged Mortgage, the
Appraised Value of the related Mortgaged Property shall be: (i) with respect
to a Pledged Mortgage other than a Refinancing Pledged Mortgage, the lesser of
(a) the value of the Mortgaged Property based upon the appraisal made at the
time of the origination of such Pledged Mortgage and (b) the sales price of the
Mortgaged Property at the time of the origination of such Pledged Mortgage;
(ii) with respect to a Refinancing Pledged Mortgage, the value of the Mortgaged
Property based upon the appraisal made at the time of the origination of such
Refinancing Pledged Mortgage.
"ASSIGNMENTS": Collectively (i) the original instrument of
assignment of a Mortgage, including any interim assignments from the originator
or any other holder of any Pledged Mortgage, and (ii) the original instrument
of assignment of such Mortgage, made by the Issuer to the Trustee (which in
either case may, to the extent permitted by the laws of the state in which the
related Mortgaged Property is located, be a blanket instrument of assignment
covering other Mortgages as well and which may also, to the extent permitted by
the laws of the state in which the related Mortgaged Property is located, be an
instrument of assignment running directly from the mortgagee of record under
the related Mortgage to the Trustee).
"AUTHENTICATING AGENT": The Person, if any, appointed as
Authenticating Agent by the Trustee at the request of the Issuer pursuant to
Section 6.15, until any successor Authenticating Agent for the Bonds is named,
and thereafter "Authenticating Agent" shall mean such successor.
"AUTHORIZED OFFICER": Any officer of the Owner Trustee who is
authorized to act for the Owner Trustee in respect of the Issuer and whose name
appears on a list of such authorized officers furnished by the Owner Trustee to
the Trustee, as such list may be amended or supplemented from time to time, and
any officer of the Issuer who is authorized to act pursuant to the Deposit
Trust Agreement and whose name appears on a list furnished by the Depositor to
the Owner Trustee and the Trustee, as such list may be amended or supplemented
from time to time.
I-3
<PAGE> 22
"AVAILABLE FUNDS": As defined in Section 1 of the Master
Servicing Agreement.
"BANK": ________________________, a Delaware banking
corporation, in its individual capacity and not as Owner Trustee.
"BANKRUPTCY CODE": The United States Bankruptcy Reform Act of
1978, as amended.
"BENEFICIAL OWNER": With respect to a Book Entry Bond, the
Person who is the beneficial owner of such Book Entry Bond.
"BOND ACCOUNT": The separate Eligible Account or Accounts
created and maintained by the Master Servicer pursuant to Section 3(h)(v) of
the Master Servicing Agreement with a depository institution in the name of the
Master Servicer for the benefit of the Trustee on behalf of Bondholders and
designated "Sequoia Mortgage Holdings, Inc. in trust for the registered
holders of Sequoia Mortgage Trust 199_-_ Collateralized Mortgage Bonds, Series
199_-_".
"BOND DISTRIBUTION AMOUNT": As to any Payment Date, an amount
equal to the sum of (i) the Senior Interest Payment Amount, (ii) the Senior
Principal Payment Amount, (iii) the Class B-1 Interest Payment Amount, (iv) the
Class B-1 Principal Payment Amount, (v) the Class B-2 Interest Payment Amount
and (vi) the Class B-2 Principal Payment Amount.
"BOND PAYMENT AMOUNT": As to any Payment Date, an amount
equal to the sum of (i) the Senior Interest Payment Amount, (ii) the Senior
Principal Payment Amount, (iii) the Class B-1 Interest Payment Amount, (iv) the
Class B- 1 Principal Payment Amount, (v) the Class B-2 Interest Payment Amount
and (vi) the Class B-2 Principal Payment Amount, in each case for such Payment
Date.
"BONDHOLDER" OR "HOLDER": The Person in whose name a
Bond is registered in the Bond Register.
"BOND INSURANCE POLICY": Any financial guaranty insurance
policy covering any Bonds or Class of Bonds of any Series.
I-4
<PAGE> 23
"BOND INSURER": The issuer of any Bond Insurance Policy.
"BOND INTEREST RATE": The Senior Bond Interest Rate, the
Class B-1 Bond Interest Rate or the Class B-2 Bond Interest Rate, as
applicable.
"BOND REGISTER" AND "BOND REGISTRAR": As defined in Section
2.07.
"BONDS": Any bonds authorized by, and authenticated and
delivered under, this Indenture.
"BOOK ENTRY BONDS": The Bonds shall be registered in the name
of the Depository or its nominee, ownership of which is reflected on the books
of the Depository or on the books of a Person maintaining an account with such
Depository (directly or as an indirect participant in accordance with the rules
of such Depository).
"BUSINESS DAY": Any day other than (i) a Saturday or a
Sunday, or (ii) a day on which banking institutions in the City of New York,
New York or the State of California or the city in which the Corporate Trust
Office of the Trustee is located are authorized or obligated by law or
executive order to be closed.
"CERTIFICATE INTEREST RATE": As defined in Section 1 of the
Master Servicing Agreement.
"CLASS": Collectively, all of the Bonds bearing the same
class designation. The Bonds are divided into Classes as provided in Section
2.03.
"CLASS B-1 INTEREST CARRYOVER SHORTFALL": The amount by which
sum of (i) the interest at the Class B-1 Bond Interest Rate on the Class B-1
Principal Amount and (ii) the interest at the Class B-1 Bond Interest Rate on
any Class B-1 Principal Carryover Shortfall, on each prior Payment Date,
exceeded the amount actually distributed as interest on such prior Payment
Dates and not subsequently distributed.
"CLASS B-1 BOND INTEREST RATE": With respect to any Interest
Accrual Period, the annual rate at which interest
I-5
<PAGE> 24
accrues on the Class B-1 Bonds as specified in such Bonds and in Section
2.03(c).
"CLASS B-1 INTEREST PAYMENT AMOUNT": As to any Payment Date,
the sum of (i) interest at the Class B-1 Bond Interest Rate on the Class B-1
Principal Amount, (ii) interest at the Class B-1 Bond Interest Rate on any
Class B-1 Principal Carryover Shortfall, (iii) the Class B-1 Interest Carryover
Shortfall and (iv) interest at the Class B-1 Bond Interest Rate on any Class
B-1 Interest Carryover Shortfall.
"CLASS B-1 PERCENTAGE": As to any Payment Date, the
percentage equivalent of a fraction the numerator of which is the Class B-1
Principal Amount immediately prior to such date and the denominator of which is
the sum of (i) the Senior Class Principal Amount, (ii) the Class B-1 Principal
Amount, (iii) the Class B-2 Principal Amount and (iv) the Invested Amount, in
each case immediately prior to such date.
"CLASS B-1 PRINCIPAL AMOUNT": As to any Payment Date is the
lesser of (i) the aggregate of the Stated Principal Balances of the Pledged
Mortgages, less the Senior Class Principal Amount immediately prior to such
date, and (ii) the Original Class B-1 Principal Amount reduced by all amounts
previously distributed to holders of the Class B-1 Bonds as payments of
principal.
"CLASS B-1 PRINCIPAL CARRYOVER SHORTFALL": As to any Payment
Date, the excess of (i) the Original Class B-1 Principal Amount reduced by all
amounts previously distributed to holders of the Class B-1 Bonds as payments of
principal or Class B-1 Principal Carryover Shortfall, over (ii) the Class B-1
Principal Amount immediately prior to such date.
"CLASS B-1 PRINCIPAL PAYMENT AMOUNT": As to any Payment Date,
the sum of (i) the Class B-1 Percentage of the sum of (a) the principal portion
of the Schedules Payment due on each Pledged Mortgage [on the related Due
Date], (b) the principal portion of the purchase price of each Pledged Mortgage
that was purchased by Redwood Trust or another person pursuant to the Mortgage
Loan Purchase Agreement [or by the Master Servicer in connection with any
optional purchase by the Master Servicer of a defaulted Pledged Mortgage] as of
such Payment Date, (c) the
I-6
<PAGE> 25
Substitution Adjustment Amount in connection with any Deleted Pledged Mortgage
received with respect to such Payment Date, (d) any Insurance Proceeds or
Liquidation Proceeds allocable to recoveries of principal of Pledged Mortgages
that are not yet Liquidated Pledged Mortgages received during the [calendar
month] preceding the month of such Payment Date, (e) with respect to each
Pledged Mortgage that became a Liquidated Pledged Mortgage during the [calendar
month] preceding the month of such Payment Date, the Stated Principal Balance
of such Pledged Mortgage and (f) all partial and full principal prepayments by
borrowers received during the related Prepayment Period and (ii) any Class B-1
Principal Carryover Shortfall.
CLASS B-2 BOND INTEREST RATE": With respect to any Interest
Accrual Period, the annual rate at which interest accrues on the Class B-2
Bonds as specified in such Bonds and in Section 2.03(c).
"CLASS B-2 INTEREST CARRYOVER SHORTFALL": The amount by which
sum of (i) the interest at the Class B-2 Bond Interest Rate on the Class B-2
Principal Amount and (ii) the interest at the Class B-2 Bond Interest Rate on
any Class B-2 Principal Carryover Shortfall, on each prior Payment Date,
exceeded the amount actually distributed as interest on such prior Payment
Dates and not subsequently distributed.
"CLASS B-2 INTEREST PAYMENT AMOUNT": As to any Payment Date,
the sum of (i) interest at the Class B-2 Bond Interest Rate on the Class B-2
Principal Amount, (ii) interest at the Class B-2 Bond Interest Rate on any
Class B-2 Principal Carryover Shortfall, (iii) the Class B-2 Interest Carryover
Shortfall and (iv) interest at the Class B-2 Bond Interest Rate on any Class
B-2 Interest Carryover Shortfall.
"CLASS B-2 PERCENTAGE": As to any Payment Date, the
percentage equivalent of a fraction the numerator of which is the Class B-2
Principal Amount immediately prior to such date and the denominator of which is
the sum of (i) the Senior Class Principal Amount, (ii) the Class B-1 Principal
Amount, (iii) the Class B-2 Principal Amount and (iv) the Invested Amount, in
each case immediately prior to such date.
I-7
<PAGE> 26
"CLASS B-2 PRINCIPAL AMOUNT": As to any Payment Date is the
lesser of (i) the aggregate of the Stated Principal Balances of the Pledged
Mortgages, less the sum of the Senior Class Principal Amount and the Class B-1
Principal Amount, in each case immediately prior to such date, and (ii) the
Original Class B-2 Principal Amount reduced by all amounts previously
distributed to holders of the Class B-2 Bonds as payments of principal.
"CLASS B-2 PRINCIPAL CARRYOVER SHORTFALL": As to any Payment
Date, the excess of (i) the Original Class B-2 Principal Amount reduced by all
amounts previously distributed to holders of the Class B-2 Bonds as payments of
principal or Class B-2 Principal Carryover Shortfall, over (ii) the Class B-2
Principal Amount immediately prior to such date.
"CLASS B-2 PRINCIPAL PAYMENT AMOUNT": As to any Payment Date,
the sum of (i) the Class B-2 Percentage of the sum of (a) the principal portion
of the Scheduled Payment due on each Pledged Mortgage [on the related Due
Date], (b) the principal portion of the purchase price of each Pledged Mortgage
that was purchased by Redwood Trust or another person pursuant to the Mortgage
Loan Purchase Agreement [or by the Master Servicer in connection with any
optional purchase by the Master Servicer of a defaulted Pledged Mortgage] as of
such Payment Date, (c) the Substitution Adjustment Amount in connection with
any Deleted Pledged Mortgage received with respect to such Payment Date, (d)
any Insurance Proceeds or Liquidation Proceeds allocable to recoveries of
principal of Pledged Mortgages that are not yet Liquidated Pledged Mortgages
received during the [calendar month] preceding the month of such Payment Date,
(e) with respect to each Pledged Mortgage that became a Liquidated Pledged
Mortgage during the [calendar month] preceding the month of such Payment Date,
the Stated Principal Balance of such Pledged Mortgage and (f) all partial and
full principal prepayments by borrowers received during the related Prepayment
Period and (ii) any Class B-2 Principal Carryover Shortfall.
"CLASS INTEREST SHORTFALL": As to any Payment Date, the
Senior Interest Shortfall, the Class B-1 Interest Carryover Shortfall or the
Class B-2 Interest Carryover Shortfall, as applicable.
I-8
<PAGE> 27
"CLASS PRINCIPAL AMOUNT": The Senior Class Principal Amount,
the Class B-1 Principal Amount or the Class B-2 Principal Amount, as
applicable.
"CLOSING DATE": ____________ ___, 199__.
"CODE": The Internal Revenue Code of 1986, including any
successor or amendatory provisions.
"COMMISSION": Securities and Exchange Commission, as from
time to time constituted, created under the Securities Exchange Act of 1934, or
if at any time such Commission is not existing and performing the duties now
assigned to it under the Trust Indenture Act, then the body performing such
duties at such time under the Trust Indenture Act or similar legislation
replacing the Trust Indenture Act.
"CONTROLLING CLASS": The Class A-1 Bonds or, if the Class A-1
Bonds are no longer Outstanding, the most senior Class of Subordinated Bonds
then Outstanding.
"COOPERATIVE LOAN": As defined in Section 1 of the Master
Servicing Agreement.
"COOPERATIVE SHARES": As defined in Section 1 of the Master
Servicing Agreement.
"CORPORATE TRUST OFFICE": The principal corporate trust
office of the Trustee located at ______________
______________________________________, or at such other address as the Trustee
may designate from time to time by notice to the Bondholders and the Issuer, or
the principal corporate trust office of any successor Trustee.
"CUT-OFF DATE": _____________ ___, 199__.
"DEBT SERVICE REDUCTION": With respect to any Pledged
Mortgage, a reduction by a court of competent jurisdiction in a proceeding
under the Bankruptcy Code in the Scheduled Payment for such Pledged Mortgage
which became final and non-appealable, except such a reduction resulting from a
Deficient Valuation or any reduction that results in a permanent forgiveness of
principal.
I-9
<PAGE> 28
"DEFAULT": Any occurrence which is, or with notice or the
lapse of time or both would become, an Event of Default.
"DEFAULTED PLEDGED MORTGAGE": The meaning specified in
Section 8.04(e).
"DEFICIENT VALUATION": With respect to any Pledged Mortgage,
a valuation by a court of competent jurisdiction of the Mortgaged Property in
an amount less than the then outstanding indebtedness under the Pledged
Mortgage, or any reduction in the amount of principal to be paid in connection
with any Scheduled Payment that results in a permanent forgiveness of
principal, which valuation or reduction results from an order of such court
which is final and non-appealable in a proceeding under the Bankruptcy Code.
"DEFINITIVE BONDS": Bonds other than Book Entry Bonds.
"DELETED PLEDGED MORTGAGE": As defined in Section 5 of the
Master Servicing Agreement.
"DENOMINATION": With respect to each Bond, the amount set
forth on the face thereof as the "Initial Principal Amount of this Bond".
"DEPOSITOR": Sequoia Mortgage Funding Corporation, a Delaware
corporation.
"DEPOSITORY": The initial Depository with respect to each
Class of Book Entry Bonds shall be The Depository Trust Company of New York,
the nominee for which is Cede & Co. The Depository shall at all times be a
"clearing corporation" as defined in Section 8-102(3) of the Uniform Commercial
Code of the State of New York.
"DEPOSITORY PARTICIPANTS": A broker, dealer, bank or other
financial institution or other Person for whom from time to time a Depository
effects book-entry transfers and pledges of securities deposited with the
Depository.
"DEPOSIT TRUST AGREEMENT": The Amended and Restated Deposit
Trust Agreement, dated as of ____________ _ _, 199__, between the Bank and the
Depositor, creating the Issuer, as such
I-10
<PAGE> 29
Deposit Trust Agreement may be amended or supplemented from time to time.
"DETERMINATION DATE": As to any Payment Date, the ___th day
of each month or if such ___th day is not a Business Day the next succeeding
Business Day; provided, however, that if such next succeeding Business Day is
less than two Business Days prior to the related Payment Date, then the
Determination Date shall be the next Business Day preceding the ___th day of
such month.
"DISTRIBUTION ACCOUNT": The separate Eligible Account created
and maintained by the Trustee pursuant to Section 8.02 in the name of the
Trustee for the benefit of the Bondholders and designated "____________________
in trust for registered holders of Sequoia Mortgage Trust 199_-_, Collateralized
Mortgage Bonds. Funds in the Distribution Account shall be held in trust for the
Bondholders for the uses and purposes set forth in this Indenture.
"DISTRIBUTION ACCOUNT DEPOSIT DATE": As to any Payment Date,
[12:30 p.m. Pacific time] on the Business Day immediately preceding such
Payment Date.
"DUE DATE": The first day of each month.
["DUFF & PHELPS": Duff & Phelps Credit Rating Company, or any
successor thereto. For purposes of Section 11.04 the address for notices to
Duff & Phelps shall be Duff & Phelps Credit Rating Company, 55 E. Monroe
Street, 35th Floor, Chicago, Illinois 60603, Attention: MBS Monitoring, or
such other address as Duff & Phelps may hereafter furnish to the Issuer and the
Master Servicer.]
"ELIGIBLE ACCOUNT": Any of (i) an account or accounts
maintained with a federal or state chartered depository institution or trust
company the short-term unsecured debt obligations of which (or, in the case of
a depository institution or trust company that is the principal subsidiary of a
holding company, the debt obligations of such holding company) have the highest
short-term ratings of each Rating Agency at the time any amounts are held on
deposit therein, or (ii) an account or accounts in a depository institution or
trust company in which such accounts
I-11
<PAGE> 30
are insured by the FDIC or the SAIF (to the limits established by the FDIC or
the SAIF) and the uninsured deposits in which accounts are otherwise secured
such that, as evidenced by an Opinion of Counsel delivered to the Trustee and
to each Rating Agency, the Bondholders have a claim with respect to the funds
in such account or a perfected first priority security interest against any
collateral (which shall be limited to Permitted Investments) securing such
funds that is superior to claims of any other depositors or creditors of the
depository institution or trust company in which such account is maintained, or
(iii) a trust account or accounts maintained with the trust department of a
federal or state chartered depository institution or trust company, acting in
its fiduciary capacity or (iv) any other account acceptable to each Rating
Agency. Eligible Accounts may bear interest, and may include, if otherwise
qualified under this definition, accounts maintained with the Trustee.
"ESCROW ACCOUNT": As defined in Section 1 of the Master
Servicing Agreement.
"EVENT OF DEFAULT": The meaning specified in Section 5.01.
"EXPENSE RATE": As to each Pledged Mortgage, the sum of the
related Servicing Fee Rate, the Master Servicing Fee Rate and Trustee Fee Rate.
"FDIC": The Federal Deposit Insurance Corporation, or any
successor thereto.
"FHLMC": The Federal Home Loan Mortgage Corporation, a
corporate instrumentality of the United States created and existing under Title
III of the Emergency Home Finance Act of 1970, as amended, or any successor
thereto.
"FIRREA": The Financial Institutions Reform, Recovery and
Enforcement Act of 1989.
["FITCH": Fitch Investors Service, L.P., or any successor
thereto. For purposes of Section 11.04 the address for notices to Fitch shall
be Fitch Investors Service, L.P., One State Street Plaza, New York, New York
10004, Attention: Residential Mortgage Surveillance Group, or such other
address as
I-12
<PAGE> 31
Fitch may hereafter furnish to the Issuer and the Master Servicer.]
"FNMA": The Federal National Mortgage Association, a
federally chartered and privately owned corporation organized and existing
under the Federal National Mortgage Association Charter Act, or any successor
thereto.
"GRANT": To grant, bargain, sell, warrant, alienate, remise,
release, convey, assign, transfer, mortgage, pledge, create and grant a
security interest in, deposit, set-over and confirm. A Grant of a Pledged
Mortgage and related Mortgage Documents, a Permitted Investment, the Master
Servicing Agreement, an Insurance Policy, or any other instrument shall include
all rights, powers and options (but none of the obligations) of the Granting
party thereunder, including, without limitation, the immediate and continuing
right to claim for, collect, receive and give receipts for principal and
interest payments thereunder, Insurance Proceeds, condemnation awards, purchase
prices and all other moneys payable thereunder and all proceeds thereof, to
give and receive notices and other communications, to make waivers or other
agreements, to exercise all rights and options, to bring Proceedings in the
name of the Granting party or otherwise, and generally to do and receive
anything which the Granting party is or may be entitled to do or receive
thereunder or with respect thereto.
"HIGHEST LAWFUL RATE": The meaning specified in Section
11.18.
"HOLDER": The holder of Bonds issued pursuant to this
Indenture.
"INDENTURE" or "THIS INDENTURE": This instrument as
originally executed and, if from time to time supplemented or amended by one or
more indentures supplemental hereto entered into pursuant to the applicable
provisions hereof, as so supplemented or amended. All references in this
instrument to designated "Articles", "Sections", "Subsections" and other
subdivisions are to the designated Articles, Sections, Subsections and other
subdivisions of this instrument as originally executed. The words "herein",
"hereof" and "hereunder" and other words of similar import refer to this
I-13
<PAGE> 32
Indenture as a whole and not to any particular Article, Section, Subsection or
other subdivision.
"INDEPENDENT": When used with respect to any specified Person
means such a Person who (i) is in fact independent of the Issuer and any other
obligor upon the Bonds, (ii) does not have any direct financial interest or any
material indirect financial interest in the Issuer or in any such other obligor
or in an Affiliate of the Issuer or such other obligor and (iii) is not
connected with the Issuer or any such other obligor as an officer, employee,
promoter, underwriter, trustee, partner, director or person performing similar
functions. Whenever it is herein provided that any Independent Person's opinion
or certificate shall be furnished to the Trustee, such Person shall be
appointed by an Issuer Order and with the approval of the Trustee, which
approval shall not be unreasonably withheld, and such opinion or certificate
shall state that the signer has read this definition and that the signer is
Independent within the meaning hereof.
"INDEX": As to (a) each Pledged Mortgage, the index from time
to time in effect for the adjustment of the Mortgage Rate set forth as such on
the related Mortgage Note and (b) either Bond Interest Rate and any Payment
Date, the weekly average yield on United States Treasury Securities adjusted to
a constant maturity of one year as made available by the Federal Reserve Board
and most recently available as of 45 days prior to the first day of the month
preceding the month in which such Payment Date occurs.
"INDIRECT PARTICIPANT": A broker, dealer, bank or other
financial institution or other Person that clears through or maintains a
custodial relationship with a Depository Participant.
"INDIVIDUAL BOND": A Bond of an original principal amount of
$1,000; a Bond of an original principal amount in excess of $1,000 shall be
deemed to be a number of Individual Bonds equal to the quotient obtained by
dividing such original principal amount by $1,000.
"INSURANCE POLICY": With respect to any Pledged Mortgage, any
insurance policy, including all riders and
I-14
<PAGE> 33
endorsements thereto in effect, including any replacement policy or policies
for any Insurance Policies.
"INSURANCE PROCEEDS": Proceeds paid by an insurer pursuant to
any Insurance Policy, in each case other than any amount included in such
Insurance Proceeds in respect of Insured Expenses.
"INSURED EXPENSES": Expenses covered by an Insurance Policy
or any other insurance policy with respect to the Pledged Mortgages.
"INTEREST ACCRUAL PERIOD": With respect to each Class of
Bonds and any Payment Date, the calendar month prior to the month of such
Payment Date.
"INTEREST CONVERSION DATE": As to the Pledged Mortgages, the
date on which the first Adjustment Date occurs.
"INTEREST PAYMENT AMOUNT": The Senior Interest Payment
Amount, the Class B-1 Interest Payment Amount, the Class B-2 Interest Payment
Amount or the Certificate Interest Payment Amount, as applicable.
"INVESTED AMOUNT": As of any Payment Date, the lesser of (i)
the aggregate of the Stated Principal Balances of the Pledged Mortgages, less
the sum of (x) the Senior Class Principal Amount, (y) the Class B-1 Principal
Amount and (z) the Class B-2 Principal Amount, in each case immediately prior
to such date, and (ii) the Original Invested Amount reduced by all amounts
previously distributed to the holder of the Investor Certificate in reduction
of the Invested Amount.
"INVESTOR CERTIFICATE": As defined in Section 1.01 of the
Deposit Trust Agreement.
"INVESTOR PERCENTAGE": As of any Payment Date, the difference
between 100% and the sum of the Senior Percentage, the Class B-1 Percentage and
the Class B-2 Percentage for such date.
"ISSUER": Sequoia Mortgage Trust 199_-_ formed pursuant to
the Deposit Trust Agreement.
I-15
<PAGE> 34
"ISSUER ORDER" and "ISSUER REQUEST": A written order or
request that is dated and signed in the name of the Issuer by an Authorized
Officer and delivered to the Trustee.
"LETTER AGREEMENT": With respect to the Book Entry Bonds, the
letter agreement among the Issuer, the Trustee and the Depository governing
book entry transfers of, and certain other matters with respect to, such Book
Entry Bonds and attached as Exhibit I hereto.
"LIQUIDATED PLEDGED MORTGAGE": With respect to any Payment
Date, a defaulted Pledged Mortgage (including any REO Property) which was
liquidated in the calendar month preceding the month of such Payment Date and
as to which the Master Servicer has certified (in accordance with the Master
Servicing Agreement) that it has received all amounts it expects to receive in
connection with the liquidation of such Pledged Mortgage including the final
disposition of an REO Property.
"LIQUIDATION PROCEEDS": Amounts, including Insurance
Proceeds, received in connection with the partial or complete liquidation of
defaulted Pledged Mortgages, whether through trustee's sale, foreclosure sale
or otherwise or amounts received in connection with any condemnation or partial
release of a Mortgaged Property and any other proceeds received in connection
with an REO Property, less the sum of related unreimbursed Master Servicing
Fees, Servicing Advances and Advances.
"LOAN-TO-VALUE RATIO": With respect to any Pledged Mortgage
and as to any date of determination, the fraction (expressed as a percentage)
the numerator of which is the principal balance of the related Pledged Mortgage
at such date of determination and the denominator of which is the Appraised
Value of the related Mortgaged Property.
"MARGIN": As to each Pledged Mortgage, the percentage amount
set forth on the related Mortgage Note added to the Index in calculating the
Mortgage Rate thereon.
"MASTER SERVICER": _________________________________, a
____________ corporation, as Master Servicer under the Master Servicing
Agreement, and its permitted successors and assigns thereunder.
I-16
<PAGE> 35
"MASTER SERVICING AGREEMENT": The master servicing agreement
dated as of _____________ , 199__, among the Issuer, the Trustee and the
Master Servicer, pursuant to which the Master Servicer will be obligated to
manage and supervise the administration and servicing of the Pledged Mortgages
securing the Bonds and each Servicer of the Pledged Mortgages, or its
successors or assigns, as such agreement may be amended or supplemented from
time to time as permitted thereby.
"MASTER SERVICING FEE": As to each Pledged Mortgage and any
Payment Date, an amount equal to one month's interest at the related Master
Servicing Fee Rate on the Stated Principal Balance of such Pledged Mortgage or,
in the event of any payment of interest which accompanies a Principal
Prepayment in Full made by the Mortgagor, interest at the Master Servicing Fee
Rate on the Stated Principal Balance of such Pledged Mortgage for the period
covered by such payment of interest, subject to reduction as provided in
Section 5(a) of the Master Servicing Agreement.
"MASTER SERVICING FEE RATE": With respect to each Mortgage
Loan, _____% per annum.
"MATURITY": With respect to any Bond, the date on which the
entire unpaid principal amount of such Bond becomes due and payable as therein
or herein provided, whether at the Stated Maturity of the final installment of
such principal or by declaration of acceleration, call for redemption or
otherwise.
"MAXIMUM RATE": As to any Pledged Mortgage, the maximum rate
set forth on the related Mortgage Note at which interest can accrue on such
Pledged Mortgage.
["MOODY'S": Moody's Investors Service, Inc., or any successor
thereto. For purposes of Section 11.04 the address for notices to Moody's shall
be Moody's Investors Service, Inc., 99 Church Street, New York, New York 10007,
Attention: ____________ or such other address as Moody's may hereafter furnish
to the Issuer and the Master Servicer.]
"MORTGAGE": The mortgage, deed of trust or other instrument
creating a first lien on an estate in fee simple or leasehold interest in real
property securing a Mortgage Note.
I-17
<PAGE> 36
"MORTGAGE DOCUMENTS": The mortgage documents listed in
Section 2(a)(i) of the Master Servicing Agreement pertaining to a particular
Pledged Mortgage and any additional documents delivered to the Trustee to be
added to the Mortgage Documents pursuant to the Master Servicing Agreement.
"MORTGAGE NOTE": The original executed note or other evidence
of indebtedness evidencing the indebtedness of a Mortgagor under a Pledged
Mortgage.
"MORTGAGE RATE": The annual rate of interest borne by a
Mortgage Note from time to time.
"MORTGAGED PROPERTY": The underlying property securing a
Pledged Mortgage, which, with respect to a Cooperative Loan, is the related
Cooperative Shares and Proprietary Lease.
"MORTGAGOR": The obligor(s) on a Mortgage Note.
"NET MORTGAGE RATE": As to any Pledged Mortgage and Payment
Date, the related Mortgage Rate as of the Due Date in the month preceding the
month of such Payment Date reduced by the related Expense Rate.
"NET INTEREST SHORTFALLS": As to any Payment Date, the amount
by which the sum of (i) the amount of interest which would otherwise have been
received with respect to any Pledged Mortgage that was the subject of a Relief
Act Reduction and (ii) any Prepayment Interest Shortfalls, in each case during
the [calendar month] preceding the month of such Payment Date, exceeds the sum
of (i) the Master Servicing Fee for such period and (ii) the Certificate
Interest Payment Amount, the Invested Amount Payment and any other amounts
payable to the holder of the Investor Certificate described in [ ].
"NONRECOVERABLE ADVANCE": Any portion of an Advance or
Servicer Advance previously made or proposed to be made by the Master Servicer
or the related Servicer, as the case may be, that, in the good faith judgment
of the Master Servicer or such Servicer, will not be ultimately recoverable by
the Master Servicer from the related Mortgagor, related Liquidation Proceeds or
otherwise.
I-18
<PAGE> 37
"OFFICERS' CERTIFICATE": A certificate signed by two
Authorized Officers.
"OFFICER'S CERTIFICATE OF THE MASTER SERVICER": A certificate
(i) signed by the Chairman of the Board, the Vice Chairman of the Board, the
President, a Managing Director, a Vice President (however denominated), an
Assistant Vice President, the Treasurer, the Secretary, or one of the Assistant
Treasurers or Assistant Secretaries of the Master Servicer, or (ii) if provided
for herein, signed by a Servicing Officer, as the case may be, and delivered to
the Trustee, as required hereby.
"OPERATIVE AGREEMENTS": The meaning ascribed thereto in the
Deposit Trust Agreement.
"OPINION OF COUNSEL": A written opinion of counsel who may,
except as otherwise expressly provided in this Indenture, be counsel for the
Issuer, and who shall be reasonably satisfactory to the Trustee.
"OPTIONAL REDEMPTION DATE": With respect to the Bonds which
are subject to optional redemption, the date on which Bonds may be redeemed
pursuant to Section 10.01.
"OPTIONAL REDEMPTION RECORD DATE": The meaning specified in
Section 10.02.
"ORIGINAL CLASS B-1 PRINCIPAL AMOUNT": $____________.
"ORIGINAL CLASS B-2 PRINCIPAL AMOUNT": $____________.
"ORIGINAL INVESTED AMOUNT": $____________.
"ORIGINAL PLEDGED MORTGAGES": The Pledged Mortgages listed on
the Pledged Mortgage Schedule and granted to the Trustee on the Closing Date.
"ORIGINAL SENIOR CLASS PRINCIPAL AMOUNT":
$___________________.
"ORIGINAL SUBORDINATION AMOUNT": The sum of the Original
Subordinated Class Principal Amount and the Original Invested Amount.
I-19
<PAGE> 38
"OTS": The Office of Thrift Supervision.
"OUTSTANDING": As of the date of determination, all Bonds
theretofore authenticated and delivered under this Indenture except:
(i) Bonds theretofore cancelled by the Bond Registrar
or delivered to the Bond Registrar for cancellation;
(ii) Bonds or portions thereof for whose payment or
redemption money in the necessary amount has been theretofore
deposited with the Trustee or any Paying Agent (other than the Issuer)
in trust for the Holders of such Bonds; provided, however, that if
such Bonds are to be redeemed, notice of such redemption has been duly
given pursuant to this Indenture or provision therefor, satisfactory
to the Trustee, has been made;
(iii) Bonds in exchange for or in lieu of which other
Bonds have been authenticated and delivered pursuant to this Indenture
unless proof satisfactory to the Trustee is presented that any such
Bonds are held by a bona fide purchaser (as defined by the Uniform
Commercial Code of the applicable jurisdiction); and
(iv) Bonds alleged to have been destroyed, lost or
stolen for which replacement Bonds have been issued as provided for in
Section 2.08;
provided, however, that in determining whether the Holders of the requisite
percentage of the aggregate Class Principal Amount of the Outstanding Bonds
have given any request, demand, authorization, direction, notice, consent or
waiver hereunder, Bonds owned by the Issuer, any other obligor upon the Bonds
or any Affiliate of the Issuer or such other obligor shall be disregarded and
deemed not to be Outstanding, except that, in determining whether the Trustee
shall be protected in relying upon any such request, demand, authorization,
direction, notice, consent or waiver, only Bonds which the Trustee knows to be
so owned shall be so disregarded. Bonds so owned which have been pledged in
good faith may be regarded as Outstanding if the pledgee establishes to the
satisfaction of the Trustee the pledgee's right so to act
I-20
<PAGE> 39
with respect to such Bonds and that the pledgee is not the Issuer, any other
obligor upon the Bonds or any Affiliate of the Issuer or such other obligor.
"OUTSTANDING PLEDGED MORTGAGE": As of any Due Date, a Pledged
Mortgage with a Stated Principal Balance greater than zero which was not the
subject of a Principal Prepayment in Full prior to such Due Date and which did
not become a Liquidated Pledged Mortgage prior to such Due Date.
"OWNER": The meaning ascribed thereto in the Deposit Trust
Agreement.
"OWNER TRUSTEE": Wilmington Trust Company, a Delaware banking
corporation, not in its individual capacity but solely as Owner Trustee under
the Deposit Trust Agreement, until a successor Person shall have become the
Owner Trustee pursuant to the applicable provisions of the Deposit Trust
Agreement, and thereafter "Owner Trustee" shall mean such successor Person.
"PAYING AGENT": The Trustee or any other depository
institution or trust company that is authorized by the Issuer pursuant to
Section 3.03 to pay the principal of, or interest on, any Bonds on behalf of
the Issuer.
"PAYMENT DATE": The ___th day of each [calendar month] after
the initial issuance of the Bonds or, if such ___th day is not a Business Day,
the next succeeding Business Day, commencing in ____________ 199__.
"PAYMENT DATE STATEMENT": The meaning specified in Section
8.06.
["PERIODIC RATE CAP": As to any Pledged Mortgage and any
Adjustment Date, the maximum percentage increase or decrease to the related
Mortgage Note on any such Adjustment Date, as specified in the related Mortgage
Note.]
"PERMITTED ENCUMBRANCE": Any lien, charge, security interest,
mortgage or other encumbrance Granted by the Issuer in the Trust Estate,
provided that:
I-21
<PAGE> 40
(i) such lien, charge, security interest, mortgage or
encumbrance extends only to a portion of the Trust Estate which is
limited to cash deliverable or payable to the Issuer pursuant to
Section 8.01 or Section 8.02(d);
(ii) such lien, charge, security interest, mortgage or other
encumbrance secures indebtedness which the Issuer is permitted to
incur under the terms of this Indenture; and
(iii) the beneficiary of such lien, charge, security interest,
mortgage or other encumbrance has agreed that in connection with the
enforcement thereof it will not bring any Proceeding seeking, or which
would result in, the sale of any portion of the Trust Estate and will
not file any petition for the commencement of insolvency proceedings
with respect to the Issuer under the federal bankruptcy laws, as now
or hereafter in effect, or any other present or future federal or
state bankruptcy, insolvency or similar law, or for the appointment of
any receiver, liquidator, assignee, trustee, custodian, sequestrator
or other similar official of the Issuer or of any of its property, or
seeking an order for the winding up or liquidation of the affairs of
the Issuer.
"PERMITTED INVESTMENTS": At any time, any one or more of the
following obligations and securities:
(i) obligations of the United States or any agency thereof,
provided that such obligations are backed by the full faith and credit
of the United States;
(ii) general obligations of or obligations guaranteed by any
state of the United States or the District of Columbia receiving the
highest long-term debt rating of each Rating Agency, or such lower
rating as will not result in the downgrading or withdrawal of the
ratings then assigned to the Bonds by the Rating Agencies, as
evidenced by a signed writing delivered by each Rating Agency;
(iii) commercial or finance company paper which is then
receiving the highest commercial or finance company paper rating of
each Rating Agency, or such lower rating as will not result in the
downgrading or withdrawal of the ratings
I-22
<PAGE> 41
then assigned to the Bonds by the Rating Agencies, as evidenced by a
signed writing delivered by each Rating Agency;
(iv) certificates of deposit, demand or time deposits, or
bankers' acceptances issued by any depository institution or trust
company incorporated under the laws of the United States or of any
state thereof and subject to supervision and examination by federal
and/or state banking authorities, provided that the commercial paper
and/or long-term unsecured debt obligations of such depository
institution or trust company (or in the case of the principal
depository institution in a holding company system, the commercial
paper or long-term unsecured debt obligations of such holding company,
but only if Moody's Investor's service, Inc. is not the applicable
Rating Agency) are then rated one of the two highest long-term and the
highest short-term ratings of each Rating Agency for such securities,
or such lower ratings as will not result in the downgrading or
withdrawal of the ratings then assigned to the Bonds by the Rating
Agencies, as evidenced by a signed writing delivered by each Rating
Agency;
(v) demand or time deposits or certificates of deposit issued
by any bank or trust company or savings institution to the extent that
such deposits are fully insured by the FDIC;
(vi) guaranteed reinvestment agreements issued by any bank,
insurance company or other corporation acceptable to the Rating
Agencies at the time of the issuance of such agreements, as evidenced
by a signed writing delivered by each Rating Agency;
(vii) repurchase obligations with respect to any security
described in clauses (i) and (ii) above, in either case entered into
with a depository institution or trust company (acting as principal)
described in clause (iv) above;
(viii) securities (other than stripped bonds, stripped
coupons or instruments sold at a purchase price in excess of 115% of
the face amount thereof) bearing interest or sold at a discount issued
by any corporation incorporated under the
I-23
<PAGE> 42
laws of the United States or any state thereof which, at the time of
such investment, have one of the two highest ratings of each Rating
Agency (except if the Rating Agency is Moody's, such rating shall be
the highest commercial paper rating of Moody's for any such series),
or such lower rating as will not result in the downgrading or
withdrawal of the ratings then assigned to the Bonds by the Rating
Agencies, as evidenced by a signed writing delivered by each Rating
Agency;
(ix) interests in any money market fund which at the date of
acquisition of the interests in such fund and throughout the time such
interests are held in such fund has the highest applicable rating by
each Rating Agency or such lower rating as will not result in a change
in the rating then assigned to the Bonds by each Rating Agency;
(x) short-term investment funds sponsored by any trust
company or national banking association incorporated under the laws of
the United States or any state thereof which on the date of
acquisition has been rated by each applicable Rating Agency in their
respective highest applicable rating category or such lower rating as
will not result in a change in the rating then specified stated
maturity and bearing interest or sold at a discount acceptable to each
Rating Agency as will not result in the downgrading or withdrawal of
the ratings then assigned to the Bonds by the Rating Agencies; and
(xi) such other investments having a specified stated
maturity and bearing interest or sold at a discount acceptable to the
Rating Agencies as will not result in the downgrading or withdrawal of
the ratings then assigned to the Bonds by the Rating Agencies;
provided, that no such instrument shall be a Permitted Investment if (i) such
instrument evidences the right to receive interest only payments with respect
to the obligations underlying such instrument or (ii) such instrument would
require the Issuer to register as an investment company under the Investment
Company Act of 1940, as amended.
I-24
<PAGE> 43
"PERSON": Any individual, corporation, partnership, joint
venture, association, joint stock company, trust, unincorporated organization
or government or any agency or political subdivision thereof.
"PLEDGED ACCOUNTS": The Bond Account and the Distribution
Account (exclusive of any earnings on investments made with funds deposited in
the Distribution Account or the Bond Account).
"PLEDGED MORTGAGE SCHEDULE": The list of Pledged Mortgages
(as from time to time amended by the Master Servicer to reflect the addition of
Replacement Pledged Mortgages and the deletion of Deleted Pledged Mortgages
pursuant to the provisions of the Master Servicing Agreement) Granted to the
Trustee pursuant to the provisions hereof as part of the Trust Estate and from
time to time subject to this Agreement, attached hereto as Schedule I.
"PLEDGED MORTGAGES": Such of the mortgage loans Granted to
the Trustee pursuant to the provisions hereof as from time to time are held as
a part of the Trust Estate (including any REO Property), the mortgage loans so
held being identified in the Pledged Mortgage Schedule, notwithstanding
foreclosure or other acquisition of title of the related Mortgaged Property.
"POOL STATED PRINCIPAL BALANCE": As to any Payment Date, the
aggregate of the Stated Principal Balances of the Pledged Mortgages which were
Outstanding Pledged Mortgages on the Due Date in the month preceding the month
of such Payment Date.
"PREDECESSOR BONDS": With respect to any particular Bond of a
Class, every previous Bond of that Class evidencing all or a portion of the
same debt as that evidenced by such particular Bond; and, for the purpose of
this definition, any Bond authenticated and delivered under Section 2.08 in
lieu of a lost, destroyed or stolen Bond shall be deemed to evidence the same
debt as the lost, destroyed or stolen Bond.
"PREPAYMENT INTEREST SHORTFALL": As to any Payment Date,
Pledged Mortgage and Principal Prepayment, the amount, if any, by which one
month's interest at the related Mortgage Rate
I-25
<PAGE> 44
on such Principal Prepayment exceeds the amount of interest paid in connection
with such Principal Prepayment.
"PREPAYMENT PERIOD": As to any Payment Date, the [calendar
month] preceding the month of such Payment Date.
"PRIMARY MORTGAGE INSURANCE POLICY": Each policy of primary
mortgage guaranty insurance or any replacement policy therefor with respect to
any Pledged Mortgage.
"PRINCIPAL PREPAYMENT": Any payment of principal by a
Mortgagor on a Pledged Mortgage that is received in advance of its scheduled
Due Date and is not accompanied by an amount representing scheduled interest
due on any date or dates in any month or months subsequent to the month of
prepayment.
"PRINCIPAL PREPAYMENT IN FULL": Any Principal Prepayment made
by a Mortgagor of the entire principal balance of a Pledged Mortgage.
"PROCEEDING": Any suit in equity, action at law or other
judicial or administrative proceeding.
"PROPRIETARY LEASE": As defined in Section 1 of the Master
Servicing Agreement.
"PROSPECTUS SUPPLEMENT": The Prospectus Supplement dated
_________ ___, 199__relating to the Bonds.
"PURCHASE PRICE": With respect to any Pledged Mortgage
required to be purchased by the Master Servicer pursuant to Section 2(a)(ii) or
2(d)(iii) of the Master Servicing Agreement or purchased at the option of the
Master Servicer pursuant to Section 3(n) of the Master Servicing Agreement, an
amount equal to the sum of (i) 100% of the unpaid principal balance of the
Pledged Mortgage on the date of such purchase, and (ii) accrued interest
thereon at the applicable Adjusted Net Mortgage Rate from the date through
which interest was last paid by the Mortgagor to the Due Date in the month in
which the Purchase Price is to be distributed to Bondholders.
"RATING AGENCY": Each of [ ] and [ ]. If either such
organization or a successor is no longer in
I-26
<PAGE> 45
existence, "Rating Agency" shall be such nationally recognized statistical
rating organization, or other comparable Person, as is designated by the
Issuer, notice of which designation shall be given to the Trustee. References
herein to a given rating or rating category of a Rating Agency shall mean such
rating category without giving effect to any modifiers.
"REALIZED LOSS": With respect to each Liquidated Pledged
Mortgage, an amount (not less than zero or more than the Stated Principal
Balance of the Pledged Mortgage) as of the date of such liquidation, equal to
(i) the Stated Principal Balance of the Liquidated Pledged Mortgage as of the
date of such liquidation, plus (ii) interest at the Net Mortgage Rate from the
Due Date as to which interest was last paid or advanced (and not reimbursed) to
Bondholders up to the Due Date in the month in which Liquidation Proceeds are
required to be distributed on the Stated Principal Balance of such Liquidated
Pledged Mortgage from time to time, minus (iii) the Liquidation Proceeds, if
any, received during the month in which such liquidation occurred, to the
extent applied as recoveries of interest at the Adjusted Net Mortgage Rate and
to principal of the Liquidated Pledged Mortgage. With respect to each Pledged
Mortgage which has become the subject of a Deficient Valuation, if the
principal amount due under the related Mortgage Note has been reduced, the
difference between the principal balance of the Pledged Mortgage outstanding
immediately prior to such Deficient Valuation and the principal balance of the
Pledged Mortgage as reduced by the Deficient Valuation. With respect to each
Pledged Mortgage which has become the subject of a Debt Service Reduction and
any Payment Date, the amount, if any, by which the principal portion of the
related Scheduled Payment has been reduced.
"RECORD DATE": With respect to any Payment Date, the date on
which the Persons entitled to receive any payment of principal of, or interest
on, any Bonds (or notice of a payment in full of principal) due and payable on
such Payment Date are determined; such date shall be the last day of the month
preceding the month of such Payment Date.
"REDEMPTION DATE": Any Optional Redemption Date or any
Payment Date on which Bonds may be redeemed.
I-27
<PAGE> 46
"REDEMPTION PRICE": With respect to any Class of Bonds to be
redeemed, an amount equal to 100% of the related Class Principal Amount of the
Bonds (including, in the case of the Subordinated Bonds, any unpaid
Subordinated Principal Carryover Shortfall) to be so redeemed, together with
interest on such amount at the applicable Bond Interest Rate through the last
day of the month immediately preceding the month in which such Redemption Date
occurs, together with any unpaid Class Interest Shortfalls.
"REFINANCING PLEDGED MORTGAGE": Any Pledged Mortgage
originated in connection with the refinancing of an existing mortgage loan.
"RELIEF ACT": The Soldiers' and Sailors' Civil Relief Act of
1940, as amended.
"RELIEF ACT REDUCTIONS": With respect to any Payment Date and
any Pledged Mortgage as to which there has been a reduction in the amount of
interest collectible thereon for the most recently ended calendar month as a
result of the application of the Relief Act, the amount, if any, by which (i)
interest collectible on such Pledged Mortgage for the most recently ended
calendar month is less than (ii) interest accrued thereon for such month
pursuant to the Mortgage Note.
"REO PROPERTY": A Mortgaged Property acquired by the Trustee
through foreclosure or deed-in-lieu of foreclosure in connection with a
defaulted Pledged Mortgage.
"REPLACEMENT PLEDGED MORTGAGE": A Mortgage Loan substituted
by the Master Servicer for a Deleted Mortgage Loan which must, on the date of
such substitution, as confirmed in a Request for Release, substantially in the
form of Exhibit C to the Master Servicing Agreement, (i) have a Stated
Principal Balance, after deduction of the principal portion of the Scheduled
Payment due in the month of substitution, not in excess of, and not more than
10% less than, the Stated Principal Balance of the Deleted Mortgage Loan; (ii)
be accruing interest at a rate no lower than and not more than 1% per annum
higher than, that of the Deleted Mortgage Loan; (iii) have a Loan-to-Value
Ratio no higher than that of the Deleted Mortgage Loan; (iv) have a Mortgage
Rate based upon the same Index and a Margin at least
I-28
<PAGE> 47
equal to and not greater than 50 basis points higher than that of the Deleted
Mortgage Loan; (v) have a Mortgage Rate subject to a Periodic Rate Cap and
Maximum Rate that are no less than those applicable to the Deleted Mortgage
Loan; (vi) have Adjustment Dates that are no more or less frequent than the
Deleted Mortgage Loan; (vii) have a remaining term to maturity no greater than
(and not more than one year less than that of) the Deleted Mortgage Loan;
(viii) not be a Cooperative Loan unless the Deleted Mortgage Loan was a
Cooperative Loan; and (ix) comply with each representation and warranty set
forth in Section 2(d)(ii) of the Master Servicing Agreement.
"REQUEST FOR RELEASE": The Request for Release submitted by
the Master Servicer to the Trustee, substantially in the form of Exhibits C and
D to the Master Servicing Agreement, as appropriate.
"RESPONSIBLE OFFICER": With respect to the Trustee, any
officer in the corporate trust department or similar group of the Trustee and
also, with respect to a particular corporate trust matter, any other officer to
whom such matter is referred because of his or her knowledge of and familiarity
with the particular subject.
"S&P": Standard & Poor's Ratings Group, a division of
McGraw-Hill Inc. For purposes of Section 11.04 the address for notices to S&P
shall be Standard & Poor's Ratings Group, 26 Broadway, 15th Floor, New York,
New York 10004, Attention: Mortgage Surveillance Monitoring, or such other
address as S&P may hereafter furnish to the Issuer and the Master Servicer.
"SAIF": The Savings Association Insurance Fund, or any
successor thereto.
"SALE": The meaning specified in Section 5.18(a).
"SCHEDULED PAYMENT": The scheduled monthly payment on a
Pledged Mortgage due on any Due Date allocable to principal and/or interest on
such Pledged Mortgage which, unless otherwise specified in the Master Servicing
Agreement, shall give effect to any related Debt Service Reduction and any
Deficient Valuation that affects the amount of the monthly payment due on such
Pledged Mortgage.
I-29
<PAGE> 48
"SECURITIES ACT": The Securities Act of 1933, as amended.
"SENIOR BOND INTEREST RATE": With respect to any Interest
Accrual Period, the annual rate at which interest accrues on the Senior Bonds
as specified in such Bonds and in Section 2.03(c).
"SENIOR BONDS": The Class A-1 Bonds.
"SENIOR CLASS PRINCIPAL AMOUNT": As of any Payment Date, the
Original Senior Class Principal Amount reduced by all amounts previously
distributed to Holders of the Senior Bonds as payments of principal.
"SENIOR INTEREST PAYMENT AMOUNT": As to any Payment Date, the
sum of (i) one month's interest accrued during the related Interest Accrual
Period at the Senior Bond Interest Rate on the Senior Class Principal Amount,
subject to reduction pursuant to Section 2.03(d) and (ii) the sum of the
amounts, if any, by which the amount described in clause (i) above on each
prior Payment Date exceeded the amount actually distributed as interest on such
prior Payment Dates and not subsequently distributed.
"SENIOR INTEREST SHORTFALL": As to any Payment Date, the
amount by which the amount described in clause (i) of the definition of Senior
Interest Payment Amount exceeds the amount of interest actually paid on the
Senior Bonds on such Payment Date pursuant to such clause (i).
"SENIOR PERCENTAGE": As to any Payment Date, the percentage
equivalent of a fraction the numerator of which is the Senior Class Principal
Amount immediately prior to such date and the denominator of which is the sum
of (i) the Senior Class Principal Amount, (ii) the Class B-1 Principal Amount,
(iii) the Class B-2 Principal Amount and (iv) the Invested Amount, in each case
immediately prior to such date.
"SENIOR PRINCIPAL PAYMENT AMOUNT": As to each Payment Date,
the Senior Percentage of the sum of (a) the principal portion of the Scheduled
Payment due on each Pledged Mortgage [on the related Due Date], (b) the
principal portion of the purchase
I-30
<PAGE> 49
price of each Pledged Mortgage that was purchased by Redwood Trust or another
person pursuant to the Mortgage Loan Purchase Agreement [or any optional
purchase by the Master Servicer of a defaulted Pledged Mortgage] as of such
Payment Date, (c) the Substitution Adjustment Amount in connection with any
Deleted Pledged Mortgage received with respect to such Payment Date, (d) any
Insurance Proceeds or Liquidation Proceeds allocable to recoveries of principal
of Pledged Mortgages that are not yet Liquidated Pledged Mortgages received
during the [calendar month] preceding the month of such Payment Date, (e) with
respect to each Pledged Mortgage that became a Liquidated Pledged Mortgage
during the [calendar month] preceding the month of such Payment Date, the
Stated Principal Balance of such Pledged Mortgage, and (f) all partial and full
principal prepayments by borrowers received during the related Prepayment
Period.
"SERVICER": Any person with which the Master Servicer has
entered into a Servicing Agreement for the servicing of all or a portion of the
Pledged Mortgages pursuant to Section 3(b) of the Master Servicing Agreement.
"SERVICER ADVANCE": The meaning ascribed to such term in
Section 3(h)(iv) of the Master Servicing Agreement.
"SERVICING ADVANCES": All customary, reasonable and necessary
"out of pocket" costs and expenses incurred in the performance by the Master
Servicer of its servicing obligations, including, but not limited to, the cost
of (i) the preservation, restoration and protection of a Mortgaged Property,
(ii) any expenses reimbursable to the Master Servicer pursuant to Section 3(n)
of the Master Servicing Agreement and any enforcement or judicial proceedings,
including foreclosures, (iii) the management and liquidation of any REO
Property and (iv) compliance with the obligations under Section 3(l) of the
Master Servicing Agreement.
"SERVICING AGREEMENT": Any agreement between the Master
Servicer and related Servicer relating to servicing and/or administration of
certain Pledged Mortgages as provided in Section 3(b) of the Master Servicing
Agreement.
"SERVICING DEFAULT": As defined in the Master Servicing
Agreement.
I-31
<PAGE> 50
"SERVICING FEE": As to each Pledged Mortgage and any Payment
Date, an amount equal to one month's interest at the applicable Servicing Fee
Rate on the Stated Principal Balance of such Pledged Mortgage.
"SERVICING FEE RATE": With respect to any Pledged Mortgage,
the per annum rate set forth in the Pledged Mortgage Schedule for such Pledged
Mortgage.
"SERVICING OFFICER": Any officer of the Master Servicer
involved in, or responsible for, the administration and servicing of the
Pledged Mortgages whose name and facsimile signature appear on a list of
servicing officers furnished to the Trustee by the Master Servicer on the
Closing Date pursuant to the Master Servicing Agreement, as such list may from
time to time be amended.
"STATED MATURITY": With respect to any and all Bonds
_________________.
"STATED PRINCIPAL BALANCE": As to any Pledged Mortgage and
Due Date, the unpaid principal balance of such Pledged Mortgage as of such Due
Date as specified in the amortization schedule at the time relating thereto
(before any adjustment to such amortization schedule by reason of any
moratorium or similar waiver or grace period) after giving effect to any
previous partial Principal Prepayments and Liquidation Proceeds allocable to
principal (other than with respect to any Liquidated Pledged Mortgage) and to
the payment of principal due on such Due Date and irrespective of any
delinquency in payment by the related Mortgagor.
"SUBORDINATED BOND INTEREST RATE": With respect to any
Interest Accrual Period, the annual rate at which interest accrues on the
Subordinated Bonds as specified in such Bonds and in Section 2.03(c).
"SUBORDINATED BONDS": The Class B-1 and the Class B-2 Bonds.
"SUBSTITUTION ADJUSTMENT AMOUNT": The meaning ascribed to
such term pursuant to Section 2(d)(iv) of the Master Servicing Agreement.
I-32
<PAGE> 51
"SUCCESSOR MASTER SERVICER": A Person appointed by the
Trustee who succeeds either the Trustee or the Master Servicer, pursuant to the
applicable provisions of the Master Servicing Agreement.
"TRUST ESTATE": All money, instruments and other property
subject or intended to be subject to the lien of this Indenture for the benefit
of the Bondholders as of any particular time (including, without limitation,
all property and interests Granted to the Trustee), including all proceeds
thereof.
"TRUST INDENTURE ACT" OR "TIA": The Trust Indenture Act of
1939, as amended, as in force at the Closing Date, unless otherwise
specifically provided.
"TRUSTEE": ______________________________, a banking
corporation organized and existing under the laws of
_________________________________, and any Person succeeding as Trustee
hereunder pursuant to Section 6.12 or any other applicable provision hereof.
"TRUSTEE FEE": As to any Payment Date, an amount equal to
one-twelfth of the Trustee Fee Rate multiplied by the Pool Stated Principal
Balance with respect to such Payment Date.
"TRUSTEE FEE RATE": With respect to each Pledged Mortgage,
the per annum rate agreed upon in writing on or prior to the Closing Date by
the Trustee and the Issuer.
"TRUSTEE MORTGAGE FILE": With respect to each Pledged
Mortgage, the original documents and instruments relating thereto to be
retained in the custody and possession of the Trustee, as set forth and
enumerated in Section 2(a) of the Master Servicing Agreement.
"WITHDRAWAL DATE": The ___th day of each month, or if such
day is not a Business Day, the next preceding Business Day.
I-33
<PAGE> 52
ARTICLE II
THE BONDS
SECTION 2.01. FORMS GENERALLY.
The Bonds and the Trustee's certificate of authentication
shall be in substantially the form required by this Article II, with such
appropriate insertions, omissions, substitutions and other variations as are
required or permitted by this Indenture and may have such letters, numbers or
other marks of identification and such legends or endorsements placed thereon
as may be required to comply with the rules of any securities exchange on which
the Bonds may be listed, or as may, consistently herewith, be determined by the
officers executing such Bonds, as evidenced by their execution thereof. Any
portion of the text of any Bond may be set forth on the reverse thereof with an
appropriate reference on the face of the Bond.
The Definitive Bonds may be produced in any manner determined
by the officers executing such Bonds, as evidenced by their execution thereof;
provided, however, that in the event the Bonds are listed on any securities
exchange, the Bonds shall be produced in accordance with the rules of any
securities exchange on which the Bonds may be listed.
SECTION 2.02. FORMS OF BONDS AND CERTIFICATE OF AUTHENTICATION.
(a) The form of Bond which is a Senior Bond is attached
hereto as Exhibit II.
(b) The form of Bond which is a Class B-1 Bond is
attached hereto as Exhibit III.
(c) The form of Bond which is a Class B-2 Bond is
attached hereto as Exhibit IV.
(d) The form of the Trustee's certificate of
authentication is as follows:
"This is one of the Bonds referred to in the within mentioned
Indenture.
II-1
<PAGE> 53
-----------------------------------
as Trustee
By:
--------------------------------
Authorized Signatory"
(e) The form of assignment is as follows:
II-2
<PAGE> 54
"FOR VALUE RECEIVED, the undersigned hereby sells, assigns and
transfers unto _______________________________________________________________
______________________________________________________________________________
(Please insert Social Security or other Identifying Number of Assignee)
______________________________________________________________________________
______________________________________________________________________________
(Please print or type name and address of Assignee)
______________________________________________________________________________
the within Bond of Sequoia Mortgage Trust 199_-_, and does hereby irrevocably
constitute and appoint __________ Attorney to transfer such Bond on the books
of the within named trust, with full power of substitution in the premises.
Dated: ____________________________________ ______________________________
Notice: The signature to this
assignment must correspond
with the name as written upon
the face of this Bond in
every particular without
alteration or enlargement or
any change whatever. The
signature must be guaranteed
by a member of a signature
guaranty medallion program.
Notarized or witnessed
signatures are not
acceptable."
[(f) The Bonds shall have a Statement of Insurance printed
thereon or attached thereto which essentially sets forth the terms of the Bond
Insurance Policy.]
II-3
<PAGE> 55
SECTION 2.03. BONDS ISSUABLE IN CLASSES; PROVISIONS WITH RESPECT TO
PRINCIPAL AND INTEREST PAYMENTS.
(a) General.
The Bonds shall be designated generally as the Sequoia
Mortgage Trust _________, "Collateralized Mortgage Bonds" of the Issuer. Each
Bond shall bear upon the face thereof the designation so selected for the Class
to which it belongs.
Bonds of each Class shall constitute Book Entry Bonds as
defined in Section 2.13 hereof. The aggregate principal amount of Bonds that
may be authenticated and delivered under the Indenture is unlimited.
All of the Bonds shall be issued in the appropriate forms
attached as Exhibits hereto with such additions and completions as are
appropriate for each such Class.
The Class A-1 Bonds shall constitute the sole Class of Senior
Bonds and the Class B-1 Bonds and the Class B-2 Bonds shall constitute the sole
Classes of Subordinated Bonds.
The final installments of principal of the Classes of Bonds
shall have the Stated Maturity specified above. The principal of each Bond
shall be payable in installments ending no later than the Stated Maturity of
the final installment of the principal thereof unless the unpaid principal of
such Bond becomes due and payable at an earlier date by declaration of
acceleration or call for redemption or otherwise. All payments made with
respect to any Bond shall be applied first to the interest then due and payable
on such Bond and then to the principal thereof.
(b) Payments of Principal of and Interest on the Bonds.
On each Payment Date, the Trustee shall withdraw the Bond
Payment Amount from the Distribution Account and apply such funds to payments
on the Bonds in the following order of priority and, in each case, to the
extent of funds remaining:
(i) to the Senior Bonds, an amount allocable to
interest equal to the Senior Interest Payment Amount for such Payment
Date;
(ii) to the Senior Bonds, an amount allocable to
principal equal to the Senior Principal Payment Amount for such
Payment Date;
II-4
<PAGE> 56
(iii) to the Class B-1 Bonds, an amount allocable to
interest equal to the Class B-1 Interest Payment Amount for such
Payment Date;
(iv) to the Class B-1 Bonds, an amount allocable to
principal equal to the Class B-1 Principal Payment Amount for such
Payment Date;
(v) to the Class B-2 Bonds, an amount allocable to
interest equal to the Class B-2 Interest Payment Amount for such
Payment Date; and
(vi) to the Class B-2 Bonds, an amount allocable to
principal to the Class B-2 Principal Payment Amount for such Payment
Date.
(c) Calculation of the Bond Interest Rate.
(i) The Bond Interest Rate for the Senior Bonds (the
"Senior Bond Interest Rate") and any Interest Accrual Period will
equal ______________;
(ii) The Bond Interest Rate for the Class B-1 Bonds (the
"Class B-1 Bond Interest Rate") and any Interest Accrual Period will
equal ___________________;
(iii) The Bond Interest Rate for the Class B-2 Bonds (the
"Class B-2 Bond Interest Rate") and any Interest Accrual Period will
equal _______________; and
(iv) The Senior Interest Payment Amount, the Class B-1
Interest Payment Amount and the Class B-2 Interest Payment Amount
shall each be calculated on the basis of a 360-day year of twelve
30-day months.
(d) Reduction of Interest Payment Amounts.
With respect to each Payment Date, the amounts referred to in
clause (i) of the definition of Senior Interest Payment Amount and clauses (i)
and (ii) of the definitions of Class B-1 Interest Payment Amount and Class B-2
Interest Payment Amount, as applicable, for such Payment Date shall be reduced
by the applicable Class' pro rata share (based on the Interest Payment Amount
for such Class before reduction pursuant to this Section 2.03(d)) of Net
Interest Shortfalls.
II-5
<PAGE> 57
(e) Pro Rata Payments.
All payments on the Bonds of any Class shall be made pro rata
among all Bonds of such Class.
(f) Payments to the Senior Bondholders provided for in
(b) of this Section 2.03 shall be paid, on each Payment Date after the
Subordinated Class Principal Amount and the Invested Amount have been reduced
to zero and where the Senior Interest Payment Amount and the Senior Principal
Payment Amount exceed the Available Funds, by the Bond Insurer.
SECTION 2.04. DENOMINATIONS.
Each Class of Book Entry Bonds shall be evidenced initially by
a single Bond representing the entire aggregate Class Principal Amount of such
Class of Bonds as of the Closing Date, beneficial ownership of which may be
held in denominations of $25,000 and increments of $1,000 in excess thereof for
all Bonds. All of the Book Entry Bonds shall be initially registered on the
Bond Register in the name of Cede & Co., the nominee of the Depository, and no
Beneficial Owner will receive a Definitive Bond representing such Beneficial
Owner's interest in the Book Entry Bonds, except in the event of Book Entry
Termination.
SECTION 2.05. EXECUTION, AUTHENTICATION, DELIVERY AND DATING.
The Bonds shall be executed by an Authorized Officer of the
Issuer. The signature of such officer on the Bonds may be manual or facsimile.
Bonds bearing the manual or facsimile signature of an
individual who was at any time an Authorized Officer shall bind the Issuer,
notwithstanding that such individual has ceased to hold such office prior to
the authentication and delivery of such Bonds or did not hold such office at
the date of such Bonds.
At any time and from time to time after the execution and
delivery of this Indenture, the Issuer may deliver Bonds executed on behalf of
the Issuer to the Trustee for
II-6
<PAGE> 58
authentication; and the Trustee shall authenticate and deliver such Bonds as in
this Indenture provided and not otherwise.
Each Bond authenticated on the Closing Date shall be dated the
Closing Date. All other Bonds which are authenticated after the Closing Date
for any other purpose hereunder shall be dated the date of their
authentication.
No Bond shall be entitled to any benefit under this Indenture
or be valid or obligatory for any purpose, unless there appears on such Bond a
certificate of authentication substantially in the form provided for herein
executed by the Trustee or by any Authenticating Agent by the manual signature
of one of its authorized officers or employees, and such certificate upon any
Bond shall be conclusive evidence, and the only evidence, that such Bond has
been duly authenticated and delivered hereunder.
SECTION 2.06. TEMPORARY BONDS.
So long as the Book Entry Bonds are held by the Depository for
the Participants in book-entry form, they may be typewritten or in any other
form acceptable to the Issuer, the Trustee and the Depository. At any time
during which the Book Entry Bonds are not held by the Depository for the
Participants in book-entry form, the Definitive Bonds shall be lithographed or
printed with steel engraved borders.
Pending the preparation of Definitive Bonds, the Issuer may
execute, and upon Issuer Order the Trustee shall authenticate and deliver,
temporary Bonds which are printed, lithographed, typewritten, mimeographed or
otherwise produced, in any authorized denomination, substantially of the tenor
of the definitive Bonds in lieu of which they may be so issued and with such
variations as the officers executing such Bonds may determine, as evidenced by
their execution of such Bonds.
If temporary Bonds are issued, the Issuer will cause
definitive Bonds to be prepared without unreasonable delay. After the
preparation of definitive Bonds, the temporary Bonds shall be exchangeable for
definitive Bonds upon surrender of the temporary Bonds at the office or agency
of the Issuer to be maintained as provided in Section 3.02, without charge to
the
II-7
<PAGE> 59
Holder. Upon surrender or cancellation of any one or more temporary Bonds, the
Issuer shall execute and the Trustee shall authenticate and deliver and
exchange therefor a like principal amount of definitive Bonds of the same Class
and of authorized denominations. Until so exchanged, the temporary Bonds shall
in all respects be entitled to the same benefits under this Indenture as
Definitive Bonds of the same Class.
SECTION 2.07. REGISTRATION, REGISTRATION OF TRANSFER AND EXCHANGE.
The Issuer shall cause to be kept a register (the "Bond
Register") in which, subject to such reasonable regulations as it may
prescribe, the Issuer shall provide for the registration of Bonds and the
registration of transfers of Bonds. The Trustee is hereby initially appointed
"Bond Registrar" for the purpose of registering Bonds and transfers of Bonds as
herein provided. Upon any resignation of any Bond Registrar appointed by the
Issuer, the Issuer shall promptly appoint a successor or, in the absence of
such appointment, shall assume the duties of Bond Registrar.
At any time the Trustee is not also the Bond Registrar, the
Trustee shall be a co-Bond Registrar. The Issuer shall cause each co-Bond
Registrar to furnish the Bond Registrar, promptly after each authentication of
a Bond by it, appropriate information with respect thereto for entry by the
Bond Registrar into the Bond Register. If the Trustee shall at any time not be
authorized to keep and maintain the Bond Register, the Trustee shall have the
right to inspect such Bond Register at all reasonable times and to rely
conclusively upon a certificate of the Person in charge of the Bond Register as
to the names and addresses of the Holders of the Bonds and the principal
amounts and numbers of such Bonds so held.
Upon surrender for registration of transfer of any Bond at the
office or agency of the Issuer to be maintained as provided in Section 3.02,
the Issuer shall execute, and the Trustee shall authenticate and deliver, in
the name of the designated transferee or transferees, one or more new Bonds of
any authorized denominations and of a like aggregate principal amount and
Class.
II-8
<PAGE> 60
At the option of the Holder, Bonds may be exchanged for other
Bonds of any authorized denominations, and of a like aggregate initial
principal amount and Class, upon surrender of the Bonds to be exchanged at such
office or agency. Whenever any Bonds are so surrendered for exchange, the
Issuer shall execute, and the Trustee shall authenticate and deliver, the Bonds
which the Bondholder making the exchange is entitled to receive.
All Bonds issued upon any registration of transfer or exchange
of Bonds shall be the valid obligations of the Issuer, evidencing the same
debt, and entitled to the same benefits under this Indenture, as the Bonds
surrendered upon such registration of transfer or exchange.
Every Bond presented or surrendered for registration of
transfer or exchange shall be duly endorsed, or be accompanied by a written
instrument of transfer in form satisfactory to the Trustee duly executed by the
Holder thereof or his attorney duly authorized in writing.
No service charge shall be made for any registration of
transfer or exchange of Bonds, but the Issuer may require payment of a sum
sufficient to cover any tax or other governmental charge as may be imposed in
connection with any registration of transfer or exchange of Bonds, other than
exchanges pursuant to Section 2.08 not involving any transfer.
SECTION 2.08. MUTILATED, DESTROYED, LOST OR STOLEN BONDS.
If (1) any mutilated Bond is surrendered to the Trustee or the
Trustee receives evidence to its satisfaction of the destruction, loss or theft
of any Bond and (2) there is delivered to the Trustee such security or
indemnity as may be required by the Trustee to save the Issuer and the Trustee
harmless, then, in the absence of notice to the Issuer or the Trustee that such
Bond has been acquired by a bona fide purchaser, the Issuer shall execute and
upon its request the Trustee shall authenticate and deliver, in exchange for or
in lieu of any such mutilated, destroyed, lost or stolen Bond, a new Bond or
Bonds of the same tenor, aggregate initial principal amount and Class bearing a
number not contemporaneously outstanding. If, after the delivery of such new
Bond, a bona fide purchaser of the original Bond in lieu of which such new Bond
was issued presents for payment such
II-9
<PAGE> 61
original Bond, the Issuer and the Trustee shall be entitled to recover such new
Bond from the person to whom it was delivered or any person taking therefrom,
except a bona fide purchaser, and shall be entitled to recover upon the
security or indemnity provided therefor to the extent of any loss, damage, cost
or expenses incurred by the Issuer or the Trustee in connection therewith. If
any such mutilated, destroyed, lost or stolen Bond shall have become or shall
be about to become due and payable, or shall have become subject to redemption
in full, instead of issuing a new Bond, the Issuer may pay such Bond without
surrender thereof, except that any mutilated Bond shall be surrendered.
Upon the issuance of any new Bond under this Section, the
Issuer may require the payment of a sum sufficient to cover any tax or other
governmental charge that may be imposed in relation thereto and any other
reasonable expenses (including the fees and expenses of the Trustee) connected
therewith.
Every new Bond issued pursuant to this Section in lieu of any
destroyed, lost or stolen Bond shall constitute an original additional
contractual obligation of the Issuer, whether or not the destroyed, lost or
stolen Bond shall be at any time enforceable by anyone, and shall be entitled
to all the benefits of this Indenture equally and proportionately with any and
all other Bonds duly issued hereunder.
The provisions of this Section are exclusive and shall
preclude (to the extent lawful) all other rights and remedies with respect to
the replacement or payment of mutilated, destroyed, lost or stolen Bonds.
SECTION 2.09. PAYMENTS OF PRINCIPAL AND INTEREST.
(a) Each payment of principal of and interest on a Book
Entry Bond shall be paid to the Depository, which shall credit the amount of
such payments to the accounts of its Depository Participants in accordance with
its normal procedures. Each Depository Participant shall be responsible for
disbursing such payments to the Beneficial Owners of the Book Entry Bonds that
it represents and to each indirect participating brokerage firm (a "brokerage
firm" or "indirect participating firm") for which it acts as agent. Each
brokerage firm shall be responsible
II-10
<PAGE> 62
for disbursing funds to the Beneficial Owners of the Book Entry Bonds that it
represents. All such credits and disbursements are to be made by the Depository
and the Depository Participants in accordance with the provisions of the Bonds.
Neither the Trustee, the Bond Registrar nor the Issuer shall have any
responsibility for such credits and disbursements.
Each payment of principal of and interest on a Definitive Bond
shall be paid to the Person in whose name such Bond (or one or more Predecessor
Bonds) is registered at the close of business on the Record Date or Optional
Redemption Record Date, for such Payment Date or Optional Redemption Date, by
check mailed to such Person's address as it appears in the Bond Register on
such Record Date or the Optional Redemption Record Date, except for the final
installment of principal payable with respect to such Bond, which shall be
payable as provided in Section 2.09(b).
All payments of principal of and interest on the Bonds shall
be made only from the Trust Estate and any other assets of the Issuer, and each
Holder of the Bonds, by its acceptance of the Bonds, agrees that it will have
recourse solely against such Trust Estate and such other assets of the Issuer
and that neither the Owner Trustee in its individual capacity, the Owner nor
any of their respective partners, beneficiaries, agents, officers, directors,
employees or successors or assigns shall be personally liable for any amounts
payable, or performance due, under the Bonds or this Indenture.
(b) All reductions in the principal amount of a Bond (or
one or more Predecessor Bonds) effected by payments of installments of
principal made on any Payment Date or Optional Redemption Date shall be binding
upon all Holders of such Bond and any Bond issued upon transfer thereof or in
exchange therefor or in lieu thereof. The final installment of principal of
each Bond (including the Redemption Price of any Bond called for optional
redemption, if such optional redemption will result in payment of the entire
unpaid principal amount of any such Bond) shall be payable only upon
presentation and surrender thereof on or after the Payment Date or Optional
Redemption Date therefor at the office or agency of the Issuer maintained by it
for such purpose in the Borough of Manhattan, the City of New York, State of
New York, pursuant to Section 3.02. Whenever the Trustee
II-11
<PAGE> 63
expects that the entire remaining unpaid principal amount of any Bond will
become due and payable on the next Payment Date, it shall, no later than five
days prior to such Payment Date, mail or cause to be mailed to the Holder of
each Bond as of the close of the business on such otherwise applicable Record
Date a notice to the effect that:
(i) the Trustee expects that funds sufficient to pay
such final installment will be available in the Distribution Account
on such Payment Date; and
(ii) if such funds are available, such final
installment will be payable on such Payment Date, but only upon
presentation and surrender of such Bond at the office or agency of the
Issuer maintained for such purpose pursuant to Section 3.02 (the
address of which shall be set forth in such notice).
Notices in connection with optional redemptions of Bonds shall
be mailed to Holders in accordance with Section 10.02.
SECTION 2.10. PERSONS DEEMED OWNERS.
Prior to due presentment for registration of transfer of any
Bond, the Issuer, [the Bond Insurer], the Trustee, any Agent and any other
agent of the Issuer, [the Bond Insurer], or the Trustee shall treat the Person
in whose name any Bond is registered as the owner of such Bond (a) on the
applicable Record Date or Optional Redemption Record Date for the purpose of
receiving payments of the principal of, and interest on, such Bond and (b) on
any other date for all other purposes whatsoever, whether or not such Bond is
overdue, and neither the Issuer, [the Bond Insurer], the Trustee, any Agent nor
any other agent of the Issuer or the Trustee shall be affected by notice to the
contrary.
SECTION 2.11. CANCELLATION.
All Bonds surrendered for payment, registration of transfer,
exchange or redemption shall, if surrendered to any Person other than the
Trustee, be delivered to the Trustee and shall be promptly cancelled by it. The
Issuer may at any time
II-12
<PAGE> 64
deliver to the Trustee for cancellation any Bond previously authenticated and
delivered hereunder which the Issuer may have acquired in any manner
whatsoever, and all Bonds so delivered shall be promptly cancelled by the
Trustee. No Bonds shall be authenticated in lieu of or in exchange for any
Bonds cancelled as provided in this Section, except as expressly permitted by
this Indenture. All cancelled Bonds held by the Trustee shall be held by the
Trustee in accordance with its standard retention policy, unless the Issuer
shall direct by an Issuer Order that they be destroyed or returned to it.
SECTION 2.12. AUTHENTICATION AND DELIVERY OF BONDS.
The Bonds may be executed by the Issuer and delivered to the
Trustee for authentication, and thereupon the same shall be authenticated and
delivered by the Trustee, upon Issuer Request and upon receipt by the Trustee
of the following:
(a) an Issuer Order authorizing the execution,
authentication and delivery of the Bonds and specifying the Classes,
the Stated Maturity of the final installment of principal, the
principal amount and the Bond Interest Rate, of each Class of such
Bonds to be authenticated and delivered;
(b) an Issuer Order authorizing the execution and
delivery of this Indenture;
(c) One or more Opinions of Counsel addressed to the
Trustee, complying with the requirements of Section 11.01, reasonably
satisfactory in form and substance to the Trustee, and to the effect
that:
(i) all instruments furnished to the Trustee by
the Issuer pursuant to this Section 2.12 in connection with
the Bonds conform in all material respects to the requirements
of this Indenture and constitute all the documents required to
be delivered under this Section 2.12 for the Trustee to
authenticate and deliver the Bonds (counsel rendering such
opinion or opinions need not express any opinion as to whether
the Pledged Mortgages Granted to the Trustee as security
conform to the requirements of this Indenture);
II-13
<PAGE> 65
(ii) all conditions precedent provided for in this
Indenture relating to the authentication and delivery of the
Bonds have been complied with in all material respects
(counsel rendering such opinion or opinions need not express
any opinion as to the matters set forth in the parenthetical
clause at the end of paragraph (i) above or as to whether the
amount of cash or other collateral, if any, delivered to the
Trustee pursuant to any subsection of this Section 2.12 is the
requisite amount);
(iii) the Bank has corporate power to execute and
deliver the Deposit Trust Agreement, the Deposit Trust
Agreement authorizes the Issuer to execute and deliver the
Bonds and this Indenture, and to issue the Bonds, and the
Owner Trustee has duly taken all necessary action under the
Deposit Trust Agreement for those purposes;
(iv) the Issuer is a statutory business trust
created under the laws of the State of Delaware and duly
authorized by the Deposit Trust Agreement;
(v) assuming due authorization, execution and
delivery thereof by the Trustee, this Indenture will be the
legally valid and binding obligation of the Issuer,
enforceable against the Issuer in accordance with its terms,
except as may be limited by bankruptcy, insolvency,
reorganization, moratorium or similar laws and equitable
principles relating to or limiting creditors' rights generally
and such counsel need express no opinion as to the
availability of equitable remedies;
(vi) the Bonds, when issued, delivered,
authenticated and paid for, will be the legally valid and
binding obligations of the Issuer, entitled to the benefits of
this Indenture, and enforceable against the Issuer in
accordance with their terms, except as may be limited by
bankruptcy, insolvency, reorganization, moratorium or similar
laws and equitable principles relating to or limiting
creditors' rights generally and such counsel need express no
opinion as to the availability of equitable remedies;
II-14
<PAGE> 66
(vii) assuming due execution and delivery thereof
by the Trustee and by the Master Servicer, the Master
Servicing Agreement constitutes the legally valid and binding
obligation of the Master Servicer and of the Issuer,
respectively, enforceable against the Master Servicer and the
Issuer in accordance with its terms, except as may be limited
by bankruptcy, insolvency, reorganization, moratorium or
similar laws and equitable principles relating to or limiting
creditors' rights generally and such counsel need express no
opinion as to the availability of equitable remedies;
(viii) the Mortgage Notes included in the Original
Pledged Mortgages have been duly and validly assigned,
delivered and pledged to the Trustee to the extent
contemplated by this Indenture, and this Indenture together
with such assignment, delivery and pledge to the Trustee,
creates as security for the Bonds a valid and perfected
security interest of first priority in such Mortgage Notes,
except to the extent limited in the event (A) the Trustee
relinquishes possession of any such Mortgage Note, (B) the
Depositor, the Issuer, the Master Servicer or any Servicer
transfers any such Mortgage Note or the related Mortgage to a
bona fide purchaser for value without notice prior to
notification to the Mortgagor of the assignment to the Trustee
of such Mortgage Note or due recordation of the Assignment to
the Trustee of the related Mortgage or (C) the Depositor, the
Issuer, the Master Servicer or any Servicer discharges any
such Mortgage Note or the related Mortgage prior to such
notification or recordation; the Mortgages delivered to the
Trustee with the Original Mortgage Notes will continue to
secure the Mortgage Notes included in the Original Pledged
Mortgages, as though, and to the same extent as if, such
Mortgage Notes had not been assigned, delivered and pledged;
and it is not necessary to record or file this Indenture or to
take any other action, except as set forth above, in order to
make effective the lien and security interest created by this
Indenture in the Mortgage Notes included in the Original
Pledged Mortgages;
II-15
<PAGE> 67
(ix) this Indenture has been duly qualified under
the TIA; and
(x) the Issuer's registration statement with
respect to the Bonds has become effective under the Securities
Act of 1933, as amended, and, to the best of such counsel's
knowledge, no stop order suspending the effectiveness of such
registration statement has been issued and is in effect under
such act and no proceedings for that purpose have been
instituted or are pending under such act.
In rendering the opinions set forth above, such counsel may
rely upon officers' certificates of the Depositor, the Owner Trustee,
the Issuer, any Servicer, the Master Servicer and the Trustee, without
independent confirmation or verification, as to the following matters
and as to such other matters as shall be reasonably acceptable to the
Trustee: (A) the accuracy of the descriptions of the Mortgage Notes
included in the Original Pledged Mortgages and the conformity thereof
to the descriptions in this Indenture, (B) the ownership by Sequoia
Mortgage Funding Corporation, the Depositor and the Issuer of such
Mortgage Notes free and clear of any lien, claim, charge or interest
of any kind of any third party, (C) the physical delivery of such
Mortgage Notes to the Trustee, (D) the absence of any evidence
appearing on any such Mortgage Note of any right or interest
inconsistent with the opinions expressed, and (E) the form of
endorsement approved by such counsel having been made on each such
Mortgage Note. In rendering the opinions set forth above, such counsel
need express no opinion as to (A) the perfection of the security
interest in any collateral not governed by Article 9 of the Uniform
Commercial Code of the State of California, (B) the existence of, or
the priority of the security interest created by the Indenture
against, any liens or other interests which arise by operation of law
and which do not require any filing or similar action in order to take
priority over a perfected security interest or (C) the priority of the
security interest created by this Indenture with respect to any claim
or lien in favor of the United States or any agency or instrumentality
thereof (including federal tax liens and liens arising under Title IV
of the Employee Retirement Income Security Act of 1974, as amended).
II-16
<PAGE> 68
(d) an Officers' Certificate complying with the
requirements of Section 11.01 and stating that:
(i) the Issuer is not in Default under this
Indenture and the issuance of the Bonds will not result in any
breach of any of the terms, conditions or provisions of, or
constitute a default under, the Deposit Trust Agreement or any
indenture, mortgage, deed of trust or other agreement or
instrument to which the Issuer is a party or by which it is
bound, or any order of any court or administrative agency
entered in any proceeding to which the Issuer is a party or by
which it may be bound or to which it may be subject, and that
all conditions precedent provided in this Indenture relating
to the authentication and delivery of the Bonds have been
complied with;
(ii) the Issuer is the owner of each Original
Pledged Mortgage, free and clear of any lien, security
interest or charge, has not assigned any interest or
participation in any such Pledged Mortgage (or, if any such
interest or participation has been assigned, it has been
released) and has the right to Grant each such Original
Pledged Mortgage to the Trustee;
(iii) the information set forth in the Pledged
Mortgage Schedule attached as Schedule A to this Indenture is
true and correct in all material respects as of the Closing
Date;
(iv) the Issuer has Granted to the Trustee all of
its right, title and interest in each Pledged Mortgage;
(v) as of the Closing Date, no lien in favor of
the United States described in Section 6321 of the Code, or
lien in favor of the Pension Benefit Guaranty Corporation
described in Section 4068(a) of the Employee Retirement Income
Security Act of 1974, as amended, has been filed as described
in subsections 6323(f) and 6323(g) of the Code upon any
property belonging to the Issuer; and
II-17
<PAGE> 69
(vi) attached thereto is a true and correct copy
of letters signed by the Rating Agencies confirming that the
Senior Bonds have been rated AAA by [ ] and [ ] and that
the Class B-1 Bonds have been rated [ ] by [ ].
(e) An executed counterpart of the Master Servicing
Agreement.
(f) A certificate of one or more Independent Persons, whose
regular business activity includes valuing securities and mortgage
loans similar to the Original Pledged Mortgages, of the fair value of
the Original Pledged Mortgages, which fair value, as so certified,
will be equal to or in excess of the sum of the Original Senior Class
Principal Amount and the Original Subordinated Class Principal Amount,
and which determination of fair value shall be as of a date not
earlier than three Business Days prior to the Closing Date.
SECTION 2.13. MATTERS RELATING TO BOOK ENTRY BONDS.
(a) If the Bonds are listed on any stock exchange at any
time after the Closing Date, the Issuer shall, if required as a condition to
such listing, prepare and deliver to the Trustee Bonds in substantially the
same form as the Bonds issued on the Closing Date, but with such other
additional features and such modifications, if any, as shall be necessary or
appropriate in order to comply with the requirements of such stock exchange for
the listing of the Bonds on such exchange. Bonds in the form issued on the
Closing Date shall thereafter be exchangeable for Bonds in such revised form to
the same extent as temporary Bonds are exchangeable for Definitive Bonds
pursuant to Section 2.06.
(b) Each Class of Book Entry Bonds will be issued in the
form of a single typewritten bond certificate (each, a "DTC Certificate") to be
delivered to the Depository by the Issuer substantially in the respective forms
for each such Class attached as Exhibits hereto. The DTC Certificate for each
such Class of Book Entry Bonds shall be initially registered on the
II-18
<PAGE> 70
Bond Register in the name of the nominee of such Depository and no Beneficial
Owner will receive a certificate representing its interests in any Class of
Book Entry Bonds except in the event that the Trustee issues Definitive Bonds,
as provided in Section 2.14. Pursuant to the Letter Agreement, while each Class
of the Book Entry Bonds remains outstanding and such Depository remains the
Holder, it will agree to make book-entry transfers among the Depository
Participants and receive and transmit payments of principal and interest on the
Book Entry Bonds until and unless the Trustee authenticates and delivers
Definitive Bonds to the Beneficial Owners of the Book Entry Bonds or their
nominees, as described in Section 2.14.
(c) Prior to Book Entry Termination, each Class of Book
Entry Bonds will remain registered in the name of the Depository or its nominee
and at all times: (i) registration of the Book Entry Bonds may not be
transferred by the Trustee or the Bond Registrar except to another Depository;
(ii) the Depository shall maintain book-entry records with respect to the
Beneficial Owners and with respect to ownership and transfers of such Book
Entry Bonds; (iii) ownership and transfers of registration of the Book Entry
Bonds on the books of the Depository shall be governed by applicable rules
established by the Depository; (iv) the Depository may collect its usual and
customary fees, charges and expenses from its Depository Participants; (v) the
Trustee shall deal with the Depository, Depository Participants and interest
participating firms as representatives of the Beneficial Owners of the Book
Entry Bonds for purposes of exercising the rights of holders under the
Indenture, and requests and directions for and votes of such representatives
shall not be deemed to be inconsistent if they are made with respect to
different Beneficial Owners; and (vi) the Trustee may rely and shall be fully
protected in relying upon information furnished by the Depository with respect
to its Depository Participants and furnished by the Depository Participants
with respect to indirect participating firms and Persons shown on the books of
such indirect participating firms as direct or indirect Beneficial Owners.
All transfers by Beneficial Owners of Book Entry Bonds shall
be made in accordance with the procedures established by the Depository
Participant or brokerage firm representing such Beneficial Owner. Each
Depository Participant shall only
II-19
<PAGE> 71
transfer Book Entry Bonds of Beneficial Owners it represents or of brokerage
firms for which it acts as agent in accordance with the Depository's normal
procedures.
SECTION 2.14. TERMINATION OF BOOK ENTRY SYSTEM.
(a) The book entry system through the Depository with
respect to any Class of Book Entry Bonds may be terminated upon the happening
of any of the following:
(i) The Depository or the Issuer advises the
Trustee in writing that the Depository is no longer willing or
able to properly discharge its responsibilities as Depository
and the Issuer is unable to locate a qualified successor
clearing agency satisfactory to the Trustee and the Issuer;
(ii) The Issuer at its option advises the Trustee
in writing that it elects to terminate the book entry system
through the Depository; or
(iii) After the occurrence of an Event of Default
(at which time the Trustee shall use all reasonable efforts to
promptly notify each Beneficial Owner through the Depository
of such Event of Default when such notice shall be given
pursuant to Section 6.02), the Beneficial Owners of a majority
in aggregate Class Principal Amount of the Book Entry Bonds
together advise the Trustee and the Depository through the
Depository Participants in writing that the continuation of a
book entry system through the Depository is no longer in the
best interests of the Beneficial Owners.
(b) Upon the occurrence of any event described in
subsection (a) above, the Trustee shall notify all Beneficial Owners, through
the Depository, of the occurrence of any such event and of the availability of
Definitive Bond certificates to Beneficial Owners requesting the same, in an
aggregate Class Principal Amount representing the interest of each, making such
adjustments and allowances as it may find necessary or appropriate as to
accrued interest, if any, and previous calls for redemption. Definitive Bond
certificates shall be issued
II-20
<PAGE> 72
only upon surrender to the Trustee of the Book Entry Bond by the Depository,
accompanied by registration instructions for the Definitive Bond certificates.
Neither the Issuer nor the Trustee shall be liable for any delay in delivery of
such instructions and may conclusively rely on, and shall be protected in
relying on, such instructions. Upon issuance of the Definitive Bond
certificates, all references herein to obligations imposed upon or to be
performed by the Depository shall cease to be applicable and the provisions
relating to Definitive Bonds shall be applicable.
II-21
<PAGE> 73
ARTICLE III
COVENANTS
SECTION 3.01. PAYMENT OF BONDS.
The Issuer will pay or cause to be duly and punctually paid
the principal of, and interest on, the Bonds in accordance with the terms of
the Bonds and this Indenture.
SECTION 3.02. MAINTENANCE OF OFFICE OR AGENCY.
The Issuer will maintain in the Borough of Manhattan, the City
of New York, the State of New York an office or agency where Bonds may be
presented or surrendered for payment or may be surrendered for registration of
transfer or exchange, and where notices and demands to or upon the Issuer in
respect of the Bonds and this Indenture may be served. The Issuer will give
prompt written notice to the Trustee of the location and any change in the
location, of such office or agency. Until written notice of any change in the
location of such office or agency is delivered to the Trustee or if at any time
the Issuer shall fail to maintain any such required office or agency or shall
fail to furnish the Trustee with the address thereof, Bonds may be so presented
and surrendered, and such notices and demands may be made or served, at the
office of ___________________________________________ at
_________________________________________ ___________________________________.
The Issuer may also from time to time designate one or more
other offices or agencies (in or outside the City of New York) where the Bonds
may be presented or surrendered for any or all such purposes and may from time
to time rescind such designations; provided, however, that (i) no such
designation or rescission shall in any manner relieve the Issuer of its
obligation to maintain an office or agency in the Borough of Manhattan, the
City of New York, the State of New York, for the purposes set forth in the
preceding paragraph, (ii) presentations or surrenders of Bonds for payment may
be made only in the City of New York, the State of New York or at the Corporate
Trust Office of the Trustee and (iii) any designation of an office or agency
for payment of Bonds shall be subject to Section 3.03. The Issuer will give
prompt written notice to the Trustee of any such designation or rescission and
of any change in the location of any such other office or agency.
III-1
<PAGE> 74
SECTION 3.03. MONEY FOR BOND PAYMENTS TO BE HELD IN TRUST.
All payments of amounts due and payable with respect to any
Bonds which are to be made from amounts withdrawn from the Distribution Account
pursuant to Section 8.02(c) or Section 5.08 shall be made on behalf of the
Issuer by the Trustee or by a Paying Agent, and no amounts so withdrawn from
the Distribution Account for payments of Bonds shall be paid over to the Issuer
under any circumstances except as provided in this Section 3.03 or in Section
5.08.
If the Issuer shall have a Paying Agent that is not also the
Bond Registrar, it shall furnish, or cause the Bond Registrar to furnish, no
later than
(a) the fifth calendar day after each Record Date, and
(b) the first Business Day after the Optional Redemption
Record Date applicable to the Optional Redemption Date,
a list, in such form as such Paying Agent may reasonably require, of the names
and addresses of the Holders of Bonds and of the number of Individual Bonds of
each Class held by each such Holder.
Whenever the Issuer shall have a Paying Agent other than the
Trustee, it will, on or before the Business Day next preceding each Payment
Date and Optional Redemption Date, direct the Trustee to deposit with such
Paying Agent an aggregate sum sufficient to pay the amounts then becoming due
(to the extent funds are then available for such purpose in the Distribution
Account), such sum to be held in trust for the benefit of the Persons entitled
thereto. Any moneys deposited with a Paying Agent in excess of an amount
sufficient to pay the amounts then becoming due on the Bonds with respect to
which such deposit was made shall, upon Issuer Order, be paid over by such
Paying Agent to the Trustee for application in accordance with Article VIII.
III-2
<PAGE> 75
Any Paying Agent shall be appointed by Issuer Order. The
Issuer shall not appoint any Paying Agent which is not, at the time of such
appointment, a depository institution or trust company whose obligations would
be Permitted Investments pursuant to clause (iv) of the definition of the term
"Permitted Investments". The Issuer will cause each Paying Agent other than the
Trustee to execute and deliver to the Trustee an instrument in which such
Paying Agent shall agree with the Trustee (and if the Trustee acts as Paying
Agent, it hereby so agrees), subject to the provisions of this Section, that
such Paying Agent will:
(1) allocate all sums received for payment to the Holders
of Bonds on each Payment Date and Optional Redemption Date among such
Holders in the proportion specified in the applicable Payment Date
Statement, as the case may be, in each case to the extent permitted by
applicable law;
(2) hold all sums held by it for the payment of amounts
due with respect to the Bonds in trust for the benefit of the Persons
entitled thereto until such sums shall be paid to such Persons or
otherwise disposed of as herein provided and pay such sums to such
Persons as herein provided;
(3) if such Paying Agent is not the Trustee, immediately
resign as a Paying Agent and forthwith pay to the Trustee all sums
held by it in trust for the payment of the Bonds if at any time it
ceases to meet the standards set forth above required to be met by a
Paying Agent at the time of its appointment;
(4) if such Paying Agent is not the Trustee, give the
Trustee notice of any Default by the Issuer (or any other obligor upon
the Bonds) in the making of any payment required to be made with
respect to any Bonds for which it is acting as Paying Agent;
(5) if such Paying Agent is not the Trustee, at any time
during the continuance of any such Default, upon the written request
of the Trustee, forthwith pay to the Trustee all sums so held in trust
by such Paying Agent; and
III-3
<PAGE> 76
(6) comply with all requirements of the Code, and all
regulations thereunder, with respect to the withholding from any
payments made by it on any Bonds of any applicable withholding taxes
imposed thereon and with respect to any applicable reporting
requirements in connection therewith; provided, however, that with
respect to withholding and reporting requirements applicable to
original issue discount (if any) on any Class of Bonds, the Issuer has
provided the calculations pertaining thereto to the Trustee.
The Issuer may at any time, for the purpose of obtaining the
satisfaction and discharge of this Indenture or any other purpose, by Issuer
Order direct any Paying Agent, if other than the Trustee, to pay to the Trustee
all sums held in trust by such Paying Agent, such sums to be held by the
Trustee upon the same trusts as those upon which such sums were held by such
Paying Agent; and upon such payment by any Paying Agent to the Trustee, such
Paying Agent shall be released from all further liability with respect to such
money.
Subject to applicable escheat laws, any money held by the
Trustee or any Paying Agent in trust for the payment of any amount due with
respect to any Bond and remaining unclaimed for six years after such amount has
become due and payable to the Holder of such Bond shall be discharged from such
trust and, upon its written request, paid to the Issuer; and the Holder of such
Bond shall thereafter, as an unsecured general creditor, look only to the
Issuer for payment thereof (but only to the extent of the amounts so paid to
the Issuer), and all liability of the Trustee or such Paying Agent with respect
to such trust money shall thereupon cease. The Trustee may, but shall not be
required to, adopt and employ, at the expense of the Issuer, any reasonable
means of notification of such repayment (including, but not limited to, mailing
notice of such repayment to Holders whose Bonds have been called but have not
been surrendered for redemption or whose right to or interest in moneys due and
payable but not claimed is determinable from the records of the Trustee or any
Agent, at the last address of record for each such Holder).
III-4
<PAGE> 77
SECTION 3.04. CORPORATE EXISTENCE OF OWNER TRUSTEE.
(a) Subject to subsections (b) and (c) below, the Owner
Trustee will keep in full effect its existence, rights and franchises as a bank
and trust company under the laws of the state of its incorporation.
(b) Any corporation into which the Owner Trustee may be
merged or with which it may be consolidated, or any corporation resulting from
any merger or consolidation to which the Owner Trustee shall be a party, shall
be the successor Owner Trustee under this Indenture without the execution or
filing of any paper, instrument or further act to be done on the part of the
parties hereto, anything herein, or in any agreement relating to such merger or
consolidation, by which any such Owner Trustee may seek to retain certain
powers, rights and privileges therefore obtaining for any period of time
following such merger or consolidation, to the contrary notwithstanding.
(c) Any successor to the Owner Trustee appointed pursuant
to Section 10.01 of the Deposit Trust Agreement shall be the successor Owner
Trustee under this Indenture without the execution or filing of any paper,
instrument or further act to be done on the part of the parties hereto.
(d) Upon any consolidation or merger of or other
succession to the Owner Trustee in accordance with this Section 3.04, the
Person formed by or surviving such consolidation or merger (if other than the
Issuer) or the Person succeeding to the Owner Trustee under the Deposit Trust
Agreement may exercise every right and power of the Owner Trustee, on behalf of
the Issuer, under this Indenture with the same effect as if such Person had
been named as the Owner Trustee herein.
SECTION 3.05. PROTECTION OF TRUST ESTATE.
(a) The Issuer will from time to time execute and deliver
all such supplements and amendments hereto and all such financing statements,
continuation statements, instruments of further assurance and other
instruments, and will take such other action as may be necessary or advisable
to:
(i) Grant more effectively all or any portion of the
Trust Estate;
III-5
<PAGE> 78
(ii) maintain or preserve the lien of this Indenture or
carry out more effectively the purposes hereof;
(iii) perfect, publish notice of or protect the validity
of any Grant made or to be made by this Indenture;
(iv) enforce any of the Mortgage Documents; or
(v) preserve and defend title to the Trust Estate and
the rights of the Trustee, and of the Bondholders, in the Pledged
Mortgages and the other property held as part of the Trust Estate
against the claims of all Persons and parties.
The Issuer hereby designates the Trustee its agent and
attorney-in-fact to execute any financing statement, continuation statement or
other instrument required pursuant to this Section 3.05; provided, however,
that such designation shall not be deemed to create a duty in the Trustee to
monitor the compliance of the Issuer with the foregoing covenants; and provided
further, however, that the duty of the Trustee to execute any instrument
required pursuant to this Section 3.05 shall arise only if the Trustee has
knowledge pursuant to Section 6.01(d) of the occurrence of a failure of the
Issuer to comply with provisions of this Section 3.05.
(b) Except as permitted by Section 8.08, the Trustee
shall not remove any portion of the Trust Estate that consists of money or is
evidenced by an instrument, certificate or other writing from the jurisdiction
in which it was held at the date of the most recent Opinion of Counsel
delivered pursuant to Section 3.06 (or from the jurisdiction in which it was
held, or to which it is intended to be removed, as described in the Opinion of
Counsel delivered at the Closing Date pursuant to Section 2.12(c), if no
Opinion of Counsel has yet been delivered pursuant to Section 3.06) or cause or
permit ownership or the pledge of any portion of the Trust Estate that consists
of book-entry securities to be recorded on the books of a Person located in a
different jurisdiction from the jurisdiction in which such ownership or pledge
was recorded at such time unless the Trustee shall have first received an
Opinion of Counsel to the effect that the lien and security interest created by
this Indenture
III-6
<PAGE> 79
with respect to such property will continue to be maintained after giving
effect to such action or actions.
SECTION 3.06. OPINIONS AS TO TRUST ESTATE.
On or before February 15 in each calendar year, beginning with
[the first calendar year commencing more than three months after the Closing
Date, the Issuer shall furnish to the Trustee an Opinion of Counsel reasonably
satisfactory in form and substance to the Trustee either stating that, in the
opinion of such counsel, such action has been taken as is necessary to maintain
the lien and security interest created by this Indenture and reciting the
details of such action or stating that in the opinion of such counsel no such
action is necessary to maintain such lien and security interest. Such Opinion
of Counsel shall also describe all such actions, if any, that will, in the
opinion of such counsel, be required to be taken to maintain the lien and
security interest of this Indenture with respect to the Trust Estate until May
15 in the following calendar year.
SECTION 3.07. PERFORMANCE OF OBLIGATIONS; MASTER SERVICING AGREEMENT.
(a) The Issuer shall punctually perform and observe all
of its obligations and agreements contained in the Deposit Trust Agreement. The
Issuer and the Trustee shall punctually perform and observe all of their
respective obligations and agreements contained in the Master Servicing
Agreement.
(b) The Issuer shall not take any action and will use its
reasonable good faith efforts not to permit any action to be taken by others
that would release any Person from any of such Person's covenants or
obligations under any of the Mortgage Documents or under any instrument
included in the Trust Estate, or that would result in the amendment,
hypothecation, subordination, termination or discharge of, or impair the
validity or effectiveness of, any of the Mortgage Documents, except as
expressly provided or permitted in this Indenture and the Master Servicing
Agreement or such Mortgage Document or other instrument or unless such action
will not adversely affect the interests of the Holders of the Bonds.
III-7
<PAGE> 80
(c) The Issuer shall monitor the performance of the
Master Servicer under the Master Servicing Agreement, and shall use its
reasonable good faith efforts to cause the Master Servicer duly and punctually
to perform all of its duties and obligations thereunder. Upon the occurrence of
a Servicing Default of which an Authorized Officer of the Issuer has actual
knowledge under the Master Servicing Agreement, the Issuer shall promptly
notify the Trustee thereof, and shall specify in such notice the action, if
any, the Issuer is taking in respect of such Servicing Default. So long as any
such Servicing Default shall be continuing, the Trustee may (i) terminate all
of the rights and powers of the Master Servicer pursuant to the applicable
provisions of the Master Servicing Agreement; (ii) exercise any rights it may
have to enforce the Master Servicing Agreement against the Master Servicer;
and/or (iii) waive any such Servicing Default under the Master Servicing
Agreement or take any other action with respect to such Servicing Default as is
permitted thereunder.
(d) Upon any termination by the Trustee of the Master
Servicer's rights and powers pursuant to the Master Servicing Agreement, the
rights and powers of the Master Servicer with respect to the Pledged Mortgages
shall vest in the Trustee and the Trustee shall be the successor in all
respects to the Master Servicer in its capacity as Master Servicer with respect
to such Pledged Mortgages under the Master Servicing Agreement, until the
Trustee shall have appointed, with the consent of the Issuer, such consent not
to be unreasonably withheld, and the Rating Agencies, and in accordance with
the applicable provisions of the Master Servicing Agreement a new FNMA- or
FHLMC-approved Person to serve as successor to the Master Servicer. With such
consent, the Trustee may elect to continue to serve as successor Master
Servicer under the Master Servicing Agreement. Upon appointment of a successor
Master Servicer, the Trustee and such successor Master Servicer shall enter
into a master servicing agreement in a form substantially similar to the Master
Servicing Agreement. In connection with any such appointment, the Trustee may
make such arrangements for the compensation of such successor as it and such
successor shall agree, but in no event shall such compensation of any successor
Master Servicer (including the Trustee) be in excess of that payable to the
Master Servicer under the Master Servicing Agreement.
III-8
<PAGE> 81
(e) Upon any termination of the Master Servicer's rights
and powers pursuant to the Master Servicing Agreement, the Trustee shall
promptly notify the Issuer and the Rating Agencies, specifying in such notice
that the Trustee or any successor Master Servicer, as the case may be, has
succeeded the Master Servicer under the Master Servicing Agreement, which
notice shall also specify the name and address of any such successor Master
Servicer.
SECTION 3.08. INVESTMENT COMPANY ACT.
The Issuer shall at all times conduct its operations so as not
to be subject to the Investment Company Act of 1940, as amended (or any
successor statute), and the rules and regulations thereunder.
SECTION 3.09. NEGATIVE COVENANTS.
The Issuer shall not:
(a) sell, transfer, exchange or otherwise dispose of any
portion of the Trust Estate except as expressly permitted by this
Indenture or the Master Servicing Agreement;
(b) claim any credit on, or make any deduction from, the
principal of, or interest on, any of the Bonds by reason of the
payment of any taxes levied or assessed upon any portion of the Trust
Estate;
(c) engage in any business or activity other than in
connection with, or relating to, the issuance of the Bonds and the
Investor Certificate pursuant to this Indenture and the Deposit Trust
Agreement, respectively, or amend Section 2.03 or Section 11.01 of the
Deposit Trust Agreement as in effect on the Closing Date without, in
each case, the consent of the Holders of 66 2/3% of the aggregate
Class Principal Amount of the Bonds then Outstanding;
(d) incur any indebtedness or assume or guaranty any
indebtedness of any Person, except for such indebtedness as may be
incurred by the Issuer in connection with the issuance of the Bonds
pursuant to this Indenture;
III-9
<PAGE> 82
(e) dissolve or liquidate in whole or in part; or
(f) (i) permit the validity or effectiveness of this
Indenture or any Grant to be impaired, or permit the lien of this
Indenture to be amended, hypothecated, subordinated, terminated or
discharged, or permit any Person to be released from any covenants or
obligations under this Indenture, except as may be expressly permitted
hereby, (ii) permit any lien, charge, security interest, mortgage or
other encumbrance (other than the lien of this Indenture, the lien
created by Section 8.04 of the Deposit Trust Agreement, as in effect
on the Closing Date, or any Permitted Encumbrance) to be created on or
extended to or otherwise arise upon or burden the Trust Estate or any
part thereof or any interest therein or the proceeds thereof or (iii)
permit the lien of this Indenture not to constitute a valid perfected
first priority security interest in the Trust Estate.
SECTION 3.10. ANNUAL STATEMENT AS TO COMPLIANCE.
On or before 120 days after the end of the first fiscal year
of the Issuer which ends more than three months after the Closing Date, and
each fiscal year thereafter, the Issuer shall deliver to the Trustee a written
statement, signed by an Authorized Officer, stating that:
(1) a review of the fulfillment by the Issuer during such
year of its obligations under this Indenture has been made under such
officer's supervision; and
(2) to the best of such officer's knowledge, based on
such review, the Issuer has fulfilled all of its obligations under
this Indenture throughout such year, or, if there has been a Default
in the fulfillment of any such obligation, specifying each such
Default known to such officer and the nature and status thereof.
SECTION 3.11. RECORDING OF ASSIGNMENTS.
The Issuer shall cause the Assignments of the Pledged
Mortgages securing the Bonds to be duly recorded in the manner specified in
Section 2(a)(i) of the Master Servicing Agreement.
III-10
<PAGE> 83
If the Issuer fails to cause the Assignment to be recorded within the time
limit provided thereunder, the Issuer shall cause the Master Servicer to
purchase such corresponding Pledged Mortgage pursuant to Section 8.04 and the
applicable provisions of the Master Servicing Agreement.
SECTION 3.12. LIMITATION OF LIABILITY OF .
It is expressly understood and agreed by the parties hereto
that (a) this Indenture is executed and delivered by _________________________,
not individually or personally but solely as owner trustee of Sequoia Mortgage
Trust 199_-_ under the Deposit Trust Agreement, in the exercise of the powers
and authority conferred and vested in it, (b) each of the representations,
undertakings and agreements herein made on the part of the Issuer is made and
intended not as personal representations, undertakings and agreements by
________________________, but is made and intended for the purpose for binding
only the Issuer, (c) nothing herein contained shall be construed as creating
any liability on ___ _____________________, other than any liability arising
out of its gross negligence, bad faith or wilful misconduct, and (d) under no
circumstances shall ________________________ be personally liable for the
payment of any indebtedness or expenses of the Issuer or be liable for the
breach or failure of any obligation, representation, warranty or covenant made
or undertaken by the Issuer under this Indenture or the other Operative
Agreements.
III-11
<PAGE> 84
ARTICLE IV
SATISFACTION AND DISCHARGE
SECTION 4.01. SATISFACTION AND DISCHARGE OF INDENTURE.
Whenever the following conditions shall have been satisfied:
(1) either
(A) all Bonds theretofore authenticated and
delivered (other than (i) Bonds which have been destroyed,
lost or stolen and which have been replaced or paid as
provided in Section 2.08, and (ii) Bonds for whose payment
money has theretofore been deposited in trust and thereafter
repaid to the Issuer, as provided in Section 3.03) have been
delivered to the Trustee for cancellation; or
(B) all Bonds not theretofore delivered to the
Trustee for cancellation
(i) have become due and payable, or
(ii) will become due and payable at the
Stated Maturity of the final installment of the
principal thereof within one year, or
(iii) are to be called for redemption
within one year under irrevocable arrangements
satisfactory to the Trustee for the giving of notice
of redemption by the Trustee in the name, and at the
expense, of the Issuer,
and the Issuer, in the case of clauses (B)(i), (B)(ii) or (B)(iii)
above, has deposited or caused to be deposited with the Trustee, in
trust for such purpose, an amount sufficient to pay and discharge the
entire indebtedness on such Bonds not theretofore delivered to the
Trustee for cancellation, for principal and interest to the Stated
Maturity of their entire unpaid principal amount or to the applicable
Redemption Date, as the case may be, and in the case of
IV-1
<PAGE> 85
Bonds which were not paid at the Stated Maturity of their entire
unpaid principal amount, for all overdue principal and all interest
payable on such Bonds to the next succeeding Payment Date therefor;
(2) the Issuer has paid or caused to be paid all other
sums payable hereunder by the Issuer; and
(3) the Issuer has delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel reasonably satisfactory in form
and substance to the Trustee each stating that all conditions
precedent herein providing for the satisfaction and discharge of this
Indenture have been complied with;
then, upon Issuer Request, this Indenture and the lien, rights and interests
created hereby shall cease to be of further effect, and the Trustee and each
co-trustee and separate trustee, if any, then acting as such hereunder shall,
at the expense of the Issuer, execute and deliver all such instruments as may
be necessary to acknowledge the satisfaction and discharge of this Indenture
and shall pay, or assign or transfer and deliver, to the Issuer or upon Issuer
Order all Pledged Mortgages, cash, securities and other property held by it as
part of the Trust Estate remaining after satisfaction of the conditions set
forth in clauses (1) and (2) above.
Notwithstanding the satisfaction and discharge of this
Indenture, the obligations of the Issuer to the Trustee under Section 6.07, the
obligations of the Trustee to the Issuer and the Holders of Bonds under Section
3.03, the obligations of the Trustee to the Holders of Bonds under Section 4.02
and the provisions of Article II with respect to lost, stolen, destroyed or
mutilated Bonds, registration of transfers of Bonds and rights to receive
payments of principal of, and interest on, the Bonds shall survive.
SECTION 4.02. APPLICATION OF TRUST MONEY.
All money deposited with the Trustee pursuant to Sections 3.03
and 4.01 shall be held in trust and applied by it, in accordance with the
provisions of the Bonds and this Indenture, to the payment, either directly or
through any Paying Agent, as the Trustee may determine, to the Persons entitled
thereto, of the principal and interest for whose payment such money has been
deposited with the Trustee.
IV-2
<PAGE> 86
ARTICLE V
DEFAULTS AND REMEDIES
SECTION 5.01. EVENT OF DEFAULT.
"Event of Default", wherever used herein, means, with respect
to Bonds issued hereunder, any one of the following events (whatever the reason
for such Event of Default and whether it shall be voluntary or involuntary or
be effected by operation of law or pursuant to any judgment, decree or order of
any court or any order, rule or regulation of any administrative or
governmental body):
(1) if the Issuer shall
(A) default in the payment when and as due of any
installment of principal of or interest on any Bond, or
(B) default in the payment of the Redemption
Price of any Bond which has been called for optional
redemption pursuant to Article X;
(2) if the Issuer shall breach, or default in the due
observance, of any one or more of the covenants set forth in clauses
(a) through (e) of Section 3.09;
(3) if the Issuer shall breach, or default in the due
observance or performance of, any other of its covenants in this
Indenture, and such Default shall continue for a period of 30 days
after there shall have been given, by registered or certified mail, to
the Issuer by the Trustee, or to the Issuer and the Trustee [by the
Bond Insurer, or, during the existence of a Bond Insurer Default] by
the Holders of Bonds representing more than 50% of the aggregate Class
Principal Amount of the Controlling Class, a written notice specifying
such Default and requiring it to be remedied and stating that such
notice is a "Notice of Default" hereunder;
(4) if any representation or warranty of the Issuer made
in this Indenture or any certificate or other writing delivered
pursuant hereto or in connection herewith shall prove to be incorrect
in any material respect as of the time
V-1
<PAGE> 87
when the same shall have been made and, within 30 days after there
shall have been given, by registered or certified mail, written notice
thereof to the Issuer by the Trustee, or to the Issuer and the Trustee
by the Holders of Bonds representing more than 50% of the aggregate
Class Principal Amount of the Controlling Class, the circumstance or
condition in respect of which such representation or warranty was
incorrect shall not have been eliminated or otherwise cured;
(5) the entry of a decree or order for relief by a court
having jurisdiction in respect of the Issuer in an involuntary case
under the federal bankruptcy laws, as now or hereafter in effect, or
any other present or future federal or state bankruptcy, insolvency or
similar law, or appointing a receiver, liquidator, assignee, trustee,
custodian, sequestrator or other similar official of the Issuer or of
any substantial part of its property, or ordering the winding up or
liquidation of the affairs of the Issuer and the continuance of any
such decree or order unstayed and in effect for a period of 60
consecutive days; or
(6) the commencement by the Issuer of a voluntary case
under the federal bankruptcy laws, as now or hereafter in effect, or
any other present or future federal or state bankruptcy, insolvency or
similar law, or the consent by the Issuer to the appointment of or
taking possession by a receiver, liquidator, assignee, trustee,
custodian, sequestrator or other similar official of the Issuer or of
any substantial part of its property or the making by the Issuer of an
assignment for the benefit of creditors or the failure by the Issuer
generally to pay its debts as such debts become due or the taking of
corporate action by the Issuer in furtherance of any of the foregoing.
(a) Notwithstanding the foregoing, prior to the payment
in full of the Senior Bonds, the failure of the Issuer to pay when and as due
any installment of principal of or interest (regardless of the lapse of any
grace period) on any Subordinated Bond shall not constitute an Event of Default
hereunder. In addition, notwithstanding any applicable provision of this
Indenture, upon payment in full of the Senior Bonds, the prior
V-2
<PAGE> 88
occurrence of any such shortfalls attributable to the Subordinated Bonds, which
shortfalls have previously been paid in full, will not constitute an Event of
Default hereunder in respect of the Subordinated Bonds. Subject to the
foregoing, Section 5.01 of the Indenture shall otherwise apply in all respects
to the Subordinated Bonds.
(b) Notwithstanding the foregoing, the failure of the
Issuer to pay when and as due any installment of principal of (regardless of
the lapse of any grace period) any Senior Bond shall not constitute an Event of
Default hereunder unless the Senior Class Principal Amount exceeds the
aggregate Stated Principal Balances of the Pledged Mortgages after application
of all available amounts on deposit in the Distribution Account on a Payment
Date. Subject to the foregoing, Section 5.01 of the Indenture shall otherwise
apply in all respects to the Senior Bonds.
SECTION 5.02. ACCELERATION OF MATURITY; RESCISSION AND ANNULMENT.
If an Event of Default occurs and is continuing with respect
to the Bonds, then and in every such case the Trustee or the Holders of Bonds
representing more than 50% of the aggregate Class Principal Amount of the
Controlling Class may declare all the Bonds to be immediately due and payable,
by a notice in writing to the Issuer (and to the Trustee if given by
Bondholders), and upon any such declaration such Bonds shall become immediately
due and payable in an amount equal to:
(i) the aggregate Class Principal Amount of all
Classes of Bonds,
(ii) accrued and unpaid interest at the respective Bond
Interest Rates on the aggregate Class Principal Amount through the
date of acceleration, and
(iii) in the case of the Senior Bonds, interest (but
only to the extent payment thereof shall be legally enforceable) on
any overdue installments of interest on the Senior Bonds from the
Stated Maturity of any such installments to the date of the
acceleration at the Bond Interest Rate at which such interest accrued
or such lower rate at which payment of such interest shall be legally
enforceable.
V-3
<PAGE> 89
At any time after such a declaration of acceleration of
maturity of the Bonds has been made and before a judgment or decree for payment
of the money due has been obtained by the Trustee as hereinafter in this
Article provided, the Holders of Bonds representing more than 50% of the
aggregate Class Principal Amount of the Controlling Class, by written notice to
the Issuer and the Trustee, may rescind and annul such declaration and its
consequences if:
(1) the Issuer has paid or deposited with the Trustee a
sum sufficient to pay:
(A) all payments of principal of, and interest
on, all Bonds and all other amounts which would then be due
hereunder or upon such Bonds if the Event of Default giving
rise to such acceleration had not occurred; and
(B) all sums paid or advanced by the Trustee
hereunder and the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and
counsel; and
(2) all Events of Default, other than the nonpayment of
the principal of Bonds which have become due solely by such
acceleration, have been cured or waived as provided in Section 5.15.
No such rescission shall affect any subsequent Default or
impair any right consequent thereon.
SECTION 5.03. COLLECTION OF INDEBTEDNESS AND SUITS FOR ENFORCEMENT BY
TRUSTEE.
Subject to Section 5.05, the Issuer covenants that if an Event
of Default shall occur and be continuing in respect to the Bonds and the Bonds
have been declared due and payable and such declaration and its consequences
have not been rescinded and annulled, the Issuer will, upon demand of the
Trustee, pay to the Trustee, for the benefit of the Holders of the Bonds:
V-4
<PAGE> 90
(i) the amounts specified in the first paragraph
of Section 5.02, and
(ii) in addition thereto, such further amount as
shall be sufficient to cover the costs and expenses of collection,
including the reasonable compensation, expenses, disbursements and
advances of the Trustee, its agents and counsel.
If the Issuer fails to pay such amounts forthwith upon such
demand, the Trustee, in its own name and as trustee of an express trust, may
institute a Proceeding for the collection of the sums so due and unpaid, and
may prosecute such Proceeding to judgment or final decree, and may enforce the
same against the Issuer or any other obligor upon the Bonds and collect, out of
the Trust Estate (as defined in the Deposit Trust Agreement), wherever
situated, of the Issuer, the moneys adjudged or decreed to be payable in the
manner provided by law; provided, however, that neither the Bank nor any of its
agents, officers, directors, employees, successors or assigns shall be
personally liable for any amounts due under the Bonds or this Indenture.
If an Event of Default occurs and is continuing, the Trustee
may in its discretion proceed to protect and enforce its rights and the rights
of the Bondholders by any Proceedings the Trustee deems appropriate to protect
and enforce any such rights, whether for the specific enforcement of any
covenant or agreement in this Indenture or in aid of the exercise of any power
granted herein, or enforce any other proper remedy, including, without
limitation, instituting a Proceeding prior to any declaration of acceleration
of the Maturity of the Bonds for the collection of all amounts then due and
unpaid on such Bonds, prosecuting such Proceeding to final judgment or decree,
enforcing the same against the Issuer and collecting out of the property,
wherever situated, of the Issuer the moneys adjudged or decreed to be payable
in the manner provided by law.
SECTION 5.04. REMEDIES.
If an Event of Default shall have occurred and be continuing
and the Bonds have been declared due and payable and such declaration and its
consequences have not been rescinded and
V-5
<PAGE> 91
annulled, the Trustee (subject to Section 5.18, to the extent applicable) may
do one or more of the following:
(a) institute Proceedings for the collection of all
amounts then payable on the Bonds, or under this Indenture, whether by
declaration or otherwise, enforce any judgment obtained, and collect
from the Issuer moneys adjudged due;
(b) in accordance with Section 5.18, sell the Trust
Estate or any portion thereof or rights or interest therein, at one or
more public or private Sales called and conducted in any manner
permitted by law;
(c) institute Proceedings from time to time for the
complete or partial foreclosure of this Indenture with respect to the
Trust Estate; and
(d) exercise any remedies of a secured party under the
Uniform Commercial Code and take any other appropriate action to
protect and enforce the rights and remedies of the Trustee or the
Holders of the Bonds hereunder.
SECTION 5.05. [RESERVED].
SECTION 5.06. TRUSTEE MAY FILE PROOFS OF CLAIM.
In case of the pendency of any receivership, insolvency,
liquidation, bankruptcy, reorganization, arrangement, composition or other
judicial Proceeding relative to the Issuer or any other obligor upon any of the
Bonds or the property of the Issuer or of such other obligor or their
creditors, the Trustee (irrespective of whether the Bonds shall then be due and
payable as therein expressed or by declaration or otherwise and irrespective of
whether the Trustee shall have made any demand on the Issuer for the payment of
any overdue principal or interest) shall be entitled and empowered, by
intervention in such Proceeding or otherwise to:
(i) file and prove a claim for the whole amount of
principal and interest owing and unpaid in respect of the Bonds and
file such other papers or documents and take such other actions as it
deems necessary or advisable in order to
V-6
<PAGE> 92
have the claims of the Trustee (including any claim for the reasonable
compensation, expenses, disbursements and advances of the Trustee, its
agents and counsel) and of the Bondholders allowed in such Proceeding;
and
(ii) collect and receive any moneys or other property
payable or deliverable on any such claims and to distribute the same;
and any receiver, assignee, trustee, liquidator or sequestrator (or
other similar official) in any such Proceeding is hereby authorized by
each Bondholder to make such payments to the Trustee and, in the event
that the Trustee shall consent to the making of such payments directly
to the Bondholders, to pay to the Trustee any amount due it for the
reasonable compensation, expenses, disbursements and advances of the
Trustee, its agents and counsel, and any other amounts due the Trustee
under Section 6.07.
Nothing herein contained shall be deemed to authorize the
Trustee to authorize or consent to or accept or adopt on behalf of any
Bondholder any plan of reorganization, arrangement, adjustment or composition
affecting any of the Bonds or the rights of any Holder thereof, or to authorize
the Trustee to vote in respect of the claim of any Bondholder in any such
Proceeding.
SECTION 5.07. TRUSTEE MAY ENFORCE CLAIMS WITHOUT POSSESSION OF BONDS.
All rights of action and claims under this Indenture or any of
the Bonds may be prosecuted and enforced by the Trustee without the possession
of any of the Bonds or the production thereof in any Proceeding relating
thereto, and any such Proceeding instituted by the Trustee shall be brought in
its own name as trustee of an express trust, and any recovery of judgment shall
be for the ratable benefit of the Holders of the Bonds in respect of which such
judgment has been recovered. Any surplus shall be available, in accordance with
Section 5.08, for the payment of the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel.
V-7
<PAGE> 93
SECTION 5.08. APPLICATION OF MONEY COLLECTED.
If the Bonds have been declared due and payable following an
Event of Default and such declaration and its consequences have not been
rescinded and annulled, any money collected by the Trustee with respect to the
Bonds pursuant to this Article or otherwise and any monies that may then be
held or thereafter received by the Trustee with respect to the Bonds shall be
applied, after payment to the Trustee of such amounts as may be payable to it
under Section 6.07, in the order, at the date or dates fixed by the Trustee
and, in case of the distribution of the entire amount due on account of
principal of, and interest on, such Bonds, upon presentation and surrender
thereof:
First: To the payment of amounts then due and unpaid to any
Servicer or the Master Servicer in respect of Nonrecoverable Advances
made by such Servicer or the Master Servicer pursuant to the related
Servicing Agreement or the Master Servicing Agreement;
Second: To the payment of amounts of interest and principal
then due and unpaid upon the Outstanding Bonds in accordance with the
priorities set forth in Section 2.03(b); and
Third: To the payment of the remainder, if any, to the Issuer
or any other Person legally entitled thereto.
SECTION 5.09. LIMITATION ON SUITS.
No Holder of a Bond shall have any right to institute any
Proceedings, judicial or otherwise, with respect to this Indenture, or for the
appointment of a receiver or trustee, or for any other remedy hereunder,
unless:
(1) such Holder has previously given written notice to
the Trustee of a continuing Event of Default;
(2) the Holders of Bonds representing more than 50% of
the aggregate Class Principal Amount of the Controlling Class shall
have made written request to the Trustee to institute Proceedings in
respect of such Event of Default in its own name as Trustee hereunder;
V-8
<PAGE> 94
(3) such Holder or Holders have offered to the Trustee
indemnity in full against the costs, expenses and liabilities to be
incurred in compliance with such request;
(4) the Trustee for 60 days after its receipt of such
notice, request and offer of indemnity has failed to institute any
such Proceeding; and
(5) no direction inconsistent with such written request
has been given to the Trustee during such 60-day period by the Holders
of Bonds representing more than 50% of the aggregate Class Principal
Amount of the Controlling Class;
it being understood and intended that no one or more Holders of Bonds shall
have any right in any manner whatever by virtue of, or by availing themselves
of, any provision of this Indenture to affect, disturb or prejudice the rights
of any other Holders of Bonds or to obtain or to seek to obtain priority or
preference over any other Holders or to enforce any right under this Indenture,
except in the manner herein provided and for the equal and ratable benefit of
all the Holders of Bonds.
SECTION 5.10. UNCONDITIONAL RIGHTS OF BONDHOLDERS TO RECEIVE PRINCIPAL AND
INTEREST.
Notwithstanding any other provision in this Indenture, other
than the provisions hereof limiting the right to recover amounts due on a Bond
to recovery from the property of the Issuer, the Holder of any Bond shall have
the right, to the extent permitted by applicable law, which right is absolute
and unconditional, to receive payment of each installment of interest on such
Bond on the respective Stated Maturities of such installments of interest, to
receive payment of each installment of principal of such Bond when due (or, in
the case of any Bond called for redemption, on the date fixed for such
redemption) and to institute suit for the enforcement of any such payment, and
such right shall not be impaired without the consent of such Holder.
V-9
<PAGE> 95
SECTION 5.11. RESTORATION OF RIGHTS AND REMEDIES.
If the Trustee or any Bondholder has instituted any Proceeding
to enforce any right or remedy under this Indenture and such Proceeding has
been discontinued or abandoned for any reason, or has been determined adversely
to the Trustee or to such Bondholder, then and in every such case the Issuer,
the Trustee and the Bondholders shall, subject to any determination in such
Proceeding, be restored severally and respectively to their former positions
hereunder, and thereafter all rights and remedies of the Trustee and the
Bondholders shall continue as though no such Proceeding had been instituted.
SECTION 5.12. RIGHTS AND REMEDIES CUMULATIVE.
No right or remedy herein conferred upon or reserved to the
Trustee or to the Bondholders is intended to be exclusive of any other right or
remedy, and every right and remedy shall, to the extent permitted by law, be
cumulative and in addition to every other right and remedy given hereunder or
now or hereafter existing at law or in equity or otherwise. The assertion or
employment of any right or remedy hereunder, or otherwise, shall not prevent
the concurrent assertion or employment of any other appropriate right or
remedy.
SECTION 5.13. DELAY OR OMISSION NOT WAIVER.
No delay or omission of the Trustee or of any Holder of any
Bond to exercise any right or remedy accruing upon any Event of Default shall
impair any such right or remedy or constitute a waiver of any such Event of
Default or an acquiescence therein. Every right and remedy given by this
Article or by law to the Trustee or to the Bondholders may be exercised from
time to time, and as often as may be deemed expedient, by the Trustee or by the
Bondholders, as the case may be.
SECTION 5.14. CONTROL BY BONDHOLDERS.
The Holders of Bonds representing more than 50% of the
aggregate Class Principal Amount of the Controlling Class shall have the right
to direct the time, method and place of conducting any Proceeding for any
remedy available to the Trustee or exercising any trust or power conferred on
the Trustee; provided, however, that:
V-10
<PAGE> 96
(1) such direction shall not be in conflict with any rule
of law or with this Indenture;
(2) any direction to the Trustee to undertake a Sale of
the Trust Estate shall be by the Holders of Bonds representing the
percentage of the aggregate Class Principal Amount of the Controlling
Class specified in Section 5.18(b)(1), unless Section 5.18(b)(2) is
applicable; and
(3) [Reserved];
(4) the Trustee may take any other action deemed proper
by the Trustee which is not inconsistent with such direction;
provided, however, that, subject to Section 6.01, the Trustee need not
take any action which it determines might involve it in liability or
be unjustly prejudicial to the Bondholders not consenting.
SECTION 5.15. WAIVER OF PAST DEFAULTS.
The Holders of Bonds representing more than 50% of the
aggregate Class Principal Amount of the Controlling Class may on behalf of the
Holders of all the Bonds of such Class waive any past Default hereunder and its
consequences, except a Default:
(1) in the payment of any installment of principal of, or
interest on, any Bond; or
(2) in respect of a covenant or provision hereof which
under Section 9.02 cannot be modified or amended without the consent
of the Holder of each Outstanding Bond affected.
Upon any such waiver, such Default shall cease to exist, and
any Event of Default arising therefrom shall be deemed to have been cured for
every purpose of this Indenture; but no such waiver shall extend to any
subsequent or other Default or impair any right consequent thereon.
SECTION 5.16. UNDERTAKING FOR COSTS.
All parties to this Indenture agree, and each Holder of any
Bond by his or her acceptance thereof shall be deemed to have agreed, that any
court may in its discretion require, in any suit
V-11
<PAGE> 97
for the enforcement of any right or remedy under this Indenture, or in any suit
against the Trustee for any action taken, suffered or omitted by it as Trustee,
the filing by any party litigant in such suit of an undertaking to pay the
costs of such suit, and that such court may in its discretion assess reasonable
costs, including reasonable attorneys' fees, against any party litigant in such
suit, having due regard to the merits and good faith of the claims or defenses
made by such party litigant; but the provisions of this Section shall not apply
to any suit instituted by the Trustee, to any suit instituted by any
Bondholder, or group of Bondholders, holding in the aggregate Bonds
representing more than 10% of the aggregate Class Principal Amount of the
Controlling Class, or to any suit instituted by any Bondholder for the
enforcement of the payment of any installment of interest on any Bond on or
after the Stated Maturity thereof expressed in such Bond or for the enforcement
of the payment of any installment of principal of any Bond when due (or, in the
case of any Bond called for redemption, on or after the applicable redemption
date).
SECTION 5.17. WAIVER OF STAY OR EXTENSION LAWS.
The Issuer covenants (to the extent that it may lawfully do
so) that it will not at any time insist upon, or plead, or in any manner
whatsoever claim or take the benefit or advantage of, any stay or extension of
law wherever enacted, now or at any time hereafter in force, which may affect
the covenants in, or the performance of, this Indenture; and the Issuer (to the
extent that it may lawfully do so) hereby expressly waives all benefit or
advantage of any such law, and covenants that it will not hinder, delay or
impede the execution of any power herein granted to the Trustee, but will
suffer and permit the execution of every such power as though no such law had
been enacted.
SECTION 5.18. SALE OF TRUST ESTATE.
(a) The power to effect any sale (a "Sale") of any
portion of the Trust Estate pursuant to Section 5.04 shall not be exhausted by
any one or more Sales as to any portion of the Trust Estate remaining unsold,
but shall continue unimpaired until the entire Trust Estate shall have been
sold or all amounts payable on the Bonds and under this Indenture with respect
thereto shall have been paid. The Trustee may from time to time postpone any
V-12
<PAGE> 98
public Sale by public announcement made at the time and place of such Sale. The
Trustee hereby expressly waives its right to any amount fixed by law as
compensation for any Sale.
(b) To the extent permitted by law, the Trustee shall not
in any private Sale sell or otherwise dispose of the Trust Estate, or any
portion thereof, unless:
(1) the Holders of all Controlling Class consent to, or
direct the Trustee to make, such Sale; or
(2) the proceeds of such Sale would be not less than the
entire amount which would be distributable to the Holders of the
Bonds, in full payment thereof in accordance with Section 5.08, on the
Payment Date next succeeding the date of such Sale.
(3) [Reserved]
The purchase by the Trustee of all or any portion of the Trust
Estate at a private Sale shall not be deemed a Sale or disposition thereof for
purposes of this Section 5.18(b).
(c) Unless the Holders of all Controlling Class have
otherwise consented or directed the Trustee, at any public Sale of all or any
portion of the Trust Estate at which a minimum bid equal to or greater than the
amount described in paragraph (2) of subsection (b) of this Section 5.18 has
not been established by the Trustee and no Person bids an amount equal to or
greater than such amount, the Trustee shall bid an amount at least $1.00 more
than the highest other bid.
(d) In connection with a Sale of all or any portion of
the Trust Estate:
(1) any Holder or Holders of Bonds may bid for
and purchase the property offered for Sale, and upon compliance with
the terms of sale may hold, retain and possess and dispose of such
property, without further accountability, and may, in paying the
purchase money therefor, deliver any Controlling Class or claims for
interest thereon in lieu of cash up to the amount which shall, upon
distribution of the net proceeds of such Sale,
V-13
<PAGE> 99
be payable thereon, and such Bonds, in case the amount so payable
thereon shall be less than the amount due thereon, shall be returned
to the Holders thereof after being appropriately stamped to show such
partial payment;
(2) the Trustee may bid for and acquire the
property offered for Sale in connection with any public Sale thereof,
and, in lieu of paying cash therefor, may make settlement for the
purchase price by crediting the gross Sale price against the sum of
(A) the amount which would be distributable to the Holders of the
Bonds as a result of such Sale in accordance with Section 5.08 on the
Payment Date next succeeding the date of such Sale and (B) the
expenses of the Sale and of any Proceedings in connection therewith
which are reimbursable to it, without being required to produce the
Bonds in order to complete any such Sale or in order for the net Sale
price to be credited against such Bonds, and any property so acquired
by the Trustee shall be held and dealt with by it in accordance with
the provisions of this Indenture;
(3) the Trustee shall execute and deliver an
appropriate instrument of conveyance transferring its interest in any
portion of the Trust Estate in connection with a Sale thereof;
(4) the Trustee is hereby irrevocably appointed
the agent and attorney-in-fact of the Issuer to transfer and convey
its interest in any portion of the Trust Estate in connection with a
Sale thereof, and to take all action necessary to effect such Sale;
and
(5) no purchaser or transferee at such a Sale
shall be bound to ascertain the Trustee's authority, inquire into the
satisfaction of any conditions precedent or see to the application of
any moneys.
(e) Notwithstanding anything in this Indenture to the
contrary, if an Event of Default specified in Section 5.01(1) is the Event of
Default, or one of the Events of Default, on the basis of which the Bonds have
been declared due and payable, then the Trustee may, in its sole discretion,
sell the Trust Estate without compliance with this Section 5.18.
V-14
<PAGE> 100
SECTION 5.19. ACTION ON BONDS.
The Trustee's right to seek and recover judgment under this
Indenture shall not be affected by the seeking, obtaining or application of any
other relief under or with respect to this Indenture. Neither the lien of this
Indenture nor any rights or remedies of the Trustee or the Holders of Bonds
shall be impaired by the recovery of any judgment by the Trustee against the
Issuer or by the levy of any execution under such judgment upon any portion of
the Trust Estate.
V-15
<PAGE> 101
ARTICLE VI
THE TRUSTEE
SECTION 6.01. DUTIES OF TRUSTEE.
(a) If an Event of Default has occurred and is
continuing, the Trustee shall exercise such of the rights and powers vested in
it by this Indenture, and use the same degree of care and skill in their
exercise, as a prudent person would exercise or use under the circumstances in
the conduct of his or her own affairs.
(b) Except during the continuance of an Event of
Default:
(1) The Trustee need perform only those duties
that are specifically set forth in this Indenture and no others and no
implied covenants or obligations shall be read into this Indenture;
and
(2) In the absence of bad faith on its part, the
Trustee may conclusively rely, as to the truth of the statements and
the correctness of the opinions expressed therein, upon certificates
or opinions furnished to the Trustee and conforming to the
requirements of this Indenture. The Trustee shall, however, examine
such certificates and opinions to determine whether they conform to
the requirements of this Indenture.
(c) The Trustee may not be relieved from liability for
its own negligent action, its own negligent failure to act or its own willful
misconduct, except that:
(1) This paragraph does not limit the effect of
subsection (b) of this Section;
(2) The Trustee shall not be liable for any error
of judgment made in good faith by a Responsible Officer, unless it is
proved that the Trustee was negligent in ascertaining the pertinent
facts; and
VI-1
<PAGE> 102
(3) The Trustee shall not be liable with respect
to any action it takes or omits to take in good faith in accordance
with a direction received by it pursuant to Section 5.14 or Section
5.18.
(d) Except with respect to duties of the Trustee
prescribed by the TIA, as to which this Section 6.01(d) shall not apply, for
all purposes under this Indenture, the Trustee shall not be deemed to have
notice or knowledge of any Event of Default described in Section 5.01(2),
5.01(5) or 5.01(6) or any Default described in Section 5.01(3) or 5.01(4) or
any Servicing Default or default under the Master Servicing Agreement unless a
Responsible Officer assigned to and working in the Trustee's corporate trust
department has actual knowledge thereof or unless written notice of any event
which is in fact such an Event of Default, Servicing Default or default is
received by the Trustee at the Corporate Trust Office, and such notice
references the Bonds generally, the Issuer, the Trust Estate or this Indenture.
(e) No provision of this Indenture shall require the
Trustee to expend or risk its own funds or otherwise incur any financial
liability in the performance of any of its duties hereunder, or in the exercise
of any of its rights or powers, if it shall have reasonable grounds for
believing that repayment of such funds or adequate indemnity against such risk
or liability is not reasonably assured to it. In determining that such
repayment or indemnity is not reasonably assured to it, the Trustee must
consider not only the likelihood of repayment or indemnity by or on behalf of
the Issuer but also the likelihood of repayment or indemnity from amounts
payable to it from the Trust Estate pursuant to Sections 6.07 and 8.02(d);
provided, however, that, except as provided in the first sentence of this
Section 6.01(e), the Trustee shall not refuse or fail to perform any of its
duties hereunder solely as a result of nonpayment of its reasonable fees and
expenses; and provided further, however, that nothing in this Section 6.01(e)
shall be construed to limit the exercise by the Trustee of any right or remedy
permitted under this Indenture or otherwise in the event of the Issuer's
failure to pay the amounts due the Trustee pursuant to Section 6.07.
VI-2
<PAGE> 103
(f) Every provision of this Indenture that in any way
relates to the Trustee is subject to the provisions of this Section.
(g) Notwithstanding any extinguishment of all right,
title and interest of the Issuer in and to the Trust Estate following an Event
of Default and a consequent declaration of acceleration of the Maturity of the
Bonds, whether such extinguishment occurs through a Sale of the Trust Estate to
another Person, the acquisition of the Trust Estate by the Trustee or
otherwise, the rights, powers and duties of the Trustee with respect to the
Trust Estate (or the proceeds thereof) and the Bondholders and the rights of
Bondholders shall continue to be governed by the terms of this Indenture.
SECTION 6.02. NOTICE OF DEFAULT.
Within 90 days after the occurrence of any Default known to
the Trustee, the Trustee shall transmit by mail to all Holders of Bonds notice
of each such Default, unless such Default shall have been cured or waived;
provided, however, that except in the case of a Default of the type described
in Section 5.01(1), the Trustee shall be protected in withholding such notice
if and so long as the board of directors, the executive committee or a trust
committee of directors and/or Responsible Officers of the Trustee in good faith
determine that the withholding of such notice is in the interests of the
Holders of the Bonds; and provided, further, that in the case of any Default of
the character specified in Section 5.01(3) or 5.01(4) no such notice to Holders
of the Bonds shall be given until at least 30 days after the occurrence
thereof. Concurrently with the mailing of any such notice to the Holders of the
Bonds, the Trustee shall transmit by mail a copy of such notice to the Rating
Agencies.
SECTION 6.03. RIGHTS OF TRUSTEE.
Except as otherwise provided in Section 6.01 hereof:
(a) the Trustee may rely and shall be protected in acting
or refraining from acting upon any resolution, certificate, statement,
instrument, opinion, report, notice, request, direction, consent, order, bond,
note or other paper or
VI-3
<PAGE> 104
document believed by it to be genuine and to have been signed or presented by
the proper party or parties;
(b) any request or direction of the Issuer mentioned
herein shall be sufficiently evidenced by an Issuer Request or Issuer Order,
and any resolution of the board of directors may be sufficiently evidenced by a
written resolution;
(c) whenever in the administration of this Indenture the
Trustee shall deem it desirable that a matter be proved or established prior to
taking, suffering or omitting any action hereunder, the Trustee (unless other
evidence be herein specifically prescribed) may, in the absence of bad faith on
its part, rely upon an Officers' Certificate or the Officer's Certificate of
the Master Servicer;
(d) the Trustee may consult with counsel, and the written
advice of such counsel or any Opinion of Counsel shall be full and complete
authorization and protection in respect of any action taken, suffered or
omitted by it hereunder in good faith and in reliance thereon;
(e) the Trustee shall be under no obligation to exercise
any of the rights or powers vested in it by this Indenture at the request or
direction of any of the Bondholders pursuant to this Indenture, unless such
Bondholders shall have offered to the Trustee reasonable security or indemnity
against the costs, expenses and liabilities which might be incurred by it in
compliance with such request or direction;
(f) the Trustee shall not be bound to make any
investigation into the facts or matters stated in any resolution, certificate,
statement, instrument, opinion, report, notice, request, direction, consent,
order, bond, note or other paper or document, but the Trustee, in its
discretion may make such further inquiry or investigation into such facts or
matters as it may see fit, and if the Trustee shall determine to make such
further inquiry or investigation, it shall be entitled, on reasonable prior
notice to the Issuer, to examine the books, records and premises of the Issuer,
personally or by agent or attorney, during the Issuer's normal business hours;
provided that the Trustee shall and shall cause its agents to hold in
confidence all such information except to the extent disclosure
VI-4
<PAGE> 105
may be required by law and except to the extent that the Trustee, in its sole
judgment, may determine that such disclosure is consistent with its obligations
hereunder;
(g) the Trustee may execute any of the trusts or powers
hereunder or perform any duties hereunder either directly or by or through
agents or attorneys and the Trustee shall not be responsible for any misconduct
or negligence on the part of any agent or attorney appointed and supervised
with due care by it hereunder;
(h) the Trustee shall not be liable for any action it
takes or omits to take in good faith which it believes to be authorized or
within its rights or powers;
(i) prior to the time that one of its Responsible
Officers obtains actual knowledge of a Servicing Default as defined in the
Master Servicing Agreement or a failure by the Master Servicer thereunder which
with notice and the passage of time will become a Servicing Default, the
Trustee shall not be responsible for taking action with respect thereto;
(j) the Trustee shall not be responsible for supervising,
monitoring or reviewing the Master Servicer's performance of its duties under
the Master Servicing Agreement except to the extent of determining (i) that the
periodic reports, certificates and opinions required to be delivered by the
Master Servicer to it thereunder are delivered in timely fashion and conform to
the requirements of the Master Servicing Agreement, (ii) that the amounts
received by it from the Master Servicer for deposit in the Distribution Account
during any month are as shown in the Master Servicer's report for such month,
(iii) and that any Trustee Mortgage File or document therein that has been
released by the Trustee to the Master Servicer is returned as provided in the
Master Servicing Agreement; and
(k) the provisions of this Section, other than clauses
(e), (i) and (j), and of Sections 6.01(b) and (c) shall apply to the Trustee as
it may be Successor Master Servicer under the Master Servicing Agreement.
VI-5
<PAGE> 106
SECTION 6.04. NOT RESPONSIBLE FOR RECITALS OR ISSUANCE OF BONDS.
The recitals contained herein and in the Bonds, except the
certificates of authentication on the Bonds, shall be taken as the statements
of the Issuer, and the Trustee assumes no responsibility for their correctness.
The Trustee makes no representations with respect to the Trust Estate or as to
the validity or sufficiency of this Indenture or of the Bonds. The Trustee
shall not be accountable for the use or application by the Issuer of the Bonds
or the proceeds thereof or any money paid to the Issuer or upon Issuer Order
pursuant to the provisions hereof.
SECTION 6.05. MAY HOLD BONDS.
The Trustee, any Agent, or any other agent of the Issuer, in
its individual or any other capacity, may become the owner or pledgee of Bonds
and, subject to Sections 6.08 and 6.13, may otherwise deal with the Issuer or
any Affiliate of the Issuer with the same rights it would have if it were not
the Trustee, Agent or such other agent.
SECTION 6.06. MONEY HELD IN TRUST.
Money held by the Trustee in trust hereunder need not be
segregated from other funds except to the extent required by this Indenture or
by law. The Trustee shall be under no liability for interest on any money
received by it hereunder except as otherwise agreed with the Issuer and except
to the extent of income or other gain on investments which are obligations of
the Trustee, in its commercial capacity, and income or other gain actually
received by the Trustee on investments, which are obligations of others.
SECTION 6.07. COMPENSATION AND REIMBURSEMENT.
The Issuer agrees:
(1) subject to any separate written agreement with the
Trustee, to pay the Trustee from time to time reasonable compensation
for all services rendered by it hereunder (which compensation shall
not be limited by any provision of law in regard to the compensation
of a trustee of an express trust);
VI-6
<PAGE> 107
(2) except as otherwise expressly provided herein, to
reimburse the Trustee upon its request for all reasonable expenses,
disbursements and advances incurred or made by the Trustee in
connection with the performance of its duties hereunder (including the
reasonable compensation and the expenses and disbursements of its
agents and counsel), except any such expense, disbursement or advance
as may be attributable to its negligence or bad faith; and
(3) to indemnify the Trustee and its agents for, and to
hold them harmless against, any loss, liability or expense incurred
without negligence or bad faith on their part, arising out of, or in
connection with, the acceptance or administration of this trust,
including the costs and expenses of defending themselves against any
claim in connection with the exercise or performance of any of their
powers or duties hereunder, provided that:
(i) with respect to any such claim, the Trustee
shall have given the Issuer written notice thereof promptly
after the Trustee shall have knowledge thereof;
(ii) while maintaining absolute control over its
own defense, the Trustee shall cooperate and consult fully
with the Issuer in preparing such defense; and
(iii) notwithstanding anything to the contrary in
this Section 6.07(3), the Issuer shall not be liable for
settlement of any such claim by the Trustee entered into
without the prior consent of the Issuer.
As security for the performance of the obligations of the
Issuer under this Section, the Trustee shall have a lien ranking junior to the
lien of the Bonds with respect to which any claim of the Trustee under this
Section arose (but senior to all other liens, if any) upon all property and
funds held or collected as part of the Trust Estate by the Trustee in its
capacity as such. The Trustee shall not institute any Proceeding seeking the
enforcement of such lien against the Trust Estate unless such Proceeding is in
connection with a Proceeding in accordance with Article V for enforcement of
the lien of this Indenture after the occurrence of an Event of Default (other
than
VI-7
<PAGE> 108
an Event of Default arising solely from the Issuer's failure to pay amounts due
the Trustee under this Section 6.07) and a resulting declaration of
acceleration of Maturity of the Bonds which has not been rescinded and
annulled.
SECTION 6.08. ELIGIBILITY; DISQUALIFICATION.
Irrespective of whether this Indenture is qualified under the
TIA, this Indenture shall always have a Trustee who satisfies the requirements
of TIA Sections 310(a)(1) and 310(a)(5). The Trustee shall always have a
combined capital and surplus as stated in Section 6.09. The Trustee shall be
subject to TIA Section 310(b).
SECTION 6.09. TRUSTEE'S CAPITAL AND SURPLUS.
The Trustee shall at all times have a combined capital and
surplus of at least $50,000,000 or shall be a member of a bank holding company
system, the aggregate combined capital and surplus of which is at least
$50,000,000; provided, however, that the Trustee's separate capital and surplus
shall at all times be at least the amount required by TIA Section 310(a)(2) if
this Indenture is qualified under the TIA. If the Trustee publishes annual
reports of condition of the type described in TIA Section 310(a)(2), its
combined capital and surplus for purposes of this Section 6.09 shall be as set
forth in the latest such report.
SECTION 6.10. RESIGNATION AND REMOVAL; APPOINTMENT OF SUCCESSOR.
(a) No resignation or removal of the Trustee and no
appointment of a successor Trustee pursuant to this Article shall become
effective until the acceptance of appointment by the successor Trustee under
Section 6.11.
(b) The Trustee may resign at any time by giving written
notice thereof to the Issuer. If an instrument of acceptance by a successor
Trustee shall not have been delivered to the Trustee within 30 days after the
giving of such notice of resignation, the resigning Trustee may petition any
court of competent jurisdiction for the appointment of a successor Trustee.
VI-8
<PAGE> 109
(c) The Trustee may be removed at any time by Act of the
Holders representing more than 50% of the aggregate Class Principal Amount of
the Controlling Class, delivered to the Trustee and to the Issuer.
(d) If at any time:
(1) the Trustee shall have a conflicting interest
prohibited by Section 6.08 and shall fail to resign or eliminate such
conflicting interest in accordance with Section 6.08 after written
request therefor by the Issuer or by any Bondholder; provided,
however, that this Section 6.10(d)(1) shall not be operative as part
of this Indenture unless and until this Indenture is qualified under
the TIA, and until such qualification this Indenture shall be
construed as if this Section 6.10(d)(1) were not contained herein; or
(2) the Trustee shall cease to be eligible under
Section 6.09 or shall become incapable of acting or shall be adjudged
a bankrupt or insolvent, or a receiver of the Trustee or of its
property shall be appointed, or any public officer shall take charge
or control of the Trustee or of its property or affairs for the
purpose of rehabilitation, conservation or liquidation;
then, in any such case, (i) the Issuer by an Issuer Order may remove the
Trustee or (ii) subject to Section 5.16, any Bondholder who has been a bona
fide Holder of a Bond for at least six months may, on behalf of itself and all
others similarly situated, petition any court of competent jurisdiction for the
removal of the Trustee and the appointment of a successor Trustee, unless this
Indenture is qualified under the TIA and the Trustee's duty to resign is stayed
as provided in Section 310(b) of the TIA.
(e) If the Trustee shall resign, be removed or become
incapable of acting, or if a vacancy shall occur in the office of the Trustee
for any cause, the Issuer, by an Issuer Order shall promptly appoint a
successor Trustee. If within one year after such resignation, removal or
incapability or the occurrence of such vacancy a successor Trustee shall be
appointed by Act of the Holders of Bonds representing more than 50% of the
aggregate
VI-9
<PAGE> 110
Class Principal Amount of the Controlling Class delivered to the Issuer and the
retiring Trustee, the successor Trustee so appointed shall, forthwith upon its
acceptance of such appointment, become the successor Trustee and supersede the
successor Trustee appointed by the Issuer. If no successor Trustee shall have
been so appointed by the Issuer or Bondholders and shall have accepted
appointment in the manner hereinafter provided, any Bondholder who has been a
bona fide Holder of a Bond for at least six months may, on behalf of itself and
all others similarly situated, petition any court of competent jurisdiction for
the appointment of a successor Trustee.
(f) The Issuer shall give notice of each resignation and
each removal of the Trustee and each appointment of a successor Trustee to the
Holders of Bonds. Each notice shall include the name of the successor Trustee
and the address of its Corporate Trust Office.
SECTION 6.11. ACCEPTANCE OF APPOINTMENT BY SUCCESSOR.
Every successor Trustee appointed hereunder shall execute,
acknowledge and deliver to the Issuer and the retiring Trustee an instrument
accepting such appointment, and thereupon the resignation or removal of the
retiring Trustee shall become effective and such successor Trustee, without any
further act, deed or conveyance, shall become vested with all the rights,
powers, trusts and duties of the retiring Trustee. Notwithstanding the
foregoing, on request of the Issuer or the successor Trustee, such retiring
Trustee shall, upon payment of its charges, execute and deliver an instrument
transferring to such successor Trustee all the rights, powers and trusts of the
retiring Trustee, and shall duly assign, transfer and deliver to such successor
Trustee all property and money held by such retiring Trustee hereunder subject
nevertheless to its lien, if any, provided for in Section 6.07. Upon request of
any such successor Trustee, the Issuer shall execute and deliver any and all
instruments for more fully and certainly vesting in and confirming to such
successor Trustee all such rights, powers and trusts.
No successor Trustee shall accept its appointment unless at
the time of such acceptance such successor Trustee shall be qualified and
eligible under this Article.
VI-10
<PAGE> 111
SECTION 6.12. MERGER, CONVERSION, CONSOLIDATION OR SUCCESSION TO BUSINESS OF
TRUSTEE.
Any corporation into which the Trustee may be merged or
converted or with which it may be consolidated, or any corporation resulting
from any merger, conversion or consolidation to which the Trustee shall be a
party, or any corporation succeeding to all or substantially all of the
corporate trust business of the Trustee, shall be the successor of the Trustee
hereunder, provided such corporation shall be otherwise qualified and eligible
under this Article, without the execution or filing of any paper or any further
act on the part of any of the parties hereto. In case any Bonds have been
authenticated, but not delivered, by the Trustee then in office, any successor
by merger, conversion or consolidation to such authenticating Trustee may adopt
such authentication and deliver the Bonds so authenticated with the same effect
as if such successor Trustee had authenticated such Bonds.
SECTION 6.13. PREFERENTIAL COLLECTION OF CLAIM AGAINST ISSUER.
If this Indenture is qualified under the TIA, the Trustee
shall be subject to TIA Section 311(a), excluding any creditor relationship
listed in TIA Section 311(b), and a Trustee who has resigned or been removed
shall be subject to TIA Section 311(a) to the extent indicated.
SECTION 6.14. CO-TRUSTEES AND SEPARATE TRUSTEES.
At any time or times, for the purpose of meeting the legal
requirements of the TIA or of any jurisdiction in which any of the Trust Estate
may at the time be located, the Issuer and the Trustee shall have power to
appoint, and, upon the written request of the Trustee or of the Holders of
Bonds representing more than 50% of the aggregate Class Principal Amount of the
Controlling Class with respect to which a co-trustee or separate trustee is
being appointed, the Issuer shall for such purpose join with the Trustee in the
execution, delivery and performance of all instruments and agreements necessary
or proper to appoint, one or more Persons approved by the Trustee either to act
as co-trustee, jointly with the Trustee, of all or any part of the Trust
Estate, or to act as separate trustee of any such property, in either case with
such powers as may be provided in the
VI-11
<PAGE> 112
instrument of appointment, and to vest in such Person or Persons in the
capacity aforesaid, any property, title, right or power deemed necessary or
desirable, subject to the other provisions of this Section. If the Issuer does
not join in such appointment within 15 days after the receipt by it of a
request to do so, or in case an Event of Default has occurred and is
continuing, the Trustee alone shall have power to make such appointment.
Should any written instrument from the Issuer be required by
any co-trustee or separate trustee so appointed for more fully confirming to
such co-trustee or separate trustee such property, title, right or power, any
and all such instruments shall, on request, be executed, acknowledged and
delivered by the Issuer. Each notice shall include the name and address of any
such co-trustee or successor trustee.
Every co-trustee or separate trustee shall, to the extent
permitted by law, but to such extent only, be appointed subject to the
following terms:
(1) The Bonds shall be authenticated and
delivered and all rights, powers, duties and obligations hereunder in
respect of the custody of securities, cash and other personal property
held by, or required to be deposited or pledged with, the Trustee
hereunder, shall be exercised solely by the Trustee.
(2) The rights, powers, duties and obligations
hereby conferred or imposed upon the Trustee in respect of any
property covered by such appointment shall be conferred or imposed
upon and exercised or performed by the Trustee or by the Trustee and
such co-trustee or separate trustee jointly, as shall be provided in
the instrument appointing such co-trustee or separate trustee, except
to the extent that under any law of any jurisdiction in which any
particular act is to be performed, the Trustee shall be incompetent or
unqualified to perform such act, in which event such rights, powers,
duties and obligations shall be exercised and performed by such
co-trustee or separate trustee.
(3) The Trustee at any time, by an instrument in
writing executed by it, with the concurrence of the Issuer
VI-12
<PAGE> 113
evidenced by an Issuer Order, may accept the resignation of or remove
any co-trustee or separate trustee appointed under this Section, and,
in case of an Event of Default has occurred and is continuing, the
Trustee shall have power to accept the resignation of, or remove, any
such co-trustee or separate trustee without the concurrence of the
Issuer. Upon the written request of the Trustee, the Issuer shall join
with the Trustee in the execution, delivery and performance of all
instruments and agreements necessary or proper to effectuate such
resignation or removal. A successor to any co-trustee or separate
trustee which has resigned or has been removed may be appointed in the
manner provided in this Section.
(4) No co-trustee or separate trustee shall be
required to satisfy the eligibility requirements under Sections 6.08
and 6.09. No co-trustee or separate trustee hereunder shall be
personally liable by reason of any act or omission of the Trustee, or
any other such trustee hereunder.
(5) Any Act of Bondholders delivered to the Trustee
shall be deemed to have been delivered to each such co-trustee and
separate trustee.
SECTION 6.15. AUTHENTICATING AGENTS.
Upon the request of the Issuer, the Trustee shall appoint an
Authenticating Agent with power to act on its behalf and subject to its
direction in the authentication and delivery of the Bonds designated for such
authentication by the Issuer and containing provisions therein for such
authentication (or with respect to which the Issuer has made other
arrangements, satisfactory to the Trustee and such Authenticating Agent, for
notation on the Bonds of the authority of an Authenticating Agent appointed
after the initial authentication and delivery of such Bonds) in connection with
transfers and exchanges under Sections 2.06 and 2.07, if any, as fully to all
intents and purposes as though the Authenticating Agent had been expressly
authorized by those Sections to authenticate and deliver Bonds. For all
purposes of this Indenture (other than in connection with the authentication
and delivery of Bonds pursuant to Sections 2.05 and 2.12 in connection with
their initial issuance and for
VI-13
<PAGE> 114
purposes of Section 2.08), the authentication and delivery of Bonds by the
Authenticating Agent pursuant to this Section shall be deemed to be the
authentication and delivery of Bonds "by the Trustee". Such Authenticating
Agent shall at all times be a Person that both meets the requirements of
Section 6.09 for the Trustee hereunder and has its principal office in the
Borough of Manhattan, City and State of New York.
Any Authenticating Agent shall also serve as Bond Registrar or
co-Bond Registrar, as provided in Section 2.07. Any Authenticating Agent
appointed by the Trustee pursuant to the terms of this Section 6.15 or pursuant
to the terms of any supplemental indenture shall deliver to the Trustee as a
condition precedent to the effectiveness of such appointment an instrument
accepting the trusts, duties and responsibilities of Authenticating Agent and
of Bond Registrar or co-Bond Registrar and indemnifying the Trustee for and
holding the Trustee harmless against, any loss, liability or expense (including
reasonable attorneys' fees) incurred without negligence or bad faith on its
part, arising out of or in connection with the acceptance, administration of
the trust or exercise of authority by such Authenticating Agent, Bond Registrar
or co-Bond Registrar.
Any corporation into which any Authenticating Agent may be
merged or converted or with which it may be consolidated, or any corporation
resulting from any merger, consolidation or conversion to which any
Authenticating Agent shall be a party, or any corporation succeeding to the
corporate trust business of any Authenticating Agent, shall be the successor of
the Authenticating Agent hereunder, if such successor corporation is otherwise
eligible under this Section, without the execution or filing of any further act
on the part of the parties hereto or the Authenticating Agent or such successor
corporation.
Any Authenticating Agent may at any time resign by giving
written notice of resignation to the Trustee and the Issuer. The Trustee may at
any time terminate the agency of any Authenticating Agent by giving written
notice of termination to such Authenticating Agent and the Issuer. Upon
receiving such a notice of resignation or upon such a termination, or in case
at any time any Authenticating Agent shall cease to be eligible under this
Section, the Trustee shall promptly appoint a successor Authenticating Agent,
shall give written notice of such
VI-14
<PAGE> 115
appointment to the Issuer and shall mail notice of such appointment to all
Holders of Bonds.
The Trustee agrees, subject to Section 6.01(e), to pay to any
Authenticating Agent from time to time reasonable compensation for its services
and the Trustee shall be entitled to be reimbursed for such payments, subject
to Section 6.07. The provisions of Sections 2.10, 6.04 and 6.05 shall be
applicable to any Authenticating Agent.
SECTION 6.16. REVIEW OF MORTGAGE DOCUMENTS.
The Trustee agrees, for the benefit of the Holders of the
Bonds, to review, within 90 days after the Closing Date, the Mortgage Documents
delivered to it in connection with the Grant of the Original Pledged Mortgages
as security for the Bonds. The Trustee's review shall be limited to a
determination that all documents referred to in the definition of the term
Mortgage Documents have been delivered with respect to each such Pledged
Mortgage (other than the documents related to any Pledged Mortgage so listed
which has been subject to a Principal Prepayment in Full and the proceeds of
which have been delivered to the Trustee in lieu of the applicable Mortgage
Documents), that all such documents have been executed, and that all such
documents relate to the Original Pledged Mortgages, provided that the Trustee
shall not be responsible for determining whether any assignment is in
recordable form or for verifying the information with respect to said loans
contained on the Pledged Mortgage Schedule. In performing such review the
Trustee may rely upon the purported genuineness and due execution of any such
document and on the purported genuineness of any signature thereon. If the
Trustee discovers any defect or omission in the Mortgage Documents or that any
document required to be delivered to it has not been delivered or that any
document so delivered does not relate to any of the Original Pledged Mortgages,
it shall promptly notify the Issuer and the Master Servicer of such Pledged
Mortgage in accordance with the provisions of the Master Servicing Agreement.
SECTION 6.17. PAYMENT OF CERTAIN INSURANCE PREMIUMS.
Notwithstanding anything to the contrary contained in this
Indenture, the Trustee agrees, for the benefit of the
VI-15
<PAGE> 116
Holders of the Bonds, that, should it fail to receive notice from the Master
Servicer or the applicable Insurer, within the time period required pursuant to
the Master Servicing Agreement, to the effect that any premiums due with
respect to any Insurance Policies the premiums for which are required to be
paid by the Servicer or the Master Servicer from amounts on deposit in the
related Escrow Account, or required to be advanced by the Master Servicer or
the related Servicer, have been paid in full at the times set forth in the
Master Servicing Agreement, the Trustee shall proceed with diligence to make
inquiries of the Master Servicer, the Issuer and the applicable Insurers as to
whether such premiums have been paid at the times set forth in the Master
Servicing Agreement. In the event such premiums have not been paid and the
coverage provided under the related Insurance Policy may be interrupted or
adversely affected, the Trustee agrees promptly to pay such premiums from
amounts on deposit in the Distribution Account, pursuant to Section 8.02(d) and
in accordance with its obligations under the applicable provisions of the
Master Servicing Agreement.
SECTION 6.18. SUBSTITUTION OF INSURANCE POLICIES, ETC.; NOTIFICATION OF
RATING AGENCIES.
(a) Provided that the conditions set forth in paragraph
(b) hereof have been satisfied, the Issuer may substitute a replacement policy
or instrument for any Bond Insurance Policy.
(b) The Issuer shall notify each Rating Agency rating the
Bonds in the event that any replacement policy or instrument is obtained for
any Bond Insurance Policy and Insurer or other Person other than the Person who
issued such policy or instrument; provided, however, that the Trustee shall not
be required to accept any such replacement policy or instrument unless the
Trustee has received from each Rating Agency rating the Bonds a written
instrument to the effect that such acceptance by the Trustee will not result in
the lowering of the then applicable rating of any Bonds issued pursuant to this
Indenture by such Rating Agency.
VI-16
<PAGE> 117
ARTICLE VII
BONDHOLDERS' LISTS AND REPORTS
SECTION 7.01. ISSUER TO FURNISH TRUSTEE NAMES AND ADDRESSES OF BONDHOLDERS.
(a) The Issuer shall furnish or cause to be furnished to
the Trustee (i) semi-annually, not less than 45 days nor more than 60 days
after the Interest Payment Date occurring closest to six months after the
Closing Date and each Interest Payment Date occurring at six-month intervals
thereafter, a list, in such form as the Trustee may reasonably require, of the
names and addresses of the Holders of Bonds and (ii) at such other times, as
the Trustee may request in writing, within 30 days after receipt by the Issuer
of any such request, a list of similar form and content as of a date not more
than 10 days prior to the time such list is furnished; provided, however, that
so long as the Trustee is the Bond Registrar, no such list shall be required to
be furnished.
(b) In addition to furnishing to the Trustee the
Bondholder lists, if any, required under subsection (a), the Issuer shall also
furnish all Bondholder lists, if any, required under Section 3.03 at the times
required by Section 3.03.
SECTION 7.02. PRESERVATION OF INFORMATION; COMMUNICATIONS TO BONDHOLDERS.
(a) The Trustee shall preserve, in as current a form as
is reasonably practicable, the names and addresses of the Holders of Bonds
contained in the most recent list, if any, furnished to the Trustee as provided
in Section 7.01 and the names and addresses of the Holders of Bonds received by
the Trustee in its capacity as Bond Registrar. The Trustee may destroy any list
furnished to it as provided in Section 7.01 upon receipt of a new list so
furnished.
(b) If this Indenture is qualified under the TIA,
Bondholders may communicate pursuant to TIA Section 312(b) with other
Bondholders with respect to their rights under this Indenture or under the
Bonds.
VII-1
<PAGE> 118
(c) If this Indenture is qualified under the TIA, the
Issuer, the Trustee and the Bond Registrar shall have the protection of TIA
Section 312(c).
SECTION 7.03. REPORTS BY TRUSTEE.
(a) If this Indenture is qualified under the TIA, then
within 30 days after May 15 of each year (the "reporting date"), commencing
with the year after the issuance of the Bonds, (i) in the circumstance required
by TIA Section 313(a), the Trustee shall mail to all Holders a brief report
dated as of such reporting date that complies with TIA Section 313(a), (ii) the
Trustee shall also mail to Holders of Bonds with respect to which it has made
advances any reports with respect to such advances that are required by TIA
Section 313(b)(2) and (iii) the Trustee shall also mail to Holders of Bonds any
reports required by TIA Section 313(b)(1). For purposes of the information
required to be included in any such reports pursuant to TIA Sections 313(a)(3),
313(b)(1) (if applicable) or 313(b)(2), the principal amount of indenture
securities outstanding on the date as of which such information is provided
shall be the aggregate Class Principal Amount of the then Controlling Class
covered by the report. The Trustee shall comply with TIA Section 313(c) with
respect to any reports required by this Section 7.03(a).
(b) If this Indenture is qualified under the TIA, a copy
of each report required under this Section 7.03 shall, at the time of such
transmission to Holders of Bonds be filed by the Trustee with the Commission
and with each securities exchange upon which the Bonds are listed. The Issuer
will notify the Trustee when the Bonds are listed on any securities exchange.
SECTION 7.04. REPORTS BY ISSUER.
If this Indenture is qualified under the TIA, the Issuer (a)
shall file with the Trustee, within 15 days after it files them with the
Commission, copies of the annual reports and of the information, documents and
other reports (or copies of such portions of any of the foregoing as the
Commission may by rules and regulations prescribe) which the Issuer is required
to file with the Commission pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 and (b) shall also comply with the other provisions of TIA
Section 314(a).
VII-2
<PAGE> 119
SECTION 7.05. NOTICE TO THE RATING AGENCIES [AND TO BOND INSURER.]
The Issuer shall use its best efforts promptly to provide
notice to the Rating Agencies [and the Bond Insurer] of any of the following
events of which it has actual knowledge:
(a) any material change to or amendment of this
Indenture;
(b) the occurrence of any Default or Event of Default
that has not been cured;
(c) the resignation or termination of the Trustee;
(d) the substitution of Pledged Mortgages;
(e) the final payment of Bondholders; and
[(f) any payment or claim made under the Bond Insurance
Policy.]
VII-3
<PAGE> 120
ARTICLE VIII
ACCOUNTS, PAYMENTS OF INTEREST AND PRINCIPAL, AND RELEASES
SECTION 8.01. COLLECTION OF MONEYS.
Except as otherwise expressly provided herein, the Trustee may
demand payment or delivery of, and shall receive and collect, directly and
without intervention or assistance of any fiscal agent or other intermediary,
all money and other property payable to or receivable by the Trustee pursuant
to this Indenture. The Trustee shall hold all such money and property received
by it as part of the Trust Estate and shall apply it as provided in this
Indenture. Except as otherwise expressly provided herein, if any default
occurred in the making of any payment or performance under any agreement or
instrument that is part of the Trust Estate, the Trustee may take such action
as may be appropriate to enforce such payment or performance, including the
institution and prosecution of appropriate Proceedings. Any such action shall
be without prejudice to any right to claim a Default or Event of Default
hereunder and any right to proceed thereafter as provided in Article V.
SECTION 8.02. DISTRIBUTION ACCOUNT.
(a) On or prior to the Closing Date, the Issuer shall
cause the Master Servicer to establish and maintain, in the name of the
Trustee, for the benefit of the Bondholders and the Holder of the Investor
Certificate, the Pledged Accounts as provided in Section 3(h) of the Master
Servicing Agreement.
(b) Except as otherwise provided in the Master Servicing
Agreement, within one Business Day of receipt thereof by the Master Servicer,
the Master Servicer will deposit in the Bond Account all amounts required to be
deposited therein pursuant to Section 3(h) of the Master Servicing Agreement.
(c) The Trustee shall establish and maintain, on behalf of
the Bondholders, the Distribution Account. The Trustee shall, promptly upon
receipt, deposit in the Distribution Account and retain therein the following:
VIII-1
<PAGE> 121
(i) the aggregate amount remitted by the Master
Servicer to the Trustee pursuant to Section 3(h)(vii) of the
Master Servicing Agreement; and
(ii) any other amounts deposited hereunder which are
required to be deposited in the Distribution Account.
In the event that the Master Servicer shall remit any amount
not required to be remitted, it may at any time direct the Trustee to withdraw
such amount from the Distribution Account, any provision herein to the contrary
notwithstanding. Such direction may be accomplished by delivering an Officer's
Certificate to the Trustee which describes the amounts deposited in error in
the Distribution Account. All funds deposited in the Distribution Account shall
be held by the Trustee in trust for the Bondholders until disbursed in
accordance with this Indenture or withdrawn in accordance with Section 2.03(b).
In no event shall the Trustee incur liability for withdrawals from the
Distribution Account at the direction of the Master Servicer.
(d) Subject to Sections 5.02 and 5.08, on each Payment
Date and Redemption Date, the Trustee shall distribute all amounts on deposit
in the Distribution Account to Bondholders in respect of the Bonds to the
extent of amounts due and unpaid on the Bonds for principal and interest in the
amounts and in the order of priority set forth in Section 2.03(b).
SECTION 8.03. GENERAL PROVISIONS REGARDING PLEDGED ACCOUNTS.
(a) Each Pledged Account shall relate solely to the
Bonds, the Investor Certificate and to the Pledged Mortgages, Permitted
Investments and other property securing the Bonds. Funds and other property in
each Pledged Account shall not be commingled with any other moneys or property
of the Issuer or any Affiliate thereof. Notwithstanding the foregoing, the
Trustee may hold any funds or other property received or held by it as part of
a Pledged Account, other than the Distribution Account, in collective accounts
maintained by it in the normal course of its business and containing funds or
property held by it for other Persons (which may include the Issuer or an
Affiliate), provided that such accounts are under the sole control of the
Trustee and the Trustee maintains adequate records indicating the ownership of
all such funds or property and the portions thereof held for credit to each
Pledged Account.
VIII-2
<PAGE> 122
(b) So long as no Default or Event of Default shall have
occurred and be continuing, all or a portion of the funds in the Pledged
Accounts shall be invested in Permitted Investments and reinvested by the
Trustee upon written direction of the Master Servicer, subject to the
provisions of Section 3(h) of the Master Servicing Agreement. Any such
Permitted Investment shall mature not later than the applicable date specified
in Section 3(h)(ix) of the Master Servicing Agreement. All income and gain (net
of any losses) realized from any such investment of funds on deposit in the
Pledged Accounts shall be for the benefit of the Master Servicer as servicing
compensation and shall be remitted to it monthly as provided in the Master
Servicing Agreement. The amount of any realized losses in the Pledged Accounts
incurred in respect of any such investments shall promptly be deposited by the
Master Servicer in the applicable Pledged Account or Pledged Accounts. The
Master Servicer will not direct the Trustee to make any investment of any funds
or to sell any investment held in any of the Pledged Accounts unless the
security interest Granted and perfected in such account will continue to be
perfected in such investment or the proceeds of such sale, in either case
without any further action by any Person, and, in connection with any direction
to the Trustee to make any such investment or sale, if requested by the
Trustee, the Master Servicer shall deliver to the Trustee an Opinion of
Counsel, acceptable to the Trustee, to such effect.
(c) Subject to Section 6.01(c), the Trustee shall not in
any way be held liable by reason of any insufficiency in any of the Pledged
Accounts resulting from any loss on any Permitted Investment included therein
except for losses attributable to the Trustee's failure to make payments on
such Permitted Investments issued by the Trustee, in its commercial capacity as
principal obligor and not as trustee, in accordance with their terms.
(d) If (i) the Master Servicer shall have failed to give
investment directions for any funds on deposit in the Pledged Accounts to the
Trustee by 11:00 a.m. Eastern Time (or such other time as may be agreed by the
Master Servicer and Trustee) on any Business Day or (ii) a Default or Event of
Default shall have occurred and be continuing with respect to the
VIII-3
<PAGE> 123
Bonds but the Bonds shall not have been declared due and payable pursuant to
Section 5.02 or (iii) if such Bonds shall have been declared due and payable
following an Event of Default, amounts collected or receivable from the Trust
Estate are being applied in accordance with Section 5.05 as if there had not
been such a declaration, then the Trustee shall, to the fullest extent
practicable, invest and reinvest funds in the Pledged Accounts in one or more
Permitted Investments.
(e) The Trustee shall, at all times while any Bonds are
outstanding, maintain in its possession, or in the possession of an agent whose
actions with respect to such items are under the sole control of the Trustee,
all certificates or other instruments, if any, evidencing any investment of
funds in a Pledged Account. The Trustee shall relinquish possession of such
items, or direct its agent to do so, only for purposes of collecting the final
payment receivable on such investment or certificate or, in connection with the
sale of any investment held in a Pledged Account, against delivery of the
amount receivable in connection with any sale.
SECTION 8.04. PURCHASES OF DEFECTIVE PLEDGED MORTGAGES.
(a) If at any time the Issuer or the Trustee discovers or
is notified by the Master Servicer (i) that there has been a breach of any of
the Master Servicer's representations and warranties with respect to Pledged
Mortgages contained in the Master Servicing Agreement that materially and
adversely affects the interests of the Bondholders in any Pledged Mortgage,
(ii) that any of the Mortgage Documents for a Pledged Mortgage has not been
properly executed by the Mortgagor or contains a material defect or (iii) that
any Mortgage Documents for a Pledged Mortgage shall not have been received by
the Trustee within the applicable time periods and in the forms set forth in
Section 3.11 or Section 6.16, as the case may be, and the Master Servicing
Agreement, then the party discovering such defect or omission or receiving
notice thereof shall promptly notify the other party and the Master Servicer
(other than in cases where the Master Servicer has given notice thereof).
(b) If any defect, misrepresentation or omission
described in subsection (a) of this Section 8.04 materially and adversely
affects the interests of the Bondholders, then the
VIII-4
<PAGE> 124
Issuer shall, pursuant to the applicable provisions of the Master Servicing
Agreement, cause the Master Servicer to either (i) cure any such defect,
misrepresentation or omission, (ii) remove such Pledged Mortgage and substitute
in its place a Replacement Pledged Mortgage or (iii) purchase the affected
Pledged Mortgage, in each case at the times and in the manner set forth in the
Master Servicing Agreement.
(c) Upon any such purchase or substitution, the Issuer
shall be entitled to request a release of the defective Pledged Mortgage from
the lien of this Indenture pursuant to Section 8.08(c) and Section 8.12.
(d) If the Master Servicer shall either (i) purchase any
Pledged Mortgage it is required to purchase pursuant to the Master Servicing
Agreement and deposit the Purchase Price therefor in the Bond Account or (ii)
(a) remove such Pledged Mortgage from the Trust Estate and substitute in its
place a Replacement Pledged Mortgage and (b) deposit in the Bond Account any
related Substitution Adjustment Amount, in each case in the manner set forth in
the Master Servicing Agreement, then the Master Servicer shall be deemed to
have complied with all requirements imposed upon it by this Section 8.04 with
respect to such Pledged Mortgage.
(e) The Master Servicer shall, in its sole discretion,
have the right to purchase for its own account from the Trust Estate any
Pledged Mortgage which is 91 days or more delinquent at a price and in the
manner specified in Section 3(n) of the Master Servicing Agreement. Upon
purchase of such Pledged Mortgage by the Master Servicer, the Master Servicer
shall have the right to treat such Pledged Mortgage (a "Defaulted Pledged
Mortgage") as having been the subject of a Principal Prepayment in Full and
request the release thereof from the lien of this Indenture pursuant to Section
8.12.
SECTION 8.05. GRANT OF REPLACEMENT PLEDGED MORTGAGE.
The Master Servicer shall be permitted to substitute any
Pledged Mortgage for any Original Pledged Mortgage initially Granted to the
Trustee on the Closing Date pursuant to this Indenture as set forth in Sections
2(a)(ii) and 2(d)(iv) of the Master Servicing Agreement.
VIII-5
<PAGE> 125
SECTION 8.06. REPORTS BY TRUSTEE TO BONDHOLDERS.
On each Payment Date or Optional Redemption Date the Trustee
shall deliver a written report to each Holder of Bonds, setting forth the
following:
(a) On or before [noon California time] on the
Determination Date, the Master Servicer shall provide by modem to the Trustee
with respect to the Pledged Mortgages, an electronic data file (accompanied by
a hardcopy report) in a format which is mutually agreed upon by the Master
Servicer and the Trustee. The Trustee shall be under no duty to recalculate,
verify or recompute the information provided to it by the Master Servicer under
this Section 8.06(a). Not later than each Payment Date, the Trustee shall
prepare and cause to be forwarded by first class mail to each Bondholder, the
Master Servicer and the Issuer a statement (each, a "Payment Date Statement")
setting forth with respect to the related distribution:
(i) the amount thereof allocable to principal,
separately identifying the aggregate amount of any Principal
Prepayments and Liquidation Proceeds included therein;
(ii) the amount thereof allocable to interest, and
(x) any of (a) the amount by which the aggregate Senior Interest
Shortfalls on prior Payment Dates exceeds the amount paid on the
Senior Bonds on prior Payment Dates pursuant to clause (ii) of the
definition of Senior Interest Payment Date, (b) the amount by which
the aggregate Class B-1 Interest Shortfalls on prior Payment Dates
exceeds the amount paid on the Class B-1 Bonds on prior Payment Dates
pursuant to clause (iii) of the definition of Class B-1 Interest
Payment Amount and (c) the amount by which the aggregate Class B-2
Interest Shortfalls on prior Payment Dates exceeds the amount paid on
the Class B-2 Bonds on prior Payment Dates pursuant to clause (iii) of
the definition of Class B-2 Interest Payment Amount included in such
distribution and (y) any of the amounts in clauses (a), (b) or (c)
above remaining after giving effect to such distribution.
(iii) if the distribution to the Holders of such Class
of Bonds is less than the full amount that would be
VIII-6
<PAGE> 126
distributable to such Holders pursuant to Section 2.03(b) on such
Payment Date if there were sufficient funds available therefor, the
amount of the shortfall and the allocation thereof as between
principal and interest and specifying, in the case of the Subordinated
Bonds, the Class B-2 Principal Carryover Shortfall and/or Class B-1
Principal Carryover Shortfall;
(iv) the Class Principal Amount of each Class of
Bonds and the Invested Amount after giving effect to the distribution
of principal on such Payment Date;
(v) the Pool Stated Principal Balance for the
following Payment Date;
(vi) the Senior Percentage, the Class B-1 Percentage,
the Class B-2 Percentage and the Investor Percentage for the following
Payment Date;
(vii) the amount of the Master Servicing Fees and
Servicing Fees paid to or retained by the Master Servicer and the
Servicers (with respect to the Servicers, in the aggregate) with
respect to such Payment Date;
(viii) the Bond Interest Rate for each such Class of
Bonds and the Certificate Interest Rate with respect to such Payment
Date;
(ix) the amount of Advances included in the
distribution on such Payment Date and the aggregate amount of Advances
outstanding as of the close of business on such Payment Date;
(x) the number and aggregate principal amounts of
Pledged Mortgages (A) delinquent (exclusive of Pledged Mortgages in
foreclosure) (1) 1 to 29 days (2) 30 to 59 days (3) 60 to 89 days and
(4) 90 or more days and (B) in foreclosure and delinquent (1) 1 to 29
days (2) 30 to 59 days (3) 60 to 89 days and (4) 90 or more days, as
of the close of business on the last day of the calendar month
preceding such Payment Date;
VIII-7
<PAGE> 127
(xi) for each of the preceding 12 calendar months, or
all calendar months since the Cut-off Date, whichever is less, the
aggregate dollar amount of the Scheduled Payments (A) due on all
Outstanding Pledged Mortgages on each of the Due Dates in each such
month and (B) delinquent 60 days or more on each of the Due Dates in
each such month;
(xii) with respect to any Pledged Mortgage that became
an REO Property during the preceding calendar month, the loan number
and Stated Principal Balance of such Pledged Mortgage as of the close
of business on the Determination Date preceding such Payment Date and
the date of acquisition thereof;
(xiii) the total number and principal balance of any
REO Properties (and market value, if available) as of the close of
business on the Determination Date preceding such Payment Date;
(xiv) the Senior Percentage, the Class B-1 Percentage,
the Class B-2 Percentage and the Investor Prepayment Percentage for
the following Payment Date;
(xv) the aggregate amount of Realized Losses incurred
during the preceding calendar month and aggregate Realized Losses
through such Payment Date;
(xvi) the amount payable to the holder of the Investor
Certificate pursuant to Section 5.01 of the Deposit Trust Agreement;
and
[(xvii) any amount payable under the Bond Insurance Policy.]
(b) The Trustee's responsibility for disbursing the above
information to the Bondholders is limited to the availability, timeliness and
accuracy of the information derived from the Master Servicer. The Trustee will
send a copy of each statement provided pursuant to this Section 8.06 to each
Rating Agency.
(c) Within a reasonable period of time after the end of each
calendar year, the Trustee shall cause to be furnished to
VIII-8
<PAGE> 128
each Person who at any time during the calendar year was a Bondholder, a
statement containing the information set forth in clauses (a)(i), (a)(ii) and
(a)(vii) of this Section 8.06 aggregated for such calendar year or applicable
portion thereof during which such Person was a Bondholder. Such obligation of
the Trustee shall be deemed to have been satisfied to the extent that
substantially comparable information shall be provided by the Trustee pursuant
to any requirements of the Code as from time to time in effect.
SECTION 8.07. REPORTS BY TRUSTEE.
In addition to any statements required to be delivered or
prepared by the Trustee pursuant to Section 2.09, 8.02, 8.06 or 10.01, the
Trustee shall deliver to the Issuer, within two Business Days after the request
of the Issuer, a written report setting forth the amount of each Pledged
Account established hereunder and the identity of the investments included
therein. Without limiting the generality of the foregoing, the Trustee shall,
upon the request of the Issuer, promptly transmit to the Issuer copies of all
accountings of, and information with respect to, collections furnished to it by
the Master Servicer and shall promptly notify the Issuer if on the second
Business Day after any Distribution Account Deposit Date, the related Bond
Distribution Amount or any portion thereof has not been received by the
Trustee.
SECTION 8.08. TRUST ESTATE; RELEASE AND DELIVERY OF MORTGAGE DOCUMENTS.
(a) The Trustee may, and when required by the provisions
of this Indenture shall, execute instruments in form supplied to it to release
property from the lien of this Indenture, or convey the Trustee's interest in
the same, in a manner and under circumstances which are not inconsistent with
the provisions of this Indenture and the TIA. No party relying upon an
instrument executed by the Trustee as provided in this Article VIII shall be
bound to ascertain the Trustee's authority, inquire into the satisfaction of
any conditions precedent or see to the application of any moneys.
(b) In order to facilitate the servicing of the Pledged
Mortgages by the Servicers, the Master Servicer is
VIII-9
<PAGE> 129
authorized under the Master Servicing Agreement for the benefit of the Trustee,
the Bondholders and the Issuer, to supervise, administer, monitor and oversee
the servicing of the Pledged Mortgages by the Servicers and the observance and
performance by the Servicers of all services, duties, responsibilities and
obligations which are to be observed or performed by each Servicer pursuant to
the Seller/Servicer Guide.
(c) Upon request by the Master Servicer accompanied by a
Request for Release in the form of Exhibit D to the Master Servicing Agreement
to the effect that a Pledged Mortgage has been the subject of a Prepayment in
Full or has otherwise been paid in full, together with any other items required
under Section 8.12, the Trustee shall promptly release the related Mortgage
Documents and execute such other documents as the Master Servicer may request
to evidence satisfaction and discharge of such Pledged Mortgage.
(d) In addition, if from time to time and as appropriate
for the servicing or foreclosure of any Pledged Mortgage, or the other purposes
set forth in the Master Servicing Agreement, the Master Servicer requests the
Trustee to release any related Mortgage Documents or other documents contained
in the Trustee Mortgage File relating to such Pledged Mortgage and delivers to
the Trustee a Request for Release in the form of Exhibit C to the Master
Servicing Agreement to the Trustee and signed by a Servicing Officer, the
Trustee shall release the related Mortgage Documents to the Master Servicer if
the applicable requirements of the Master Servicing Agreement have been
satisfied. If such Pledged Mortgage shall be liquidated and the Trustee
receives an Issuer Request accompanied by a Request for Release as provided in
subsection (c) above, together with any other items required under Section
8.12, then the Trustee shall release any documents with respect to such Pledged
Mortgage still in its possession to or upon the order of the Issuer and shall
execute such other documents as the Master Servicer may request to evidence
satisfaction and discharge of such Pledged Mortgage, as set forth in subsection
(c) above.
(e) The Trustee shall, at such time as there are no Bonds
Outstanding, release all of the Trust Estate to the Issuer (other than any cash
held for the payment of the Bonds pursuant
VIII-10
<PAGE> 130
to Section 3.03 or Section 4.02), subject, however, to Section 4.01 and the
rights of the Trustee under Section 6.07.
SECTION 8.09. AMENDMENTS TO THE MASTER SERVICING AGREEMENT.
The Trustee may enter into or consent to any amendment or
supplement to the Master Servicing Agreement or waive any Servicing Default
only in accordance with the applicable provisions of the Master Servicing
Agreement. The Trustee may, in its discretion, decline to enter into or consent
to any such supplement or amendment or make any such waiver (i) unless the
Trustee receives an Opinion of Counsel that the interests of the Holders would
not be materially adversely affected or (ii) if its own rights, duties or
immunities would be adversely affected.
SECTION 8.10. SERVICERS AND MASTER SERVICER AS AGENTS AND BAILEES OF
TRUSTEE.
In order to facilitate the servicing of the Pledged Mortgages
by the each Servicer or by the Master Servicer, each Servicer shall deposit in
the Servicing Account proceeds of the Pledged Mortgages in accordance with the
provisions of the Servicing Agreements, the Master Servicing Agreement and this
Indenture, prior to the time they are deposited into the Bond Account. In
addition, on each Withdrawal Date, the Master Servicer shall cause each
Servicer to remit to the Master Servicer for deposit in the Bond Account all
funds held in the Servicing Account that are required to be remitted to the
Master Servicer in accordance with the terms of the Servicing Agreement and the
Master Servicing Agreement. Solely for purposes of perfection under Section
9-305 of the Uniform Commercial Code or similar provision of law in the state
in which such property is held by the Servicers or the Master Servicer, the
Trustee hereby designates the Master Servicer and each Servicer as its agents
and bailees to hold such funds with respect to the Pledged Mortgages until they
are deposited into the Distribution Account as well as its agents and bailees
in holding any Mortgage Documents or other documents contained in a Trustee
Mortgage File released to it by the Trustee pursuant to Section 8.08(d), and
any other items constituting a part of the Trust Estate which from time to time
come into possession of any Servicer or the Master Servicer. It is intended
that, by the Servicers' and Master Servicer's acceptance of such agency
pursuant to the
VIII-11
<PAGE> 131
Servicing Agreements and the Master Servicing Agreement, the Trustee, as
secured party, will be deemed to have possession of such Mortgage Documents,
such moneys and such other items for purposes of Section 9-305 of the Uniform
Commercial Code or similar provision of law of the states in which such
property is held by such Servicer or the Master Servicer.
SECTION 8.11. OPINION OF COUNSEL.
The Trustee shall be entitled to receive at least five
Business Days' notice of any action to be taken pursuant to Section 8.08(a)
(other than in connection with releases of Pledged Mortgages which were the
subject of a Principal Prepayment in Full) accompanied by copies of any
instruments involved, and the Trustee shall be entitled to request an Opinion
of Counsel, in form and substance reasonably satisfactory to the Trustee,
stating the legal effect of any such action, outlining the steps required to
complete the same, and concluding that all conditions precedent to the taking
of such action have been complied with. Counsel rendering any such opinion may
rely, without independent investigation, on the accuracy and validity of any
certificate or other instrument delivered to the Trustee in connection with any
such action.
SECTION 8.12. RELEASE OF PLEDGED MORTGAGES.
(a) The Issuer shall be entitled to request a release
from the lien of this Indenture of any Pledged Mortgage at any time after such
Pledged Mortgage has been the subject of a Principal Prepayment in Full or in
accordance with the requirements of Section 8.04 if:
(i) the Master Servicer has complied with all
requirements imposed on it by Section 8.04 in connection with such
Pledged Mortgage (or is deemed to have complied with such requirements
by reason of the provisions of Section 8.04(e));
(ii) at the time such release is requested, no
Default or Event of Default has occurred and is continuing; provided,
however, that if a Pledged Mortgage has been the subject of a
Principal Prepayment in Full, then the Trustee shall release such
Pledged Mortgage from the lien of this
VIII-12
<PAGE> 132
Indenture upon compliance with all other conditions of this subsection
(a), notwithstanding the existence of a Default or Event of Default;
(iii) the Master Servicer delivers to the Trustee an
Officers' Certificate (A) identifying the Pledged Mortgage to be
released, (B) requesting the release thereof, (C) setting forth the
amount deposited in the Bond Account with respect thereto, if any, and
(D) certifying that the conditions set forth in clauses (i) and (ii)
above have been satisfied; and
(iv) the Issuer delivers to the Trustee a certificate
of fair value if required by Section 314(d)(1) or Section 314(d)(3) of
the TIA.
(b) Upon satisfaction of the conditions specified in
subsection (a) of this Section 8.12, the Trustee shall release from the lien of
this Indenture and deliver to or upon the order of the Master Servicer the
Pledged Mortgage to be released (including all related Mortgage Documents)
described in the Master Servicer's Request for Release.
VIII-13
<PAGE> 133
ARTICLE IX
SUPPLEMENTAL INDENTURES
SECTION 9.01. SUPPLEMENTAL INDENTURES WITHOUT CONSENT OF BONDHOLDERS.
Without the consent of the Holders of any Bonds, the Issuer
and the Trustee, at any time and from time to time, may enter into one or more
indentures supplemental hereto, in form satisfactory to the Trustee, for any of
the following purposes:
(1) to correct or amplify the description of any property
at any time subject to the lien of this Indenture, or better to
assure, convey and confirm unto the Trustee any property subject or
required to be subjected to the lien of this Indenture, or to subject
to the lien of this Indenture additional property;
(2) to add to the conditions, limitations and
restrictions on the authorized amount, terms and purposes of the
issuance, authentication and delivery of any Bonds, as herein set
forth, additional conditions, limitations and restrictions thereafter
to be observed;
(3) to evidence the succession of another Person to the
Issuer, and the assumption by any such successor of the covenants of
the Issuer herein and in the Bonds contained;
(4) to add to the covenants of the Issuer, for the
benefit of the Holders of all Bonds or to surrender any right or power
herein conferred upon the Issuer;
(5) to cure any ambiguity, to correct or supplement any
provision herein which may be defective or inconsistent with any other
provision herein, or to make any other provisions with respect to
matters or questions arising under this Indenture, which shall not be
inconsistent with the provisions of this Indenture, provided that such
action shall not adversely affect the interests of the Holders of the
Bonds (any such action shall be deemed not to adversely affect the
interests of the Bondholders if the Issuer delivers to the Trustee
letters from each Rating Agency to the effect that such action will
not result in a downgrading of the Bonds); or
IX-1
<PAGE> 134
(6) to modify, eliminate or add to the provisions of this
Indenture to such extent as shall be necessary to effect the
qualification of this Indenture under the TIA or under any similar
federal statute hereafter enacted, and to add to this Indenture such
other provisions as may be expressly required by the TIA.
The Trustee is hereby authorized to join in the execution of
any such supplemental indenture and to make any further appropriate agreements
and stipulations that may be therein contained, but the Trustee shall not be
obligated to enter into any such supplemental indenture that affects the
Trustee's own rights, duties, liabilities or immunities under this Indenture or
otherwise except to the extent required by law.
The Trustee may in its discretion determine whether or not the
rights of the Holder of Bonds would be adversely affected by any supplemental
indenture, and any such determination shall be conclusive upon the Holders of
all Bonds, whether theretofore or thereafter authenticated and delivered
hereunder. In making such determination, a supplemental indenture shall be
conclusively deemed by the Trustee not to adversely affect the Bonds if (i) the
Trustee receives a letter or other writing from each Rating Agency rating the
Bonds to the effect that execution of the supplemental indenture will not
result in any change in the current rating assigned by that Rating Agency to
the Bonds and (ii) the supplemental indenture effects no change in principal
priority schedules, interest rates, Redemption Prices, substitution of Mortgage
Collateral, Payment Dates, Record Dates, Accounting Dates, terms or optional
Redemption, the application of surplus to the payment of the Bonds or other
payment terms. The Trustee shall not be liable for any such determination made
in good faith.
[The Trustee shall provide the Bond Insurer, if any, with a
copy of any supplemental indenture executed pursuant to
IX-2
<PAGE> 135
this Section, by first class mail mailed to the Bond Insurer within five
Business Days after the execution of such supplemental indenture.
Notwithstanding the foregoing, no supplemental indenture that changes in any
way any of the payment terms of the Bonds may be entered into without the prior
written consent of such Bonder Insurer.]
SECTION 9.02. SUPPLEMENTAL INDENTURES WITH CONSENT OF BONDHOLDERS.
With the consent of the Holders of Bonds representing not less
than two-thirds of the aggregate Class Principal Amount of the Controlling
Class by Act of said Holders delivered to the Issuer and the Trustee [and the
Bond Insurer], the Issuer and the Trustee may enter into an indenture or
indentures supplemental hereto for the purpose of adding any provisions to, or
changing in any manner or eliminating any of the provisions of, this Indenture
or of modifying in any manner the rights of the Holders of the Bonds under this
Indenture; provided, however, that no such supplemental indenture shall,
without the consent of the Holder of each Outstanding Bond affected thereby:
(1) change the Stated Maturity of the final installment
of the principal of, or any installment of interest on, any Bond or
reduce the principal amount thereof, the Bond Interest Rate thereon or
the Redemption Price with respect thereto, change the earliest date on
which any Bond may be redeemed at the option of the Issuer, change any
place of payment where, or the coin or currency in which, any Bond or
any interest thereon is payable, or impair the right to institute suit
for the enforcement of the payment of any installment of interest due
on any Bond on or after the Stated Maturity thereof or for the
enforcement of the payment of the entire remaining unpaid principal
amount of any Bond on or after the Stated Maturity of the final
installment of the principal thereof (or, in the case of redemption,
on or after the applicable Optional Redemption Date);
(2) reduce the percentage of the aggregate Class
Principal Amount of the Controlling Class, the consent of the Holders
of which is
IX-3
<PAGE> 136
required for any such supplemental indenture, or the consent of the
Holders of which is required for any waiver of compliance with
provisions of this Indenture or Defaults hereunder and their
consequences provided for in this Indenture;
(3) modify any of the provisions of this Section, Section
5.14 or Section 5.18(b) except to increase any percentage specified
therein or to provide that certain other provisions of this Indenture
cannot be modified or waived without the consent of the Holder of each
Outstanding Bond affected thereby;
(4) modify or alter the provisions of the proviso to the
definition of the term "Outstanding";
(5) permit the creation of any lien ranking prior to or
on a parity with the lien of this Indenture with respect to any part
of the Trust Estate (except for Permitted Encumbrances) or terminate
the lien of this Indenture on any property at any time subject hereto
or deprive the Holder of any Bond of the security afforded by the lien
of this Indenture; or
(6) modify any of the provisions of this Indenture in
such manner as to materially and adversely affect rights of the
Holders of the Controlling Class to the benefits of any provisions for
the mandatory redemption of Bonds contained herein.
The Trustee may in its discretion determine whether or not the
rights of the Holder of any Controlling Class would be materially and adversely
affected by any supplemental indenture and any such determination shall be
conclusive upon the Holders of all Bonds authenticated and delivered hereunder.
The Trustee shall not be liable for any such determination made in good faith.
It shall not be necessary for any Act of Bondholders under
this Section to approve the particular form of any proposed supplemental
indenture, but it shall be sufficient if such Act shall approve the substance
thereof.
Promptly after the execution by the Issuer and the Trustee of
any supplemental indenture pursuant to this Section,
IX-4
<PAGE> 137
the Trustee shall mail to the Holders of the Bonds to which such supplemental
indenture relates [and to the Bond Insurer] a notice setting forth in general
terms the substance of such supplemental indenture. Any failure of the Trustee
to mail such notice, or any defect therein, shall not, however, in any way
impair or affect the validity of any such supplemental indenture.
SECTION 9.03. EXECUTION OF SUPPLEMENTAL INDENTURES.
In executing, or accepting the additional trusts created by,
any supplemental indenture permitted by this Article or the modifications
thereby of the trusts created by this Indenture, the Trustee shall be entitled
to receive, and (subject to Section 6.01) shall be fully protected in relying
upon, an Opinion of Counsel stating that the execution of such supplemental
indenture is authorized or permitted by this Indenture. The Trustee may, but
shall not be obligated to, enter into any such supplemental indenture which
affects the Trustee's own rights, duties or immunities under this Indenture or
otherwise.
SECTION 9.04. EFFECT OF SUPPLEMENTAL INDENTURES.
Upon the execution of any supplemental indenture under this
Article, this Indenture shall be modified in accordance therewith, and such
supplemental indenture shall form a part of this Indenture for all purposes;
and every Holder of Bonds to which such supplemental indenture relates which
have theretofore been or thereafter are authenticated and delivered hereunder
shall be bound thereby.
SECTION 9.05. CONFORMITY WITH TRUST INDENTURE ACT.
Every supplemental indenture executed pursuant to this Article
shall conform to the requirements of the TIA as then in effect so long as this
Indenture shall then be qualified under the TIA.
SECTION 9.06. REFERENCE IN BONDS TO SUPPLEMENTAL INDENTURES.
Bonds authenticated and delivered after the execution of any
supplemental indenture pursuant to this Article may, and if required by the
Trustee shall, bear a notation in form
IX-5
<PAGE> 138
approved by the Trustee as to any matter provided for in such supplemental
indenture. If the Issuer shall so determine, new Bonds so modified as to
conform, in the opinion of the Trustee and the Issuer, to any such supplemental
indenture may be prepared and executed by the Issuer and authenticated and
delivered by the Trustee in exchange for Controlling Class.
SECTION 9.07. AMENDMENTS TO DEPOSIT TRUST AGREEMENT OR MASTER SERVICING
AGREEMENT.
The Trustee shall, upon Issuer Request, consent to any
proposed amendment to the Deposit Trust Agreement or Master Servicing
Agreement, or an amendment to or waiver of any provision of any other document
relating to the Deposit Trust Agreement or Master Servicing Agreement, such
consent to be given without the necessity of obtaining the consent of the
Holders of any Bonds upon receipt by the Trustee of:
(i) an Opinion of Counsel to the effect that such amendment
or waiver will not materially and adversely affect the interests of
the Holders of the Bonds and that all conditions precedent to such
consent specified in this Section 9.07 have been satisfied; provided,
however, that no such Opinion of Counsel shall be required if the
Person requesting the amendment obtains a letter from each Rating
Agency stating that the amendment would not result in the downgrading
or withdrawal of the respective ratings then assigned to the Bonds; it
being understood and agreed that any such letter in and of itself will
not represent a determination as to the materiality of any such
amendment and will represent a determination only as to the credit
issues affecting any such rating;
(ii) an Officers' Certificate, to which such proposed
amendment or waiver shall be attached, stating that such attached copy
is the true copy of the proposed amendment or waiver and that all
conditions precedent to such consent specified in this Section 9.07
have been satisfied;
(iii) written confirmation from the Rating Agencies that the
implementation of the proposed amendment or waiver will not adversely
affect their rating of the Bonds; and
IX-6
<PAGE> 139
(iv) any other document required pursuant to Section 11.01.
Notwithstanding the foregoing, the Trustee may decline to
consent to a proposed waiver or amendment that adversely affects its own
rights, duties or immunities under this Indenture or otherwise.
Nothing in this Section 9.07 shall be construed to require
that any Person obtain the consent of the Trustee to any amendment or waiver
or any provision of any document where the making of such amendment or the
giving of such waiver without obtaining the consent of the Trustee is not
prohibited by this Indenture or by the terms of the document that is the
subject of the proposed amendment or waiver.
IX-7
<PAGE> 140
ARTICLE X
REDEMPTION OF BONDS
SECTION 10.01. SPECIAL REDEMPTION; REDEMPTION.
(a) The Bonds shall not be subject to special redemption.
(b) The Bonds shall be subject to redemption by the
Issuer, in whole but not in part, at the option of the Issuer, on any Payment
Date on or after the Payment Date on which the sum of (i) the Invested Amount,
(ii) the Senior Class Principal Amount, (iii) the Class B-1 Principal Amount
and (iv) the Class B-2 Principal Amount, after giving effect to payments
expected to be made on such Payment Date, is __% or less than the aggregate of
the Stated Principal Balances of the Pledged Mortgages as of the Cut-Off Date,
on the terms and conditions specified in this subsection (b) at the Redemption
Price. If the Issuer elects to so redeem the Bonds, it shall, no later than 30
days prior to the Optional Redemption Date selected for such redemption,
deliver notice of such election to the Trustee, together with the Redemption
Price therefor to be deposited in the Distribution Account, an Issuer Order
directing the Trustee to effect such redemption, any certification and opinion
required pursuant to Section 11.01 and a form of redemption notice. All Bonds
so redeemed shall be due and payable on such Optional Redemption Date upon the
giving of the notice thereof required by Section 10.02.
SECTION 10.02. FORM OF REDEMPTION NOTICE.
Notice of redemption shall be given by the Trustee in the name
of and at the expense of the Issuer by first class mail, postage prepaid,
mailed not less than five days prior to the applicable Optional Redemption Date
(but in no event prior to the date on which the Redemption Price with respect
to the Bonds to be redeemed pursuant to subsection (b) of Section 10.01 has
been deposited in the Distribution Account) to each Holder of Bonds to be
redeemed, such Holders being determined as of the last day of the month
preceding the month in which such Optional Redemption Date occurs (the
"Optional Redemption Record Date").
X-1
<PAGE> 141
All notices of redemption shall state:
(1) the Optional Redemption Date; and
(2) the fact of such payment in full, the place where
such Bonds are to be surrendered for payment of the Redemption Price
(which shall be the office or agency of the Issuer to be maintained as
provided in Section 3.02) and that no interest shall accrue on such
Bond for any period after the last day of the month preceding the
month in which the date fixed for redemption occurs. Failure to give
notice of redemption, or any defect therein, to any Holder of any Bond
selected for redemption shall not impair or affect the validity of the
redemption of any other Bond.
SECTION 10.03. BONDS PAYABLE ON OPTIONAL REDEMPTION DATE.
Notice of redemption having been given as provided in Section
10.02, the Bonds or portions thereof so to be redeemed shall, on the applicable
Optional Redemption Date, become due and payable at the Redemption Price and
(unless the Issuer shall default in the payment of the Redemption Price) no
interest shall accrue on such Redemption Price for any period after the last
day of the month preceding the month in which such Optional Redemption Date
occurs.
X-2
<PAGE> 142
ARTICLE XI
MISCELLANEOUS
SECTION 11.01. COMPLIANCE CERTIFICATES AND OPINIONS.
Upon any application or request by the Issuer to the Trustee
to take any action under any provision of this Indenture, the Issuer shall
furnish to the Trustee an Officers' Certificate stating that all conditions
precedent, if any, provided for in this Indenture relating to the proposed
action have been complied with and an Opinion of Counsel stating that in the
opinion of such counsel all such conditions precedent, if any, have been
complied with, except that in the case of any such application or request as to
which the furnishing of such documents is specifically required by any
provision of this Indenture relating to such particular application or request,
no additional certificate or opinion need be furnished.
Every certificate, opinion or letter with respect to
compliance with a condition or covenant provided for in this Indenture
(including one furnished pursuant to specific requirements of this Indenture
relating to a particular application or request) shall include:
(1) a statement that each individual signing such
certificate, opinion or letter has read such covenant or condition and
the definitions herein relating thereto;
(2) a brief statement as to the nature and scope of the
examination or investigation upon which the statements or opinions
contained in such certificate, opinion or letter are based;
(3) a statement that, in the opinion of each such
individual, he or she has made such examination or investigation as is
necessary to enable such individual to express an informed opinion as
to whether or not such covenant or condition has been complied with;
and
(4) a statement as to whether, in the opinion of each
such individual, such condition or covenant has been complied with.
XI-1
<PAGE> 143
SECTION 11.02. FORM OF DOCUMENTS DELIVERED TO TRUSTEE.
In any case where several matters are required to be certified
by, or covered by an opinion of, any specified Person, it is not necessary that
all such matters be certified by, or covered by the opinion of, only one such
Person, or that they be so certified or covered by only one document, but one
such Person may certify or give an opinion with respect to some matters and one
or more other such Persons as to other matters, and any such Person may certify
or give an opinion as to such matters in one or several documents
Any certificate or opinion of an officer of the Issuer may be
based, insofar as it relates to legal matters, upon a certificate or opinion
of, or representations by, counsel, unless such officer knows, or in the
exercise of reasonable care should know, that the certificate ar opinion or
representations with respect to the matters upon which his other certificate or
opinion is based are erroneous. Any such Issuer certificate or Opinion of
Counsel may be based, insofar as it relates to factual matters, upon a
certificate or opinion of, or representations by, an Authorized Officer or
Officers of the Owner Trustee or a certificate of the officers of the Depositor
or the manager of the Issuer, stating that the information with respect to such
factual matters is in the possession of the Owner Trustee, or the Depositor or
the manager of the Issuer, unless such officer or counsel knows, or in the
exercise of reasonable care should know, that the certificate or opinion or
representations with respect to such matters are erroneous. Any Opinion of
Counsel may be based on the written opinion of other counsel, in which event
such Opinion of Counsel shall be accompanied by a copy of such other counsel's
opinion and shall include a statement to the effect that such counsel believes
that such counsel and the Trustee may reasonably rely upon the opinion of such
other counsel.
Where any Person is required to make, give or execute two or
more applications, requests, consents, certificates, statements, opinions or
other instruments under this Indenture, they may, but need not, be consolidated
and form one instrument.
Wherever in this Indenture, in connection with any application
or certificate or report to the Trustee, it is
XI-2
<PAGE> 144
provided that the Issuer shall deliver any document as a condition of the
granting of such application, or as evidence of the Issuer's compliance with
any term hereof, it is intended that the truth and accuracy, at the time of the
granting of such application or at the effective date of such certificate or
report (as the case may be), of the facts and opinions stated in such document
shall in such case be conditions precedent to the right of the Issuer to have
such application granted or to the sufficiency of such certificate or report.
The foregoing shall not, however, be construed to affect the Trustee's right to
rely upon the truth and accuracy of any statement or opinion contained in any
such document as provided in Section 6.01(b)(2).
Whenever in this Indenture it is provided that the absence of
the occurrence and continuation of a Default or Event of Default is a condition
precedent to the taking of any action by the Trustee at the request or
direction of the Issuer, then, notwithstanding that the satisfaction of such
condition is a condition precedent to the Issuer's right to make such request
or direction, the Trustee shall be protected in acting in accordance with such
request or direction if it does not have knowledge of the occurrence and
continuation of such Default or Event of Default as provided in Section
6.01(d).
SECTION 11.03. ACTS OF BONDHOLDERS.
(a) Any request, demand, authorization, direction,
notice, consent, waiver or other action provided by this Indenture to be given
or taken by Bondholders may be embodied in any evidence by one or more
instruments of substantially similar tenor signed by such Bondholders in person
or by an agent duly appointed in writing; and, except as herein otherwise
expressly provided, such action shall become effective when such instrument or
instruments are delivered to the Trustee, and, where it is hereby expressly
required, to the Issuer. Such instrument or instruments (and the action
embodied therein and evidenced thereby) are herein sometimes referred to as the
"Act" of the Bondholders signing such instrument or instruments. Proof of
execution of any such instrument or of a writing appointing any such agent
shall be sufficient for any purpose of this Indenture and (subject to Section
6.01) conclusive in favor of the Trustee and the Issuer, if made in the manner
provided in this Section.
XI-3
<PAGE> 145
(b) The fact and date of the execution by any Person of
any such instrument or writing may be proved by the affidavit of a witness of
such execution or by the certificate of any notary public or other officer
authorized by law to take acknowledgements of deeds, certifying that the
individual signing such instrument or writing acknowledged to him or her the
execution thereof. Whenever such execution is by an officer of a corporation or
a member of a partnership on behalf of such corporation or partnership, such
certificate or affidavit shall also constitute sufficient proof of his or her
authority.
(c) The ownership of Bonds shall be proved by the Bond
Register.
(d) Any request, demand, authorization, direction,
notice, consent, waiver or other action by the Holder of any Bonds shall bind
the Holder of every Bond issued upon the registration of transfer thereof or in
exchange therefor or in lieu thereof, in respect of anything done, omitted or
suffered to be done by the Trustee or the Issuer in reliance thereon, whether
or not any notation of such action is made upon such Bonds.
SECTION 11.04. NOTICES, ETC. TO TRUSTEE AND ISSUER.
Any request, demand, authorization, direction, notice,
consent, waiver or Act of Bondholders or other documents provided or permitted
by this Indenture to be made upon, given or furnished to, or filed with:
(1) the Trustee by any Bondholder or by the Issuer shall
be sufficient for every purpose hereunder if made, given, furnished or
filed in writing to or with and received by the Trustee at its
Corporate Trust Office;
(2) the Issuer by the Trustee or by any Bondholder shall
be sufficient for every purpose hereunder (except as provided in
Sections 5.01(3) and (4)) if in writing and mailed, first-class,
postage prepaid, to the Issuer addressed to it c/o
_______________________________________________________________________
______________ ____________________________, Attention: Corporate
Trust Administration, or at any other address previously furnished in
writing to the Trustee by the Issuer;
XI-4
<PAGE> 146
(3) any Rating Agency by the Trustee, the Issuer or the
Master Servicer shall be sufficient for every purpose hereunder if
made, given, furnished or filed in writing to or with and received by
such Rating Agency at the address specified therefor in the definition
corresponding to the name of such Rating Agency; or
[(4) the Bond Insurer by the Trustee, the Issuer or any
Bondholder shall be sufficient for every purpose hereunder if in
writing and mailed, first-class, postage prepaid to the Bond Insurer
at ________________ _____________________.]
SECTION 11.05. NOTICES AND REPORTS TO BONDHOLDERS; WAIVER OF NOTICES.
Where this Indenture provides for notice to Bondholders of any
event or the mailing of any report to Bondholders, such notice or report shall
be sufficiently given (unless otherwise herein expressly provided) if mailed,
first-class, postage prepaid, to each Bondholder affected by such event or to
whom such report is required to be mailed, at the address of such Bondholder as
it appears on the Bond Register, not later than the latest date, and not
earlier than the earliest date, prescribed for the giving of such notice or the
mailing of such report. In any case where a notice or report to Bondholders is
mailed in the manner provided above, neither the failure to mail such notice or
report, nor any defect in any notice or report so mailed, to any particular
Bondholder shall affect the sufficiency of such notice or report with respect
to other Bondholders, and any notice or report which is mailed in the manner
herein provided shall be conclusively presumed to have been duly given or
provided.
Where this Indenture provides for notice in any manner, such
notice may be waived in writing by any Person entitled to receive such notice,
either before or after the event, and such waiver shall be the equivalent of
such notice. Waiver of notice by any Bondholder shall be filed with the
Trustee, but such filing shall not be a condition precedent to the validity of
any action taken in reliance upon such waiver.
In case, by reason of the suspension of regular mail service
as a result of a strike, work stoppage or similar activity, it shall be
impractical to mail notice of any event to
XI-5
<PAGE> 147
Bondholders when such notice is required to be given pursuant to any provision
of this Indenture, then any manner of giving such notice as shall be
satisfactory to the Trustee shall be deemed to be a sufficient giving of such
notice.
Where this Indenture provides for notice to Bondholders of any
event, such notice shall also be sent to ______________________________________
_____________________________, so long as [ ] is a Rating Agency.
SECTION 11.06. RULES BY TRUSTEE AND AGENTS.
The Trustee may make reasonable rules for any meeting of
Bondholders. Any Agent may make reasonable rules and set reasonable
requirements for its functions.
SECTION 11.07. CONFLICT WITH TRUST INDENTURE ACT.
If this Indenture is qualified under the TIA and any provision
hereof limits, qualifies or conflicts with another provision hereof which is
required to be included in this Indenture by any of the provisions of the TIA,
such required provision shall control.
SECTION 11.08. EFFECT OF HEADINGS AND TABLE OF CONTENTS.
The Article and Section headings herein and the Table of
Contents are for convenience only and shall not affect the construction hereof.
SECTION 11.09. SUCCESSORS AND ASSIGNS.
All covenants and agreements in this Indenture by the Issuer
shall bind its successors and assigns, whether so expressed or not.
SECTION 11.10. SEPARABILITY.
In case any provision in this Indenture or in the Bonds shall
be invalid, illegal or unenforceable, the validity, legality and enforceability
of the remaining provisions shall not in any way be affected or impaired
thereby.
XI-6
<PAGE> 148
SECTION 11.11. BENEFITS OF INDENTURE.
Nothing in this Indenture or in the Bonds, expressed or
implied, shall give to any Person, other than the parties hereto and their
successors hereunder, any separate trustee or co-trustee appointed under
Section 6.14 and the Bondholders, any benefit or any legal or equitable right,
remedy or claim under this Indenture.
SECTION 11.12. LEGAL HOLIDAYS.
In any case where the date of any Payment Date, Redemption
Date or any other date on which principal of, or interest on, any Bond is
proposed to be paid shall not be a Business Day, then (notwithstanding any
other provision of the Bonds or this Indenture) payment need not be made on
such date, but may be made on the next succeeding Business Day with the same
force and effect as if made on the nominal date of any such Payment Date,
Optional Redemption Date or other date for the payment of principal of, or
interest on, any Bond, as the case may be, and no interest shall accrue for the
period from and after any such nominal date, provided such payment is made in
full on such next succeeding Business Day.
SECTION 11.13. GOVERNING LAW.
This Indenture and each Bond shall be construed in accordance
with and governed by the substantive laws of the State of New York applicable
to agreements made and to be performed in the State of New York and the
obligations, rights and remedies of the parties hereto and the Bondholders
shall be determined in accordance with such laws.
SECTION 11.14. COUNTERPARTS.
This instrument may be executed in any number of counterparts,
each of which so executed shall be deemed to be an original, and all such
counterparts shall together constitute but one and the same instrument.
XI-7
<PAGE> 149
SECTION 11.15. RECORDING OF INDENTURE.
This Indenture is subject to recording in any appropriate
public recording office, such recording to be effected by the Issuer and at its
expense in compliance with any Opinion of Counsel delivered pursuant to Section
2.12(c) or Section 3.06.
SECTION 11.16. ISSUER OBLIGATION.
No recourse may be taken, directly or indirectly, against (i)
the Bank, (ii) any incorporator, subscriber to the capital stock, stockholder,
officer or director of the Bank or of any predecessor or successor of the Bank,
(iii) any holder of a beneficial interest in the Issuer (solely in its capacity
as such), (iv) any incorporator, subscriber to the capital stock, stockholder,
partner, beneficiary, agent, officer, director, employee, or successor or
assign of a holder of a beneficial interest in the Issuer, (v) the Depositor or
any Affiliate thereof (other than the Issuer) or (vi) any incorporator,
subscriber to the capital stock, stockholder, officer, director or employee of
the Trustee or any predecessor or successor of the Trustee with respect to the
Issuer's obligation with respect to the Bonds or the obligation of the Issuer
or the Trustee under this Indenture or any certificate or other writing
delivered in connection herewith or therewith.
SECTION 11.17. INSPECTION.
The Issuer agrees that, on reasonable prior notice, it will
permit any representative of the Trustee, during the Issuer's normal business
hours, to examine all books of account, records, reports and other papers of
the Issuer, to make copies and extracts therefrom, to cause such books to be
audited by Independent Accountants selected by the Trustee, and to discuss its
affairs, finances and accounts with its officers, employees and Independent
Accountants (and by this provision the Issuer hereby authorizes its Accountants
to discuss with such representatives such affairs, finances and accounts), all
at such reasonable times and as often as may be reasonably requested. Any
expense incident to the exercise by the Trustee of any rights under this
Section 11.17 shall be borne by the Issuer.
XI-8
<PAGE> 150
SECTION 11.18. USURY.
The amount of interest payable or paid on any Bond under the
terms of this Indenture shall be limited to an amount which shall not exceed
the maximum nonusurious rate of interest allowed by the applicable laws of the
United States or the State of New York (whichever shall permit the higher
rate), which could lawfully be contracted for, charged or received (the
"Highest Lawful Rate"). In the event any payment of interest on any Bond
exceeds the Highest Lawful Rate, the Issuer stipulates that such excess amount
will be deemed to have been paid as a result of an error on the part of both
the Trustee, acting on behalf of the Holder of such Bond, and the Issuer, and
the Holder receiving such excess payment shall promptly, upon discovery of such
error or upon notice thereof from the Issuer or the Trustee, refund the amount
of such excess or, at the option of the Trustee, apply the excess to the
payment of principal of such Bond, if any, remaining unpaid.
SECTION 11.19. NO PETITION.
The Trustee, by entering into this Indenture, and each
Bondholder, by accepting a Bond, hereby covenant and agree that they will not
at any time institute against the Depositor or the Issuer, or join in any
institution against the Depositor or the Issuer of, any bankruptcy,
reorganization, arrangement, insolvency or liquidation proceedings, or other
proceedings under any United States federal or state bankruptcy or similar law
in connection with any obligations relating to the Bonds, this Indenture or any
of the Operative Agreements.
XI-9
<PAGE> 151
ARTICLE XII
THE BOND INSURER
SECTION 12.01. CERTAIN MATTERS REGARDING THE BOND INSURER AND THE BOND
INSURANCE POLICY.
[as set forth in the applicable policy]
XII-1
<PAGE> 152
IN WITNESS WHEREOF, each party has caused this Indenture to be
executed by its duly authorized officer or officers as of the day and year
first above written.
SEQUOIA MORTGAGE TRUST 199_-_,
as Issuer
By: ,
----------------------------------
not in its individual capacity but
solely as Owner Trustee
By:
----------------------------------
Name:
Title:
-------------------------------
as Trustee
By:
----------------------------------
Authorized Officer
By:
----------------------------------
Name:
Title:
S-1
<PAGE> 153
STATE OF DELAWARE )
) ss.:
COUNTY OF NEW CASTLE )
On the ____ day of _____________ in the year one thousand nine
hundred and ninety-_____ before me personally came __________________________,
to me known, who being by me duly sworn did depose and say that she/he resides
in _______________, that she/he is the ______________________ of
__________________________, the corporation described in and which executed
the above instrument and that she/he signed her/his name thereto by authority
of the Board of Directors of said corporation.
[NOTARIAL SEAL]
---------------------------------
Notary Public
S-2
<PAGE> 154
STATE OF _________________ )
) ss.:
COUNTY OF ________________ )
On the ____ day of __________, 199__, before me, a notary
public in and for said State, personally appeared ___________________________,
known to me (or proved to me on the basis of satisfactory evidence) to be a
______ ______________ of ____________________________________, the
___________________ corporation that executed the within instrument, and also
known to me (or proved to me on the basis of satisfactory evidence) to be the
persons who executed it on behalf of said _____________________ corporation,
and acknowledged to me that such ___________________ corporation executed the
within instrument.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed
my official seal the day and year in this certificate first above written.
[NOTARIAL SEAL]
---------------------------------
Notary Public
S-3
<PAGE> 155
EXHIBIT I
LETTER AGREEMENT WITH THE DEPOSITORY
I-1
<PAGE> 156
EXHIBIT II
FORM OF SENIOR BOND
The form of Senior Bond is as follows:
PRINCIPAL OF THIS BOND IS PAYABLE IN INSTALLMENTS AS SET FORTH
HEREIN. ACCORDINGLY, THE CLASS PRINCIPAL AMOUNT OF THIS BOND AT ANY TIME MAY BE
LESS THAN THE AMOUNT SHOWN ON THE FACE HEREOF. THE CLASS PRINCIPAL AMOUNT OF
THIS BOND MAY BE ASCERTAINED ONLY BY OBTAINING A CONFIRMATION THEREOF FROM THE
TRUSTEE UNDER THE INDENTURE REFERRED TO BELOW.
UNLESS THIS BOND IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE
OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO THE ISSUER
OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE, OR PAYMENT, AND ANY BOND
SO ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS
REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO
CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED
REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE, OR USE HEREOF, FOR VALUE OR
OTHERWISE, BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER
HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.
II-1
<PAGE> 157
SEQUOIA MORTGAGE TRUST 199_-_,
a Delaware Statutory Business Trust
Collateralized Mortgage Bonds
CLASS A-1
DUE: __________ ___, _____
ACCRUAL DATE: __________ ___, _____
ISSUE DATE: __________ ___, _____
[ ] INTEREST RATE
Initial Class Principal
Amount of this Bond:
$____________________________ CUSIP NO.___
CERTIFICATE NUMBER 1
Sequoia Mortgage Trust 199 _-_ (the "Issuer"), a statutory
business trust formed under the Deposit Trust Agreement dated as of
_____________ ___, 199__ and having _________________________, a Delaware bank
and trust company, as Owner Trustee, for value received, hereby promises to pay
to CEDE & CO. or registered assigns, the principal sum of [AMOUNT IN WORDS]
($_______) in monthly installments on the ____________ day of each month,
commencing on ________ _ ___, _____ (each, a "Payment Date"), and ending on or
before __________ ___, _____, (the "Stated Maturity" of such final installment
of principal), and to pay interest (computed on the basis of a 360-day year of
twelve 30-day months) on the Class Principal Amount (as defined in the
Indenture hereinafter referred to) of this Bond from time to time from _
________ ___, _____ (the "Accrual Date"), or such later date to which interest
has been paid, through the last day of the month preceding the month in which
the principal amount of this Bond is paid in full, at a [variable/fixed] rate
determined as described below, such interest being payable monthly on each
Payment Date. If any Payment Date shall not be a "Business Day" (as defined in
the Indenture), payment of the amount due will be made on the next succeeding
Business Day.
Installments of principal of this Bond are due and payable as
described in the Indenture.
II-2
<PAGE> 158
Interest payable on this Bond on a Payment Date will be equal
to the amount of interest that has accrued on the Class Principal Amount of
this Bond during the one-month period ending on the last day of the month
preceding the month in which each such Payment Date occurs (each, an "Interest
Accrual Period").
The principal of, and interest on, this Bond are payable in
such coin or currency of the United States of America as at the time of payment
is legal tender for payment of public and private debts. All payments made by
the Issuer with respect to this Bond shall be applied as set forth in the
Indenture. Any installment of principal or interest which is not paid when and
as due shall bear interest as described in the Indenture.
Unless the certificate of authentication hereon has been
executed by the Trustee by manual signature, this Bond shall not be entitled to
any benefit under the Indenture, or be valid or obligatory for any purpose.
IN WITNESS WHEREOF, Sequoia Mortgage Trust 199_-_ has caused
this instrument to be duly executed by its duly authorized officer.
Dated:_______________ SEQUOIA MORTGAGE TRUST 199_-_
By:
---------------------------------
not in its individual capacity
but solely as Owner Trustee
By:
---------------------------------
Title:
------------------------------
CERTIFICATE OF AUTHENTICATION
This is one of the Bonds referred to in the within-mentioned Indenture.
,
- ---------------------------
as Trustee
By: ,
--------------------------
Authorized Signatory
II-3
<PAGE> 159
This Bond is one of a duly authorized issue of Bonds of the
Issuer, designated as its Collateralized Mortgage Bonds, Series 199_-_ (herein
called the "Bonds"). The Bonds are issuable in one or more classes; the Bonds
of particular Classes being herein called the Class A-1, Class B-1 and Class
B-2 Bonds, all issued and to be issued under the Issuer's Indenture dated as of
____________ ___, 199__ between the Issuer and _______________________________
(the "Trustee", which term includes any successor Trustee under the Indenture),
which authorized the Bonds, and reference is hereby made thereto for a statement
of the respective rights thereunder of the Issuer, the Trustee and the Holders
of the Bonds of each particular Class thereof and the terms upon which the Bonds
of each Class are, and are to be, authenticated and delivered.
The Class A-1 Bonds constitute "Senior Bonds" and the Class
B-1 Bonds and the Class B-2 Bonds constitute "Subordinated Bonds".
All terms used in this Bond which are defined in the Indenture
shall have the meanings assigned to them in the Indenture.
The Bond Interest Rate for the Senior Bonds (the "Senior Bond
Interest Rate") and any Interest Accrual Period will equal _______________.
As provided in the Indenture, the Bonds are issuable in
Classes which may vary as is provided or permitted in the Indenture. Bonds of
each Class are equally and ratably secured by the collateral pledged as
security therefor to the extent provided by the Indenture.
For each Principal Payment Date, the aggregate amount of each
installment of principal due and payable on the Senior Bonds will be equal to
the Senior Principal Payment Amount for such Payment Date. The Senior Principal
Payment Amount for any Payment Date is equal to the Senior Percentage of the
sum of (a) the principal portion of the Scheduled Payment due on each Pledged
Mortgage [on the related Due Date], (b) the principal portion of the purchase
price of each Pledged Mortgage that was purchased by Redwood Trust or another
person pursuant to the Mortgage Loan Purchase Agreement [or any optional
purchase by the Master Servicer of a defaulted Pledged Mortgage] as of such
Payment Date, (c) the
II-4
<PAGE> 160
Substitution Adjustment Amount in connection with any Deleted Pledged Mortgage
received with respect to such Payment Date, (d) any Insurance Proceeds or
Liquidation Proceeds allocable to recoveries of principal of Pledged Mortgages
that are not yet Liquidated Pledged Mortgages received during the [calendar
month] preceding the month of such Payment Date, (e) with respect to each
Pledged Mortgage that became a Liquidated Pledged Mortgage during the [calendar
month] preceding the month of such Payment Date, the Stated Principal Balance
of such Pledged Mortgage, and (f) all partial and full principal prepayments by
borrowers received during the related Prepayment Period.
Payments of principal or interest, if any, on the Bonds will
be made on each Payment Date, commencing on ____________ ___, 199__, in the
manner and in accordance with the priorities for the Bonds provided in the
Indenture.
The entire unpaid principal amount of each Class of Bonds
shall be due and payable, if not then previously paid, on the Stated Maturity
of the final installment of principal of such Class.
All payments of principal of, and interest on, the Bonds shall
be made only from the Trust Estate Granted as security for the Bonds and any
other assets of the Issuer that have not been Granted as security for any other
bonds or obligations of the Issuer, and each Holder hereof, by its acceptance
of this Bond, agrees that it will have recourse solely against such Trust
Estate and such other assets of the Issuer and that neither
_____________________ ___ in its individual capacity, any holder of a
beneficial interest in the Issuer nor any of their respective shareholders,
partners, beneficiaries, agents, officers, directors, employees, successors or
assigns shall be personally liable for any amounts payable, or performance due,
under this Bond or the Indenture.
Payment of the then remaining unpaid principal amount of this
Bond on the Stated Maturity of its final installment of principal or on such
earlier date as the Issuer shall be required to pay the then remaining unpaid
principal amount of this Bond or payment of the Redemption Price payable on any
date as of which this Bond has been called for redemption in full, shall be
made upon presentation of this Bond to the office or agency of the Issuer
maintained for such purpose. Payments of interest on this
II-5
<PAGE> 161
Bond due and payable on each Payment Date or on any Optional Redemption Date,
to the extent this Bond is not being paid in full, together with any
installment of principal of this Bond due and payable on each Payment Date or
the Optional Redemption Date, to the extent not in full payment of this Bond,
shall be made by check mailed to the Person whose name appears as the
registered Holder of this Bond (or one or more Predecessor Bonds) on the Bond
Register as of the last day of the month preceding the month in which such
Payment Date occurs (each a "Record Date").
Checks for amounts which include installments of principal due
on this Bond shall be mailed to the Person entitled thereto at the address of
such Person as it appears on the Bond Register as of the applicable Record Date
without requiring that this Bond be submitted for notation of payment and
checks returned undelivered will be held for payment to the Person entitled
thereto, subject to the terms of the Indenture, at the office or agency in the
United States of America designated by the Issuer for such purpose pursuant to
the Indenture. Any reduction in the principal amount of this Bond (or any one
or more Predecessor Bonds) effected by any payments made on any Payment Date
shall be binding upon all Holders of this Bond and of any Bond issued upon the
registration of transfer hereof or in exchange herefor or in lieu hereof,
whether or not noted hereon.
If funds are expected to be available, as provided in the
Indenture, for payment in full of the then remaining unpaid principal amount of
this Bond on a Payment Date or Optional Redemption Date which is prior to the
Stated Maturity of the final installment of principal hereof, then the Trustee,
on behalf of the Issuer, will notify the Person who was the registered Holder
hereof on the last day of the month prior to the month in which such Payment
Date or Optional Redemption Date occurs, and the amount then due and payable
shall, if sufficient funds therefor are available, be payable only upon
presentation of this Bond to the office or agency of the Issuer maintained for
such purpose.
The failure of the Issuer to pay when and as due any
installment of principal of (regardless of the lapse of any grace period) any
Senior Bond shall not constitute an Event of Default under the Indenture unless
the Senior Class Principal Amount exceeds the aggregate Stated Principal
Balances of the Pledged
II-6
<PAGE> 162
Mortgages after application of all available amounts on deposit in the
Distribution Account on a Payment Date.
If an Event of Default as defined in the Indenture shall occur
and be continuing with respect to the Bonds, the Bonds may become or be
declared due and payable in the manner and with the effect provided in the
Indenture. If any such acceleration of maturity occurs prior to the Stated
Maturity of the final installment of principal of this Bond, the amount payable
to the Holder of this Bond will be equal to the Class Principal Amount of this
Bond on the date this Bond becomes so due and payable, together with accrued
interest. Following the acceleration of the maturity of the Bonds, all amounts
collected as proceeds of the collateral securing the Bonds or otherwise shall
be applied as described in the Indenture. Following such acceleration, interest
on any overdue installments of interest on all Bonds shall be payable at the
rate set forth in the Indenture.
The Bonds are not prepayable or redeemable at the option or
direction of the Issuer except that the Bonds are subject to redemption in
whole, but not in part, at the option of the Issuer on any Payment Date on or
after the Payment Date on which the sum of (i) the Invested Amount, (ii) the
Senior Class Principal Amount, (iii) the Class B- 1 Principal Amount and (iv)
the Class B-2 Principal Amount, after giving effect to payments expected to be
made on such Payment Date, is __% or less of the aggregate of the Stated
Principal Balances of the Pledged Mortgages as of the Cut- Off Date. Any such
redemption at the option of the Issuer shall be at a price equal to 100% of the
unpaid principal amount of the Bonds (including, in the case of the
Subordinated Bonds, any unpaid Class B-1 Principal Carryover Shortfall and/or
Class B-2 Principal Carryover Shortfall) so redeemed plus accrued interest
through the last day of the month preceding the month in which such optional
redemption occurs.
As provided in the Indenture and subject to certain
limitations therein set forth, the transfer of this Bond may be registered on
the Bond Register of the Issuer, upon surrender of this Bond for registration
of transfer at the office or agency designated by the Issuer pursuant to the
Indenture, duly endorsed by, or accompanied by a written instrument of transfer
in form satisfactory to the Trustee duly executed by the Holder hereof or his
attorney duly authorized in writing, and thereupon one or more
II-7
<PAGE> 163
new Bonds of the same Class, of authorized denominations and in the same
aggregate initial principal amount, will be issued to the designated transferee
or transferees.
Prior to the due presentment for registration of transfer of
this Bond, the Issuer, the Trustee, and any agent of the Issuer shall treat the
Person in whose name this Bond is registered (i) on any Record Date, for
purposes of making payments, and (ii) on any other date for any other purposes,
as the owner hereof, whether or not this Bond be overdue, and neither the
Issuer, the Trustee nor any such agent shall be affected by notice to the
contrary.
The Indenture permits, with certain exceptions as therein
provided, the amendment thereof and the modification of the rights and
obligations of the Issuer and the rights of the Holders of the Bonds under the
Indenture at any time by the Issuer with the consent of the Holders of Bonds
representing two-thirds of the aggregate Class Principal Amount of the
Controlling Class. The Indenture also contains provisions permitting the
Holders of Bonds representing specified percentages of the aggregate Class
Principal Amount of the Controlling Class on behalf of the Holders of all the
Bonds of such Class, to waive compliance by the Issuer with certain provisions
of the Indenture and certain past defaults under the Indenture and their
consequences. Any such consent or waiver by the Holder, at the time of the
giving thereof, of this Bond (or any one or more Predecessor Bonds) shall be
conclusive and binding upon such Holder and upon all future holders of this
Bond and of any Bond issued upon the registration of transfer hereof or in
exchange herefor or in lieu hereof whether or not notation of such consent or
waiver is made upon this Bond. The Indenture also permits the Trustee to amend
or waive certain terms and conditions set forth in the Indenture without the
consent of the Holders of the Bonds of any Series issued thereunder.
The Senior Bonds are "Book Entry Bonds" which will be
available to investors only through the book entry facilities of The Depository
Trust Company, and bond certificates for all Classes of Bonds will be available
only under certain limited circumstances as described in the Indenture.
AS PROVIDED IN THE INDENTURE, THIS BOND AND THE INDENTURE
SHALL BE CONSTRUED IN ACCORDANCE WITH, AND GOVERNED BY, THE LAWS OF
II-8
<PAGE> 164
THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED
THEREIN.
No reference herein to the Indenture and no provision of this
Bond or of the Indenture shall alter or impair the obligation of the Issuer,
which is absolute and unconditional to the extent permitted by applicable law,
to pay the principal of, and interest on, this Bond at the times, place and
rate, and in the coin or currency herein prescribed.
II-9
<PAGE> 165
EXHIBIT III
FORM OF A CLASS B-1 BOND
The form of a Class B-1 Bond is as follows:
PRINCIPAL OF THIS BOND IS PAYABLE IN INSTALLMENTS AS SET FORTH
HEREIN. ACCORDINGLY, THE CLASS PRINCIPAL AMOUNT OF THIS BOND AT ANY TIME MAY BE
LESS THAN THE AMOUNT SHOWN ON THE FACE HEREOF. THE CLASS PRINCIPAL AMOUNT OF
THIS BOND MAY BE ASCERTAINED ONLY BY OBTAINING A CONFIRMATION THEREOF FROM THE
TRUSTEE UNDER THE INDENTURE REFERRED TO BELOW.
UNLESS THIS BOND IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE
OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO THE ISSUER
OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE, OR PAYMENT, AND ANY BOND
ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS
REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO
CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED
REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE, OR OTHER USE HEREOF FOR VALUE OR
OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER
HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.
THIS BOND IS SUBORDINATED IN RIGHT OF PAYMENT TO THE SENIOR
BONDS AS DESCRIBED IN THE INDENTURE REFERRED TO HEREIN.
THE FOLLOWING INFORMATION IS PROVIDED SOLELY FOR THE PURPOSE OF
APPLYING THE U.S. FEDERAL INCOME TAX ORIGINAL ISSUE DISCOUNT ("OID") RULES TO
THIS BOND. THE ISSUE DATE OF THIS BOND IS __________ ___, 199__. THE PER ANNUM
RATE OF INTEREST ON THIS BOND IS ___% ASSUMING THAT PRINCIPAL PAYMENTS ARE MADE
ON THE MORTGAGE COLLATERAL UNDERLYING THE BONDS AT _______% OF THE STANDARD
PREPAYMENT ASSUMPTION (AS DEFINED IN THE PROSPECTUS SUPPLEMENT) THIS BOND HAS
BEEN ISSUED WITH $ OF OID PER $1,000 OF INITIAL PRINCIPAL AMOUNT, THE YIELD TO
MATURITY IS ___% AND THE AMOUNT OF OID ATTRIBUTABLE TO THE INITIAL SHORT
ACCRUAL PERIOD IS $_______ OF OID PER $1,000 OF INITIAL PRINCIPAL AMOUNT,
CALCULATED ASSUMING THE YIELD IS ACCRUED DAILY DURING INITIAL SHORT PERIOD. NO
REPRESENTATION IS MADE AS TO THE RATE AT WHICH PRINCIPAL PAYMENTS WILL BE MADE
ON THE MORTGAGE COLLATERAL.
III-1
<PAGE> 166
SEQUOIA MORTGAGE TRUST 199_-_,
a Delaware Statutory Business Trust
Collateralized Mortgage Bonds
CLASS B-1
DUE: _____________ ___, _____
ACCRUAL DATE: _____________ ___, _____
ISSUE DATE: _____________ ___, _____
___________ INTEREST RATE
Initial Class Principal CUSIP NO. ______
Amount of this Bond:
$____________________ CERTIFICATE NUMBER 1
Sequoia Mortgage Trust 199_-_ (the "Issuer"), a statutory
business trust formed under the Deposit Trust Agreement dated as of __________
___, _____, and having ________________________, a Delaware bank and trust
company, as Owner Trustee for value received, hereby promises to pay to CEDE &
CO. or registered assigns, the principal sum of [AMOUNT IN WORDS]
($___________) in monthly installments on the ______________ day of each month,
commencing on _________ ___, _____ (each, a "Payment Date"), and ending on or
before __________ ___, _____ (the "Stated Maturity" of such final installment of
principal), and to pay interest (computed on the basis of a 360-day year of
twelve 30-day months) on the Class Principal Amount (as defined in the
Indenture) of this Bond from time to time from __________ ___, _____ (the
"Accrual Date"), or such later date to which interest has been paid, through the
last day of the month preceding the month in which the principal amount of this
Bond is paid in full, at a [variable/fixed] rate determined as described below,
such interest being payable monthly on each Payment Date. If any Payment Date
shall not be a "Business Day" (as defined in the Indenture), payment of the
amount due will be made on the next succeeding Business Day.
Installments of principal of this Bond are due and payable as
described in the Indenture.
Interest payable on this Bond on a Payment Date will be equal
to the amount of interest that has accrued on the Class
III-2
<PAGE> 167
Principal Balance of this Bond during the one-month period ending on the last
day of the month preceding the month in which each such Payment Date occurs
(each, an "Interest Accrual Period").
The principal of, and interest on, this Bond are payable in
such coin or currency of the United States of America as at the time of payment
is legal tender for payment of public and private debts. All payments made by
the Issuer with respect to this Bond shall be applied as set forth in the
Indenture. Any installment of principal or interest which is not paid when and
as due shall bear interest as described in the Indenture.
Unless the certificate of authentication hereon has been
executed by the Trustee by manual signature, this Bond shall not be entitled to
any benefit under the Indenture, or be valid or obligatory for any purpose.
IN WITNESS WHEREOF, Sequoia Mortgage Trust 199_-_ has caused
this instrument to be duly executed by its duly authorized officer.
Dated:_______________ SEQUOIA MORTGAGE TRUST 199_-_
By:
--------------------------------
not in its individual capacity
but solely as Owner Trustee
By:
--------------------------------
Title:
-----------------------------
CERTIFICATE OF AUTHENTICATION
This is one of the Bonds referred to in the within-mentioned Indenture.
,
- ----------------------------
as Trustee
By:
-----------------------------------
Authorized Signatory
III-3
<PAGE> 168
This Bond is one of a duly authorized issue of Bonds of the
Issuer, designated as its Collateralized Mortgage Bonds, Series 199_-_ (herein
called the "Bonds"). The Bonds are issuable in one or more classes; the Bonds
of particular Classes being herein called the Class A-1, Class B-1 and Class
B-2 Bonds, all issued and to be issued under the Issuer's Indenture dated as of
____________ ___, 199__ between the Issuer and ________________________________
(the "Trustee", which term includes any successor Trustee under the Indenture),
which authorized the Bonds, and reference is hereby made thereto for a
statement of the respective rights thereunder of the Issuer, the Trustee and
the Holders of the Bonds of each particular Class thereof and the terms upon
which the Bonds of each Class are, and are to be, authenticated and delivered.
The Class A-1 Bonds constitute "Senior Bonds" and the Class
B-1 Bonds and Class B-2 Bonds constitute "Subordinated Bonds".
All terms used in this Bond which are defined in the Indenture
shall have the meanings assigned to them in the Indenture.
The Bond Interest Rate for the Class B-1 Bonds (the "Class B-1
Bond Interest Rate") and any Interest Accrual Period will equal
________________.
As provided in the Indenture, the Bonds are issuable in
Classes which may vary as provided or permitted in the Indenture. Bonds of each
Class are equally and ratably secured by the collateral pledged as security
therefor to the extent provided by the Indenture.
For each Payment Date, the aggregate amount of each
installment of principal due and payable on the Class B-1 Bonds will be equal
to the Class B-1 Principal Payment Amount for such Payment Date. The Class B-1
Principal Payment Amount for any Payment Date is equal to the sum of (i) the
Class B-1 Percentage of the sum of (a) the principal portion of the Scheduled
Payment due on each Pledged Mortgage [on the related Due Date], (b) the
principal portion of the purchase price of each Pledged Mortgage that was
purchased by Redwood Trust or another person pursuant to the Mortgage Loan
Purchase Agreement [or by the Master Servicer in connection with any optional
purchase by the Master Servicer of a
III-4
<PAGE> 169
defaulted Pledged Mortgage] as of such Payment Date, (c) the Substitution
Adjustment Amount in connection with any Deleted Pledged Mortgage received with
respect to such Payment Date, (d) any Insurance Proceeds or Liquidation
Proceeds allocable to recoveries of principal of Pledged Mortgages that are not
yet Liquidated Pledged Mortgages received during the [calendar month] preceding
the month of such Payment Date, (e) with respect to each Pledged Mortgage that
became a Liquidated Pledged Mortgage during the [calendar month] preceding the
month of such Payment Date, the Stated Principal Balance of such Pledged
Mortgage and (f) all partial and full principal prepayments by borrowers
received during the related Prepayment Period and (ii) any Class B-1 Principal
Carryover Shortfall.
Payments of principal or interest, if any, on the Bonds will
be made on each Payment Date, commencing on __________ ___, 199__, in the
manner and in accordance with the priorities for the Bonds provided in the
Indenture.
The entire unpaid principal amount of each Class of Bonds
shall be due and payable, if not then previously paid, on the Stated Maturity
of the final installment of principal of such Class.
All payments of principal of, and interest on, the Bonds shall
be made only from the Trust Estate Granted as security for the Bonds and any
other assets of the Issuer that have not been Granted as security for any other
bonds or obligations of the Issuer, and each Holder hereof, by its acceptance
of this Bond, agrees that it will have recourse solely against such Trust
Estate and such other assets of the Issuer and that neither Wilmington Trust
Company in its individual capacity, any holder of a beneficial interest in the
Issuer nor any of their respective shareholders, partners, beneficiaries,
agents, officers, directors, employees, successors or assigns shall be
personally liable for any amounts payable, or performance due, under this Bond
or the Indenture.
Payment of the then remaining unpaid principal amount of this
Bond on the Stated Maturity of its final installment of principal or on such
earlier date as the Issuer shall be required to pay the then remaining unpaid
principal amount of this Bond or payment of the Redemption Price payable on any
date as of which
III-5
<PAGE> 170
this Bond has been called for redemption in full, shall be made upon
presentation of this Bond to the office or agency of the Issuer maintained for
such purpose. Payments of interest on this Bond due and payable on each Payment
Date or on any Optional Redemption Date, to the extent this Bond is not being
paid in full, together with any installment of principal of this Bond due and
payable on each Payment Date or the Optional Redemption Date, to the extent not
in full payment of this Bond, shall be made by check mailed to the Person whose
name appears as the registered Holder of this Bond (or one or more Predecessor
Bonds) on the Bond Register as of the last day of the month preceding the month
in which such Payment Date occurs (each a "Record Date").
Checks for amounts which include installments of principal due
on this Bond shall be mailed to the Person entitled thereto at the address of
such Person as it appears on the Bond Register as of the applicable Record Date
without requiring that this Bond be submitted for notation of payment and
checks returned undelivered will be held for payment to the Person entitled
thereto, subject to the terms of the Indenture, at the office or agency in the
United States of America designated by the Issuer for such purpose pursuant to
the Indenture. Any reduction in the principal amount of this Bond (or any one
or more Predecessor Bonds) effected by any payments made on any Payment Date
shall be binding upon all Holders of this Bond and of any Bond issued upon the
registration of transfer hereof or in exchange herefor or in lieu hereof,
whether or not noted hereon.
If funds are expected to be available, as provided in the
Indenture, for payment in full of the then remaining unpaid principal amount of
this Bond on a Payment Date or Optional Redemption Date which is prior to the
Stated Maturity of the final installment of principal hereof, then the Trustee,
on behalf of the Issuer, will notify the Person who was the registered Holder
hereof on the last day of the month prior to the month in which such Payment
Date or optional Redemption Date occurs, and the amount then due and payable
shall, if sufficient funds therefor are available, be payable only upon
presentation of this Bond to the office or agency of the Issuer maintained for
such purpose.
Prior to the payment in full of the Senior Bonds, the failure
of the Issuer to pay when and as due any installment of principal of or
interest (regardless of the lapse of any grace
III-6
<PAGE> 171
period) on any Subordinated Bond shall not constitute an Event of Default under
the Indenture. In addition, notwithstanding any applicable provision of the
Indenture, upon payment in full of the Senior Bonds, the prior occurrence of
any such shortfalls attributable to the Subordinated Bonds, which shortfalls
have previously been paid in full, will not constitute an Event of Default
under the Indenture in respect of the Subordinated Bonds.
If an Event of Default as defined in the Indenture shall occur
and be continuing with respect to the Bonds, the Bonds may become or be
declared due and payable in the manner and with the effect provided in the
Indenture. If any such acceleration of maturity occurs prior to the Stated
Maturity of the final installment of principal of this Bond, the amount payable
to the Holder of this Bond will be equal to the Class Principal Amount of this
Bond on the date this Bond becomes so due and payable, together with accrued
interest. Following the acceleration of the maturity of the Bonds, all amounts
collected as proceeds of the collateral securing the Bonds or otherwise shall
be applied as described in the Indenture. Following such acceleration, interest
on any overdue installments of interest on all Bonds shall be payable at the
rate set forth in the Indenture.
The Bonds are not prepayable or redeemable at the option or
direction of the Issuer except that the Bonds are subject to redemption in
whole, but not in part, at the option of the Issuer on any Payment Date on or
after the Payment Date on which the sum of (i) the Invested Amount, (ii) the
Senior Class Principal Amount, (iii) the Class B- 1 Principal Amount and (iv)
the Class B-2 Principal Amount, after giving effect to payments expected to be
made on such Payment Date, is __% or less of the aggregate of the Stated
Principal Balances of the Pledged Mortgages as of the Cut- Off Date. Any such
redemption at the option of the Issuer shall be at a price equal to 100% of the
unpaid principal amount of the Bonds (including, in the case of the
Subordinated Bonds, any unpaid Class B-1 Principal Carryover Shortfall and/or
Class B-2 Principal Carryover Shortfall) so redeemed plus accrued interest
through the last day of the month preceding the month in which such optional
redemption occurs.
As provided in the Indenture and subject to certain
limitations therein set forth, the transfer of this Bond may be registered on
the Bond Register of the Issuer, upon surrender of
III-7
<PAGE> 172
this Bond for registration of transfer at the office or agency designated by
the Issuer pursuant to the Indenture, duly endorsed by, or accompanied by a
written instrument of transfer in form satisfactory to the Trustee duly
executed by the Holder hereof or his attorney duly authorized in writing, and
thereupon one or more new Bonds of the same Class, of authorized denominations
and in the same aggregate initial principal amount, will be issued to the
designated transferee or transferees.
Prior to the due presentment for registration of transfer of
this Bond, the Issuer, the Trustee, and any agent of the Issuer shall treat the
Person in whose name this Bond is registered (i) on any Record Date, for
purposes of making payments, and (ii) on any other date for any other purposes,
as the owner hereof, whether or not this Bond be overdue, and neither the
Issuer, the Trustee nor any such agent shall be affected by notice to the
contrary.
The Indenture permits, with certain exceptions as therein
provided, the amendment thereof and the modification of the rights and
obligations of the Issuer and the rights of the Holders of the Bonds under the
Indenture at any time by the Issuer with the consent of the Holders of Bonds
representing two-thirds of the aggregate Class Principal Amount of the
Controlling Class. The Indenture also contains provisions permitting the
Holders of Bonds representing specified percentages of the aggregate Class
Principal Amount of the Controlling Class on behalf of the Holders of all the
Bonds of such Class, to waive compliance by the Issuer with certain provisions
of the Indenture and certain past defaults under the Indenture and their
consequences. Any such consent or waiver by the Holder, at the time of the
giving thereof, of this Bond (or any one or more Predecessor Bonds) shall be
conclusive and binding upon such Holder and upon all future holders of this
Bond and of any Bond issued upon the registration of transfer hereof or in
exchange herefor or in lieu hereof whether or not notation of such consent or
waiver is made upon this Bond. The Indenture also permits the Trustee to amend
or waive certain terms and conditions set forth in the Indenture without the
consent of the Holders of the Bonds of any Series issued thereunder.
The Class B-1 Bonds are "Book Entry Bonds" which will be
available to investors only through the book entry facilities of The Depository
Trust Company, and bond certificates for all Classes
III-8
<PAGE> 173
of Bonds will be available only under certain limited circumstances as
described in the Indenture.
AS PROVIDED IN THE INDENTURE, THIS BOND AND THE INDENTURE
SHALL 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.
No reference herein to the Indenture and no provision of this
Bond or of the Indenture shall alter or impair the obligation of the Issuer,
which is absolute and unconditional to the extent permitted by applicable law,
to pay the principal of, and interest on, this Bond at the times, place and
rate, and in the coin or currency herein prescribed.
III-9
<PAGE> 174
EXHIBIT IV
FORM OF A CLASS B-2 BOND
The form of a Class B-2 Bond is as follows:
PRINCIPAL OF THIS BOND IS PAYABLE IN INSTALLMENTS AS SET FORTH
HEREIN. ACCORDINGLY, THE CLASS PRINCIPAL AMOUNT OF THIS BOND AT ANY TIME MAY BE
LESS THAN THE AMOUNT SHOWN ON THE FACE HEREOF. THE CLASS PRINCIPAL AMOUNT OF
THIS BOND MAY BE ASCERTAINED ONLY BY OBTAINING A CONFIRMATION THEREOF FROM THE
TRUSTEE UNDER THE INDENTURE REFERRED TO BELOW.
[UNLESS THIS BOND IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE
OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO THE ISSUER
OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE, OR PAYMENT, AND ANY BOND
ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS
REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO
CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED
REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE, OR OTHER USE HEREOF FOR VALUE OR
OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER
HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.]
THIS BOND IS SUBORDINATED IN RIGHT OF PAYMENT TO THE CLASS B-1
BONDS AND THE SENIOR BONDS AS DESCRIBED IN THE INDENTURE REFERRED TO HEREIN.
THE FOLLOWING INFORMATION IS PROVIDED SOLELY FOR THE PURPOSE OF
APPLYING THE U.S. FEDERAL INCOME TAX ORIGINAL ISSUE DISCOUNT ("OID") RULES TO
THIS BOND. THE ISSUE DATE OF THIS BOND IS _____________, 199__. THE PER ANNUM
RATE OF INTEREST ON THIS BOND IS ___% ASSUMING THAT PRINCIPAL PAYMENTS ARE MADE
ON THE MORTGAGE COLLATERAL UNDERLYING THE BONDS AT _______% OF THE STANDARD
PREPAYMENT ASSUMPTION (AS DEFINED IN THE PROSPECTUS SUPPLEMENT) THIS BOND HAS
BEEN ISSUED WITH $ OF OID PER $1,000 OF INITIAL PRINCIPAL AMOUNT, THE YIELD TO
MATURITY IS ___% AND THE AMOUNT OF OID ATTRIBUTABLE TO THE INITIAL SHORT
ACCRUAL PERIOD IS $_______ OF OID PER $1,000 OF INITIAL PRINCIPAL AMOUNT,
CALCULATED ASSUMING THE YIELD IS ACCRUED DAILY DURING INITIAL SHORT PERIOD. NO
REPRESENTATION IS MADE AS TO THE RATE AT WHICH PRINCIPAL PAYMENTS WILL BE MADE
ON THE MORTGAGE COLLATERAL.
III-1
<PAGE> 175
SEQUOIA MORTGAGE TRUST 199_-_,
a Delaware Statutory Business Trust
Collateralized Mortgage Bonds
CLASS B-2
DUE: __________ ___, _____
ACCRUAL DATE: __________ ___, _____
ISSUE DATE: __________ ___, _____
INTEREST RATE
Initial Class Principal CUSIP NO. ______
Amount of this Bond:
$____________________ CERTIFICATE NUMBER 1
Sequoia Mortgage Trust 199_-_ (the "Issuer"), a statutory
business trust formed under the Deposit Trust Agreement dated as of __________
___, 199__, and having ________________________, a Delaware bank and trust
company, as Owner Trustee for value received, hereby promises to pay to CEDE &
CO. or registered assigns, the principal sum of [AMOUNT IN WORDS]
($___________) in monthly installments on the ____________ day of each month,
commencing on __________ ___, _____ (each, a "Payment Date"), and ending on or
before __________ ___, _____ (the "Stated Maturity" of such final installment
of principal), and to pay interest (computed on the basis of a 360-day year of
twelve 30-day months) on the Class Principal Amount (as defined in the
Indenture) of this Bond from time to time from __________ ___, _____ (the
"Accrual Date"), or such later date to which interest has been paid, through
the last day of the month preceding the month in which the principal amount of
this Bond is paid in full, at a variable rate determined as described below,
such interest being payable monthly on each Payment Date. If any Payment Date
shall not be a "Business Day" (as defined in the Indenture), payment of the
amount due will be made on the next succeeding Business Day.
Installments of principal of this Bond are due and payable as
described in the Indenture.
Interest payable on this Bond on a Payment Date will be equal
to the amount of interest that has accrued on the Class
III-2
<PAGE> 176
Principal Balance of this Bond during the one-month period ending on the last
day of the month preceding the month in which each such Payment Date occurs
(each, an "Interest Accrual Period").
The principal of, and interest on, this Bond are payable in
such coin or currency of the United States of America as at the time of payment
is legal tender for payment of public and private debts. All payments made by
the Issuer with respect to this Bond shall be applied as set forth in the
Indenture. Any installment of principal or interest which is not paid when and
as due shall bear interest as described in the Indenture.
Unless the certificate of authentication hereon has been
executed by the Trustee by manual signature, this Bond shall not be entitled to
any benefit under the Indenture, or be valid or obligatory for any purpose.
IN WITNESS WHEREOF, Sequoia Mortgage Trust 199_-_ has caused
this instrument to be duly executed by its duly authorized officer.
Dated:_______________ SEQUOIA MORTGAGE TRUST 199_-_
By:
--------------------------------
not in its individual capacity
but solely as Owner Trustee
By:
--------------------------------
Title:
-----------------------------
CERTIFICATE OF AUTHENTICATION
This is one of the Bonds referred to in the within-mentioned Indenture.
,
- ----------------------------
as Trustee
By:
-----------------------------------
Authorized Signatory
III-3
<PAGE> 177
This Bond is one of a duly authorized issue of Bonds of the
Issuer, designated as its Collateralized Mortgage Bonds, Series 199__-__
(herein called the "Bonds"). The Bonds are issuable in one or more classes; the
Bonds of particular Classes being herein called the Class A-1, Class B-1 and
Class B-2 Bonds, all issued and to be issued under the Issuer's Indenture dated
as of ____________ ___, _____, between the Issuer and ____________
_____________________ (the "Trustee", which term includes any successor Trustee
under the Indenture), which authorized the Bonds, and reference is hereby made
thereto for a statement of the respective rights thereunder of the Issuer, the
Trustee and the Holders of the Bonds of each particular Class thereof and the
terms upon which the Bonds of each Class are, and are to be, authenticated and
delivered.
The Class A-1 Bonds constitute "Senior Bonds" and the Class
B-1 and Class B-2 Bonds constitute "Subordinated Bonds".
All terms used in this Bond which are defined in the Indenture
shall have the meanings assigned to them in the Indenture.
The Bond Interest Rate for the Class B-2 Bonds (the "Class B-2
Bond Interest Rate") and any Interest Accrual Period will equal
_______________.
As provided in the Indenture, the Bonds are issuable in
Classes which may vary as provided or permitted in the Indenture. Bonds of each
Class are equally and ratably secured by the collateral pledged as security
therefor to the extent provided by the Indenture.
For each Payment Date, the aggregate amount of each
installment of principal due and payable on the Class B-2 Bonds will be equal
to the Class B-2 Principal Payment Amount for such Payment Date. The Class B-2
Principal Payment Amount for any Payment Date is equal to the sum of (i) the
Class B-2 Percentage of the sum of (a) the principal portion of the Scheduled
Payment due on each Pledged Mortgage [on the related Due Date], (b) the
principal portion of the purchase price of each Pledged Mortgage that was
purchased by Redwood Trust or another person pursuant to the Mortgage Loan
Purchase Agreement [or by the Master Servicer in connection with any optional
purchase by the Master Servicer of a
III-4
<PAGE> 178
defaulted Pledged Mortgage] as of such Payment Date, (c) the Substitution
Adjustment Amount in connection with any Deleted Pledged Mortgage received with
respect to such Payment Date, (d) any Insurance Proceeds or Liquidation
Proceeds allocable to recoveries of principal of Pledged Mortgages that are not
yet Liquidated Pledged Mortgages received during the [calendar month] preceding
the month of such Payment Date, (e) with respect to each Pledged Mortgage that
became a Liquidated Pledged Mortgage during the [calendar month] preceding the
month of such Payment Date, the Stated Principal Balance of such Pledged
Mortgage and (f) all partial and full principal prepayments by borrowers
received during the related Prepayment Period and (ii) any Class B-2 Principal
Carryover Shortfall.
Payments of principal or interest, if any, on the Bonds will
be made on each Payment Date, commencing on _____________ __, 199_, in the
manner and in accordance with the priorities for the Bonds provided in the
Indenture.
The entire unpaid principal amount of each Class of Bonds
shall be due and payable, if not then previously paid, on the Stated Maturity
of the final installment of principal of such Class.
All payments of principal of, and interest on, the Bonds shall
be made only from the Trust Estate Granted as security for the Bonds and any
other assets of the Issuer that have not been Granted as security for any other
bonds or obligations of the Issuer, and each Holder hereof, by its acceptance
of this Bond, agrees that it will have recourse solely against such Trust
Estate and such other assets of the Issuer and that neither Wilmington Trust
Company in its individual capacity, any holder of a beneficial interest in the
Issuer nor any of their respective shareholders, partners, beneficiaries,
agents, officers, directors, employees, successors or assigns shall be
personally liable for any amounts payable, or performance due, under this Bond
or the Indenture.
Payment of the then remaining unpaid principal amount of this
Bond on the Stated Maturity of its final installment of principal or on such
earlier date as the Issuer shall be required to pay the then remaining unpaid
principal amount of this Bond or payment of the Redemption Price payable on any
date as of which
III-5
<PAGE> 179
this Bond has been called for redemption in full, shall be made upon
presentation of this Bond to the office or agency of the Issuer maintained for
such purpose. Payments of interest on this Bond due and payable on each Payment
Date or on any Optional Redemption Date, to the extent this Bond is not being
paid in full, together with any installment of principal of this Bond due and
payable on each Payment Date or the Optional Redemption Date, to the extent not
in full payment of this Bond, shall be made by check mailed to the Person whose
name appears as the registered Holder of this Bond (or one or more Predecessor
Bonds) on the Bond Register as of the last day of the month preceding the month
in which such Payment Date occurs (each a "Record Date").
Checks for amounts which include installments of principal due
on this Bond shall be mailed to the Person entitled thereto at the address of
such Person as it appears on the Bond Register as of the applicable Record Date
without requiring that this Bond be submitted for notation of payment and
checks returned undelivered will be held for payment to the Person entitled
thereto, subject to the terms of the Indenture, at the office or agency in the
United States of America designated by the Issuer for such purpose pursuant to
the Indenture. Any reduction in the principal amount of this Bond (or any one
or more Predecessor Bonds) effected by any payments made on any Payment Date
shall be binding upon all Holders of this Bond and of any Bond issued upon the
registration of transfer hereof or in exchange herefor or in lieu hereof,
whether or not noted hereon.
If funds are expected to be available, as provided in the
Indenture, for payment in full of the then remaining unpaid principal amount of
this Bond on a Payment Date or Optional Redemption Date which is prior to the
Stated Maturity of the final installment of principal hereof, then the Trustee,
on behalf of the Issuer, will notify the Person who was the registered Holder
hereof on the last day of the month prior to the month in which such Payment
Date or optional Redemption Date occurs, and the amount then due and payable
shall, if sufficient funds therefor are available, be payable only upon
presentation of this Bond to the office or agency of the Issuer maintained for
such purpose.
Prior to the payment in full of the Senior Bonds, the failure
of the Issuer to pay when and as due any installment of principal of or
interest (regardless of the lapse of any grace
III-6
<PAGE> 180
period) on any Subordinated Bond shall not constitute an Event of Default under
the Indenture. In addition, notwithstanding any applicable provision of the
Indenture, upon payment in full of the Senior Bonds, the prior occurrence of
any such shortfalls attributable to the Subordinated Bonds, which shortfalls
have previously been paid in full, will not constitute an Event of Default
under the Indenture in respect of the Subordinated Bonds.
If an Event of Default as defined in the Indenture shall occur
and be continuing with respect to the Bonds, the Bonds may become or be
declared due and payable in the manner and with the effect provided in the
Indenture. If any such acceleration of maturity occurs prior to the Stated
Maturity of the final installment of principal of this Bond, the amount payable
to the Holder of this Bond will be equal to the Class Principal Amount of this
Bond on the date this Bond becomes so due and payable, together with accrued
interest. Following the acceleration of the maturity of the Bonds, all amounts
collected as proceeds of the collateral securing the Bonds or otherwise shall
be applied as described in the Indenture. Following such acceleration, interest
on any overdue installments of interest on all Bonds shall be payable at the
rate set forth in the Indenture.
The Bonds are not prepayable or redeemable at the option or
direction of the Issuer except that the Bonds are subject to redemption in
whole, but not in part, at the option of the Issuer on any Payment Date on or
after the Payment Date on which the sum of (i) the Invested Amount, (ii) the
Senior Class Principal Amount and (iii) the Subordinated Class Principal
Amount, after giving effect to payments expected to be made on such Payment
Date, is __% or less of the aggregate of the Stated Principal Balances of the
Pledged Mortgages as of the Cut-Off Date. Any such redemption at the option of
the Issuer shall be at a price equal to 100% of the unpaid principal amount of
the Bonds (including, in the case of the Subordinated Bonds, any unpaid Class
B-1 Principal Carryover Shortfall and/or Class B-2 Principal Carryover
Shortfall) so redeemed plus accrued interest through the last day of the month
preceding the month in which such optional redemption occurs.
As provided in the Indenture and subject to certain
limitations therein set forth, the transfer of this Bond may be registered on
the Bond Register of the Issuer, upon surrender of this Bond for registration
of transfer at the office or agency
III-7
<PAGE> 181
designated by the Issuer pursuant to the Indenture, duly endorsed by, or
accompanied by a written instrument of transfer in form satisfactory to the
Trustee duly executed by the Holder hereof or his attorney duly authorized in
writing, and thereupon one or more new Bonds of the same Class, of authorized
denominations and in the same aggregate initial principal amount, will be
issued to the designated transferee or transferees.
Prior to the due presentment for registration of transfer of
this Bond, the Issuer, the Trustee, and any agent of the Issuer shall treat the
Person in whose name this Bond is registered (i) on any Record Date, for
purposes of making payments, and (ii) on any other date for any other purposes,
as the owner hereof, whether or not this Bond be overdue, and neither the
Issuer, the Trustee nor any such agent shall be affected by notice to the
contrary.
The Indenture permits, with certain exceptions as therein
provided, the amendment thereof and the modification of the rights and
obligations of the Issuer and the rights of the Holders of the Bonds under the
Indenture at any time by the Issuer with the consent of the Holders of Bonds
representing two-thirds of the aggregate Class Principal Amount of the
Controlling Class. The Indenture also contains provisions permitting the
Holders of Bonds representing specified percentages of the aggregate Class
Principal Amount of the Controlling Class on behalf of the Holders of all the
Bonds such Class, to waive compliance by the Issuer with certain provisions of
the Indenture and certain past defaults under the Indenture and their
consequences. Any such consent or waiver by the Holder, at the time of the
giving thereof, of this Bond (or any one or more Predecessor Bonds) shall be
conclusive and binding upon such Holder and upon all future holders of this
Bond and of any Bond issued upon the registration of transfer hereof or in
exchange herefor or in lieu hereof whether or not notation of such consent or
waiver is made upon this Bond. The Indenture also permits the Trustee to amend
or waive certain terms and conditions set forth in the Indenture without the
consent of the Holders of the Bonds of any Series issued thereunder.
[The Subordinated Bonds are "Book Entry Bonds" which will be
available to investors only through the book entry facilities of The Depository
Trust Company, and bond certificates for all Classes of Bonds will be available
only under certain limited circumstances as described in the Indenture.]
III-8
<PAGE> 182
AS PROVIDED IN THE INDENTURE, THIS BOND AND THE INDENTURE
SHALL 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.
No reference herein to the Indenture and no provision of this
Bond or of the Indenture shall alter or impair the obligation of the Issuer,
which is absolute and unconditional to the extent permitted by applicable law,
to pay the principal of, and interest on, this Bond at the times, place and
rate, and in the coin or currency herein prescribed.
III-9
<PAGE> 183
EXHIBIT V
FORM OF BOND INSURANCE POLICY
III-10
<PAGE> 1
EXHIBIT 4.2
SEQUOIA MORTGAGE TRUST _______
COLLATERALIZED MORTGAGE BONDS
AMENDED AND RESTATED DEPOSIT TRUST AGREEMENT
Between
SEQUOIA MORTGAGE FUNDING CORPORATION,
as Depositor
and
________________________,
as Owner Trustee
dated as of ___________ ___, 199__
Sequoia Mortgage Trust 199__-__
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
ARTICLE I
DEFINITIONS
1.01. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ARTICLE II
ORGANIZATION
2.01. Name . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.02. Office . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.03. Purpose and Powers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.04. Appointment of the Owner Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.05. Declaration of Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.06. Issuance of Investor Certificate; Prohibition
of Transfer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.07. Situs of Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2.08. Title to Trust Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
ARTICLE III
CONCERNING THE OWNER
3.01. Ownership Prior to Closing Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
3.02. Prohibition of Disposition by Depositor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
3.03. Lost, Stolen Mutilated or Destroyed Investor
Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
3.04. Representations and Warranties of the Depositor . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
3.05. Covenants of Owner to Indemnify Bond Trustee. . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
ARTICLE IV
PAYMENTS AND DISTRIBUTIONS
4.01. Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
4.02. Method of Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
4.03. Monthly Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
4.04. Reports to Internal Revenue Service and Others . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
ARTICLE V
DUTIES OF THE OWNER TRUSTEE
5.01. Authorization; Issuance of the Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
5.02. Pledge of Collateral . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
</TABLE>
i
<PAGE> 3
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
5.03. In General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
5.04. Action upon Instructions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
5.05. No Duties Except as Specified in Agreement or
Instructions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
5.06. No Action Except Under Specified Documents or
Instructions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
5.07. Further Assurances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
5.08. Restrictions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
5.09. Corporate Existence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13]
ARTICLE VI
CONCERNING THE OWNER TRUSTEE
6.01. Acceptance of Trusts and Duties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
6.02. Furnishing of Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
6.03. Books and Records . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
6.04. Representations and Warranties of the Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
6.05. No Segregation of Moneys; No Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
6.06. Reliance; Advice of Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
6.07. Not Acting in Individual Capacity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
ARTICLE VII
INDEMNIFICATION BY OWNER
7.01. Trust Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
7.02. Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
7.03. Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
7.04. Lien on Trust Estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
ARTICLE VIII
TERMINATION OF TRUST AGREEMENT
8.01. Termination of Trust Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
ARTICLE IX
SUCCESSOR OWNER TRUSTEES AND ADDITIONAL TRUSTEES
9.01. Resignation of Owner Trustee; Appointment
of Successor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
</TABLE>
ii
<PAGE> 4
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
9.02. Appointment of Additional Trustees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
ARTICLE X
MISCELLANEOUS
10.01. Supplements and Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
10.02. No Legal Title to Trust Estate in Owner . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
10.03. Pledge of Collateral by Owner Trustee Is
Binding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
10.04. Limitations on Rights of Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
10.05. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
10.06. Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
10.07. Separate Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
10.08. Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
10.09. Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
10.10. Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
10.11. No Petition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
</TABLE>
iii
<PAGE> 5
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
ARTICLE XI
OFFICERS
11.01. Appointment of Officers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
11.02. Officers to Provide Information to the
Owner Trustee. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
EXHIBIT A FORM OF INVESTOR CERTIFICATE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1
</TABLE>
iv
<PAGE> 6
AMENDED AND RESTATED DEPOSIT TRUST AGREEMENT dated as of
__________, 199_, by and between Sequoia Mortgage Funding Corporation, a
Delaware corporation, and _________________________________________, a Delaware
banking corporation.
WHEREAS, the Depositor and the Owner Trustee have entered into
a Trust Agreement, dated as of __________, 199_ (the "Trust Agreement"); and
WHEREAS, the Depositor and the Owner Trustee desire to amend
and restate the Trust Agreement in its entirety.
NOW THEREFORE, in consideration of the premises and mutual
agreements herein contained, the Trust Agreement is hereby amended and restated
in its entirety as follows:
ARTICLE I
DEFINITIONS
1.01. Definitions. For all purposes of this Agreement, the
following terms shall have the meanings set forth below:
"AGREEMENT" or "DEPOSIT TRUST AGREEMENT" means this Amended
and Restated Deposit Trust Agreement and any amendments or modifications
hereof.
"AUTHORIZED OFFICER" means any officer of the Owner Trustee
who is authorized to act for the Owner Trustee and whose name appears on a list
of such authorized officers furnished by the Owner Trustee, as such list may be
amended or supplemented from time to time, and any Officer of the Trust who is
authorized to act pursuant to Section 11.01 of this Agreement and whose name
appears on a list furnished by the Depositor to the Owner Trustee and the Bond
Trustee, as such list may be amended or supplemented from time to time.
"BANK" means ________________________ in its individual
capacity and not as Owner Trustee.
<PAGE> 7
"BOND AGREEMENTS" mean the Indenture, the Master Servicing
Agreement, the Bonds and the Underwriting Agreement.
"BONDHOLDERS" mean the holders from time to time of the Bonds.
"BONDS" mean the Sequoia Mortgage Trust _____ Collateralized
Mortgage Bonds issued by the Trust under the Indenture.
"BUSINESS DAY" means any day that is not (i) a Saturday or a
Sunday, or (ii) a day on which banking institutions in the City of New York,
the State of California or the city of Wilmington, Delaware, are authorized or
obligated by law or executive order to be closed.
"BUSINESS TRUST STATUTE" means Chapter 38 of Title 12 of the
Delaware Code, 12 Del.C. Section 3801 et seq, as the same may be amended from
time to time.
"CERTIFICATE DISTRIBUTION AMOUNT" has the meaning specified in
Section 3.09(c).
"CERTIFICATEHOLDER" or "HOLDER" means the Person in whose name
an Investor Certificate is registered in the Certificate Register except that,
any Investor Certificate registered in the name of the Issuer, the Owner
Trustee or the Indenture Trustee or any Affiliate of any of them shall be
deemed not to be outstanding and the registered Holder will not be considered a
Certificateholder or a Holder for purposes of giving any request, demand,
authorization, direction, notice, consent or waiver under the Indenture or the
Trust Agreement provided that, in determining whether the Indenture Trustee or
the Owner Trustee shall be protected in relying upon any such request, demand,
authorization, direction, notice, consent or waiver, only Certificates that the
Indenture Trustee or the Owner Trustee knows to be so owned shall be so
disregarded. Owners of Investor Certificates that have been pledged in
satisfaction of the Indenture Trustee or the Owner Trustee, as the case may be,
the pledgee's right so to act with respect to such Investor Certificates and
that the pledgee is not the Issuer, any other
2
<PAGE> 8
obligor upon the Investor Certificates or any affiliate of any of the foregoing
Persons.
"CERTIFICATE OF TRUST" means the Certificate of Trust to be
filed by the Owner Trustee for the Trust pursuant to Section 3810(a) of the
Business Trust Statute.
"CERTIFICATE PAYING AGENT" means __________________.
"CERTIFICATE REGISTER" means the register maintained by the
Certificate Registrar in which the Certificate Registrar shall provide for the
registration of Certificates and of transfers and exchanges of Certificates.
"CERTIFICATE REGISTRAR" means, initially, ________________, in
its capacity as Certificate Registrar, or any successor to the Trustee in such
capacity.
"CLOSING DATE" has the meaning specified in the Indenture.
"COLLATERAL" means all of the Trust Estate, including the
Pledged Mortgages, rights to the Master Servicing Agreement, the Insurance
Policies, the Bond Account and the Distribution Account, that is from time to
time pledged as security for the Bonds under the Indenture.
"DEPOSITOR" means Sequoia Mortgage Funding Corporation, a
Delaware corporation.
"EXPENSES" has the meaning specified in Section 7.02.
"FISCAL YEAR" means the period from each January 1 to and
including the following December 31.
"INDENTURE" means the indenture between the Trust and the Bond
Trustee, providing for the issuance of the Bonds.
"INDENTURE TRUSTEE" means _________________________________,
a banking corporation organized and existing under
3
<PAGE> 9
the laws of _________________________________, as the trustee designated under
the Indenture.
"INITIAL PRINCIPAL BALANCE" means, with respect to the
Investor Certificates, $__________.
"INVESTOR CERTIFICATES" means the equity certificates each
representing undivided beneficial interests in the Trust in substantially the
form attached hereto as Exhibit A.
"MANAGEMENT AGREEMENT" means the agreement between the Trust
and Redwood Trust, Inc., substantially in the form annexed as Exhibit B hereto,
as such agreement may be amended or supplemented.
"MANAGER" means the Person acting in such capacity pursuant to
the Management Agreement or its successors or assigns.
"MASTER SERVICER" means ____________________________________,
a ________ corporation, which shall manage and supervise the administration and
servicing of the Pledged Mortgages securing the Bonds and the Servicers of such
Pledged Mortgages, or its successors or assigns.
"MASTER SERVICING AGREEMENT" means the Master Servicing
Agreement among the Trust, the Indenture Trustee and the Master Servicer,
pursuant to which the Master Servicer will be obligated to manage and supervise
the administration and servicing of the Pledged Mortgages by the Servicers, as
such agreement may be amended or supplemented from time to time as permitted
thereby.
"NET PROCEEDS FROM THE BONDS" means the proceeds received by
the Trust from the issue and sale of the Bonds, less the costs and expenses
incurred in connection with the issue and sale of the Bonds.
"OFFICER" means those officers referred to in Article XII.
4
<PAGE> 10
"OPERATIVE AGREEMENTS" mean the Indenture, the Underwriting
Agreement, the Management Agreement, the Master Servicing Agreement, the
Investor Certificate, the Mortgage Loan Purchase Agreement and each other
document contemplated by any of the foregoing or this Agreement to which the
Owner Trustee or the Trust is a party.
"OWNER TRUSTEE" means ________________________, not in its
individual capacity but solely as trustee under this Agreement, and any
successor trustee hereunder.
"PERIODIC FILINGS" mean any filings or submissions that the
Trust is required to make with respect to the Bonds, including without
limitation filings pursuant to the Securities and Exchange Act of 1934, as
amended, and filings with any stock exchange or self-regulatory organization.
"PERSON" means any individual, corporation, partnership, joint
venture, association, joint stock company, trust, unincorporated organization
or government or any agency or political subdivision thereof.
"PERCENTAGE INTEREST" means, with respect to any Investor
Certificate, the percentage obtained by dividing the denomination specified on
such Investor Certificate by the Initial Principal Balance of the Investor
Certificates.
"PLEDGED MORTGAGES" means those [fixed/floating] rate,
[fully-amortizing] conventional mortgage loans secured by first liens on one-
to four-family residences as are Granted to the Indenture Trustee pursuant to
the Indenture (including any REO Property).
"PROPOSER" means the Certificateholder making a written
request pursuant to Section 5.07.
"QUALIFIED REIT SUBSIDIARY" means any subsidiary of Redwood
which satisfies the requirements of Section 856(i)(2) of the Internal Revenue
Code of 1986, as amended.
5
<PAGE> 11
"REDWOOD" means Redwood Trust, Inc., a Maryland corporation.
"SECRETARY OF STATE" means the Secretary of State of the State
of Delaware.
"SERVICER" means any Person with which the Master Servicer has
entered into a Servicing Agreement for the servicing of all or a portion of the
Pledged Mortgages pursuant to Section 3(b) of the Master Servicing Agreement.
"SERVICING AGREEMENT" means any servicing agreement between
the Master Servicer and the related Servicer relating to servicing and/or
administration of certain Pledged Mortgages as provided in Section 3(b) of the
Master Servicing Agreement.
"SINGLE CERTIFICATE" means an Investor Certificate in the
denomination of $1,000.
"TRUST" means the trust established by this Agreement.
"TRUST ESTATE" means all right, title and interest of the
Owner Trustee, subject to the lien of the Indenture, in and to the Collateral
and any other property contributed by the Depositor, including without
limitation all distributions, payments, proceeds, insurance proceeds or
requisition and indemnity payments with respect thereto. Notwithstanding the
foregoing, "Trust Estate" shall not include any amounts paid or payable as
compensation or indemnity to the Bank.
"UNDERWRITING AGREEMENT" means the underwriting agreement
relating to the sale of the Bonds substantially in the form filed as an exhibit
to the registration statement with respect to the Bonds.
6
<PAGE> 12
ARTICLE II
ORGANIZATION
2.01. Name. The trust established under this Agreement may
be referred to as "Sequoia Mortgage Trust 199_-_" in which name the Owner
Trustee and the Officers may conduct the activities contemplated hereby.
2.02. Office. The office of the Trust shall be in care of
the Owner Trustee, at the address set forth in Section 10.05 or at such other
address within the State of Delaware as the Owner Trustee may designate by
notice to the Certificateholders.
2.03. Purpose and Powers. The purpose of the Trust is to
issue and administer the Bonds and the Certificates, to receive and own the
Collateral, to maintain and administer the Collateral, to pledge the Collateral
to secure the Bonds pursuant to the Indenture and to distribute the Net
Proceeds from the Bonds to the Depositor, all for the benefit of the
Certificateholders. The Trust shall not have power to perform any act or
engage in any business whatsoever except for the foregoing and any activity
that is both necessary to the foregoing and within the contemplation of the
Indenture.
2.04. Appointment of the Owner Trustee. The Depositor hereby
appoints the Bank as trustee of the Trust effective as of the date hereof, to
have all the rights, powers and duties set forth herein and in the Business
Trust Statute. The Owner Trustee acknowledges receipt in trust from the
Depositor, as of the date hereof, of the sum of Ten Dollars ($10.00)
constituting the initial Trust Estate.
The Owner Trustee is hereby authorized to execute the Bond
Agreements and the Management Agreement on behalf of the Trust. The Owner
Trustee is hereby authorized to take all actions required or permitted to be
taken by it as Issuer (as defined in the Indenture) under the Indenture and is
hereby directed to comply with the terms of the Indenture. Effective as of the
date of execution, the Owner Trustee shall have all the rights, powers and
duties set forth herein and in the Business
7
<PAGE> 13
Trust Statute with respect to accomplishing the purposes of the Trust.
2.05. Initial Capital Contribution; Declaration of Trust.
The Depositor hereby sells, assigns, transfers, conveys and sets over to the
Trust, as of the date hereof, the sum of $10. The Owner Trustee hereby
acknowledges receipt in trust from the Depositor, as of the date hereof, of the
foregoing contribution, which shall constitute the initial corpus of the Trust
and shall be deposited in the Certificate Distribution Account. The Owner
Trustee also acknowledges on behalf of the Trust receipt of the Pledged
Mortgage pursuant to Section 3 of the Mortgage Loan Purchase Agreement, which
shall constitute the Trust Estate. The Owner Trustee hereby declares that it
will hold the Trust Estate upon the trusts set forth herein and for the use and
benefit of the Certificateholders. It is the intention of the parties hereto
that the Trust constitute a business trust under the Business Trust Statute and
that this Agreement constitute the governing instrument of such business trust.
No later than the Closing Date, the Owner Trustee shall cause the filing of the
Certificate of Trust with the Secretary of State. Except as otherwise provided
in this Trust Agreement, the rights of the Certificateholders will be those of
equity owners of the Trust. Effective as of the date hereof, the Owner Trustee
shall have all rights, powers and duties set forth herein and in the Business
Trust Statute with respect to accomplishing the purposes of the Trust.
2.06. Issuance of Initial Investor Certificate. (a) Upon the
formation of the Trust by the contribution by the Depositor pursuant to Section
2.04 and until the conveyance of
8
<PAGE> 14
the Pledged Mortgages pursuant to Section 3 of the Mortgage Loan Purchase
Agreement and the issuance of the Investor Certificates, and thereafter except
as otherwise permitted hereunder, the Depositor shall be the sole
Certificateholder.
2.07. Liability of the Holders of the Investor Certificates.
The Holders of the Investor Certificates shall be jointly and severally liable
directly to and shall indemnify any injured party for all losses, claims,
damages, liabilities and expenses of the Trust (including Expenses, to the
extent not paid out of the Trust Estate); provided however, that the Holders of
the Investor Certificates shall not be liable for payments required to be made
on the Bonds or the Investor Certificates, or for any losses incurred by a
Certificateholder in the capacity of an investor in the Investor Certificates
or a Bondholder in the capacity of an investor in the Bonds. In addition, any
third party creditors of the Trust, including the Insurer (other than in
connection with the obligations described in the following sentence for which
the Holders of the Investor Certificates shall not be liable) shall be deemed
third party beneficiaries of this paragraph. The Holders of the Investor
Certificates shall be liable for any entity level taxes imposed on the Trust.
The obligations of the Holders of the Investor Certificates under this
paragraph shall be evidenced by the Investor Certificates.
2.08. Situs of Trust. The Trust will be located and
administered in the State of Delaware. All bank accounts maintained by the
Owner Trustee on behalf of the Trust shall be located in the State of Delaware.
The only office of the Trust will be as described in Section 2.02 hereof.
2.09. Title to Trust Property. Title to all of the Trust
Estate shall be vested in the Trust until this Agreement terminates pursuant to
Article VIII hereof; provided, however, that if the laws of any jurisdiction
require that title to any part of the Trust Estate be vested in the trustee of
the Trust, then title to that part of the Trust Estate shall be deemed to be
vested in the Owner Trustee or any co-trustee or separate trustee, as the case
may be, appointed pursuant to Article VI of this Agreement.
9
<PAGE> 15
2.10. Representations and Warranties of the Depositor. The
Depositor hereby represents and warrants to the Owner Trustee as follows:
(a) Upon the receipt of the Trust Estate by the Owner
Trustee on behalf of the Trust under this Agreement, the Trust will
own the Trust Estate free and clear of any lien (other than the lien
of the Indenture) and the Owner Trustee will have the right on behalf
of the Trust to grant and deliver the Collateral to the Indenture
Trustee in accordance with the Indenture and Section 5.01 of this
Agreement.
(b) This Agreement has been duly and validly authorized,
executed and delivered by, and constitutes a valid and binding
agreement of, the Depositor, enforceable in accordance with its terms,
subject, as to enforceability of remedies, to applicable bankruptcy,
insolvency, reorganization or other laws affecting creditors' rights
generally and to general principles of equity and equitable remedies
(regardless of whether the enforceability of such remedies is
considered in a proceeding at law or in equity).
2.11. Tax Treatment. It is the intention of the parties
hereto that, for federal and state income and state and local franchise tax
purposes, the Trust shall not be treated as (i) an association subject
separately to taxation as a corporation (other than as a "qualified REIT
subsidiary" as defined in Section 856(i) of the Code), (ii) a "publicly traded
partnership" as defined in Treasury Regulation Section 1.7704-1 or (iii) a
"taxable mortgage pool" as defined in Section 7701(i) of the code. It is also
the intention of the parties hereto that (i) the Bonds qualify under applicable
tax laws as indebtedness secured by the Trust Estate and (ii) the Trust formed
hereby be disregarded as an entity separate from the Depositor unless and until
the date when either (a) there is more than one Investor Certificateholder or
(b) any Series of Bonds is recharacterized as an equity interest in the Trust
for federal income tax purposes. In such event, the Trust is intended to be
classified as a partnership for federal income tax purposes. The Depositor,
the Owner Trustee and the Manager and any holder of an Investor Certificate
agree to report the transactions contemplated hereby in accordance with the
above stated intentions unless and until determined to the contrary by an
applicable taxing authority, and the provisions of this Agreement shall be
interpreted to further the above stated intentions.
2.12. Investment Company. Neither the Company nor any holder
of an Investor Certificate shall take any action which
10
<PAGE> 16
would cause the Trust to become an "investment company" which would be required
to register under the Investment Company Act.
ARTICLE III
THE INVESTOR CERTIFICATES
3.01. The Investor Certificates. The Investor Certificates
shall be issued in the form of one or more Investor Certificates each
representing not less than a 10% Percentage Interest. The Investor
Certificates shall initially be registered in the name of the Depositor. The
Investor Certificates shall be executed on behalf of the Trust by manual or
facsimile signature of an authorized officer of the Owner Trustee and
authenticated in the manner provided in Section 3.02. Investor Certificates
bearing the manual or facsimile signatures of individuals who were, at the time
when such signatures shall have been affixed, authorized to sign on behalf of
the Trust, shall be validly issued and entitled to the benefit of this Trust
Agreement, notwithstanding that such individuals or any of them shall have
ceased to be so authorized prior to the authentication and delivery of such
Investor Certificates or did not hold such offices at the date of
authentication and delivery of such Investor Certificates. A Person shall
become a Certificateholder and shall be entitled to the rights and subject to
the obligations of a Certificateholder hereunder upon such Person's acceptance
of an Investor Certificate duly registered in such Person's name pursuant to
Section 3.03.
3.02. Authentication of Investor Certificates. The Owner
Trustee shall cause all Investor Certificates issued hereunder to be executed
and authenticated on behalf of the Trust, authenticated and delivered to or
upon the written order of the Depositor, signed by its chairman of the board,
its president or any vice president, without further corporate action by the
Depositor, in authorized denominations. No Investor Certificate shall entitle
its Holder to any benefit under this Trust Agreement or be valid for any
purpose unless there shall appear on such Investor Certificate a certificate of
authentication substantially in the form set forth in Exhibit A, executed by
the Owner Trustee or the Certificate Registrar by
11
<PAGE> 17
manual signature; such authentication shall constitute conclusive evidence that
such Investor Certificate shall have been duly authenticated and delivered
hereunder. All Investor Certificates shall be dated the date of their
authentication.
3.03. Registration of and Limitations on Transfer and
Exchange of Investor Certificates. The Certificate Registrar shall keep or
cause to be kept, a Certificate Register in which, subject to such reasonable
regulations as it may prescribe, the Certificate Registrar shall provide for
the registration of Investor Certificates and of transfers and exchanges of
Investor Certificates as herein provided. _____________________ shall be the
initial Certificate Registrar. If the Certificate Registrar resigns or is
removed, the Owner Trustee shall appoint a successor Certificate Registrar.
Subject to satisfaction of the conditions set forth below with
respect to the Investor Certificate, upon surrender for registration of
transfer of any Investor Certificate at the office or agency maintained
pursuant to Section 3.09, the Owner Trustee or the Certificate Registrar shall
execute, authenticate and deliver in the name of the designated transferee or
transferees, one or more new Investor Certificates in authorized denominations
of a like aggregate amount dated the date of authentication by the Owner
Trustee or the Certificate Registrar. At the option of a Holder, Investor
Certificates may be exchanged for other Investor Certificates of authorized
denominations of a like aggregate amount upon surrender of the Investor
Certificates to be exchanged at the office or agency maintained pursuant to
Section 3.09.
Every Investor Certificate presented or surrendered for
registration of transfer or exchange shall be accompanied by a written
instrument of transfer in form satisfactory to the Certificate Registrar duly
executed by the Holder or such Holder's attorney duly authorized in writing.
Each Investor Certificate surrendered for registration of transfer or exchange
shall be cancelled and subsequently disposed of by the Certificate Registrar in
accordance with its customary practice.
12
<PAGE> 18
No service charge shall be made for any registration of
transfer or exchange of Investor Certificates, but the Owner Trustee or the
Certificate Registrar may require payment of a sum sufficient to cover any tax
or governmental charge that may be imposed in connection with any transfer or
exchange of Investor Certificates.
No Person shall become a Certificateholder until it shall
establish its non-foreign status by submitting to the Certificate Paying Agent
an IRS Form W-9 and the Certificate of Non-Foreign Status set forth in Exhibit
D hereto.
No transfer of an Investor Certificate shall be made unless
such transfer is exempt from the registration requirements of the Securities
Act and any applicable state securities laws or is made in accordance with said
Act and laws. In the event of any such transfer, the Certificate Registrar or
the Depositor shall prior to such transfer require the transferee to execute
(i) (a) an investment letter (in substantially the form attached hereto as
Exhibit C) in form and substance reasonably satisfactory to the Certificate
Registrar and the Depositor certifying to the Trust, the Owner Trustee, the
Certificate Registrar and the Depositor that such transferee is a "qualified
institutional buyer" under Rule 144A under the Securities Act, or (b) an
investment letter (in substantially the form attached hereto as Exhibit E),
acceptable to and in form and substance reasonably satisfactory to the
Certificate Registrar and the Depositor, which investment letters shall not be
an expense of the Trust, the Owner Trustee, the Certificate Registrar, the
Master Servicer or the Depositor, or (c) a certificate (in substantially the
form attached hereto as Exhibit F) in form and substance reasonably
satisfactory to the Certificate Registrar and the Depositor certifying that
such transferee is a Person involved in the organization or operation of the
Trust or an affiliate of such a Person within the meaning of Rule 3a-7 of the
Investment Company Act of 1940, as amended (including but not limited to the
Company) and (ii) the Certificate of Non-Foreign Status (in substantially the
form attached hereto as Exhibit F) acceptable to and in form and substance
reasonably satisfactory to the Certificate Registrar and the Depositor, which
certificate shall not be an expense of the Trust, the Owner Trustee, the
13
<PAGE> 19
Certificate Registrar or the Depositor. The Holder of an Investor Certificate
desiring to effect such transfer shall, and does hereby agree to, indemnify the
Trust, the Owner Trustee, the Certificate Registrar, the Master Servicer and
the Depositor against any liability that may result if the transfer is not so
exempt or is not made in accordance with such federal and state laws.
No transfer of an Investor Certificate shall be made unless
the Certificate Registrar shall have received either (i) a representation
letter from the proposed transferee of such Investor Certificate to the effect
that such proposed transferee is not an employee benefit plan subject to the
fiduciary responsibility provisions of ERISA, or Section 4975 of the Code, or a
Person acting on behalf of any such plan or using the assets of any such plan,
which representation letter shall not be an expense of the Trust, Owner
Trustee, the Certificate Registrar, the Master Servicer or the Depositor or
(ii) in the case of any such certificate presented for registration in the name
of an employee benefit plan subject to the fiduciary responsibility provisions
of ERISA, or Section 4975 of the Code (or comparable provisions of any
subsequent enactments), or a trustee of any such plan, or any other Person who
is using the assets of any such plan to effect such acquisition, an Opinion of
Counsel, in form and substance reasonably satisfactory to, and addressed and
delivered to, the Trust, the Certificate Registrar and the Depositor, to the
effect that the purchase or holding of such Investor Certificate will not
result in the assets of the Trust Estate being deemed to be "plan assets" and
subject to the fiduciary responsibility provisions of ERISA or the prohibited
transaction provisions of the Code, will not constitute or result in a
prohibited transaction within the meaning of Section 406 or Section 407 of
ERISA or Section 4975 of the Code, and will not subject the Trust, the Owner
Trustee, the Certificate Registrar or the Depositor to any obligation or
liability including obligations or liabilities under ERISA or Section 4975 of
the Code) in addition to those explicitly undertaken in this Trust Agreement
which Opinion of Counsel shall not be an expense of the Trust, the Owner
Trustee, the Certificate Registrar or Depositor.
14
<PAGE> 20
As long as two or more Persons are holders of Investor
Certificates, the Investor Certificates may only be transferred in accordance
with the following provisions: before any Investor Certificates may be
transferred to any Person, the Owner Trustee shall have received the consent to
such transfer by holder of Investor Certificates representing ownership of more
than 50% of the beneficial interest in the Trust, excluding for this purpose
the beneficial interest represented by the Investor Certificates owned by the
transferor or (unless the transferor and its Affiliates are the only holders of
Investor Certificates) any Affiliate thereof; provided, however, that no
consent shall be required to a transfer of Investor Certificates to the
Depositor upon the Closing Date.
No offer, sale, transfer or other disposition (including
pledge) of any Investor Certificate shall be made to any transferee unless such
transferee certifies to the Owner Trustee that the net worth of such transferee
equals or exceeds $500,000 other than its interest in the Investor
Certificates. The foregoing requirement shall not apply to the Depositor so
long as it is the Holder of 100% of the Investor Certificates, but shall apply
to the Depositor upon any sale of a portion of the Investor Certificates.
No offer, sale, transfer or other disposition (including any
pledge or sale under a repurchase transaction) of any Investor Certificate
shall be made to any transferee unless, prior to such disposition, the proposed
transferor delivers to the Owner Trustee an Opinion of Counsel, rendered by a
law firm generally recognized to be qualified to opine concerning the tax
aspects of asset securitization, to the effect that such transfer (including
any disposition permitted following any default under any pledge or repurchase
transaction) will not cause the Trust to be (i) treated as an association
taxable as a corporation for federal income tax purposes (other than a
Qualified REIT Subsidiary), (ii) taxable as a taxable mortgage pool as defined
in Section 7701(i) of the Code or (iii) taxable as a "publicly traded
partnership" as defined in Treasury Regulation section 1.7704-1.
Notwithstanding the foregoing, the provisions of this paragraph shall not apply
to the initial transfer of the Investor Certificates to the Depositor.
15
<PAGE> 21
No offer, sale, transfer or other disposition (including
pledge) of any Investor Certificate shall be made to any affiliate of the
Depositor or the Issuer, other than the initial transfer of the Investor
Certificate to the Depositor.
3.04. Lost, Stolen, Mutilated or Destroyed Investor
Certificates. If (a) a mutilated Investor Certificate is surrendered to the
Certificate Registrar, or (b) the Certificate Registrar receives evidence to
its satisfaction that the Investor Certificate has been destroyed, lost or
stolen, and there is delivered to the Certificate Registrar proof of ownership
satisfactory to the Certificate Registrar, together with such security or
indemnity as required by the Certificate Registrar and the Owner Trustee to
save each of them harmless, then in the absence of notice to the Certificate
Registrar or the Owner Trustee that such Investor Certificate has been acquired
by a bona fide purchaser, the Owner Trustee shall execute on behalf of the
Trust, and the Owner Trustee or the Certificate Registrar shall authenticate
and deliver, in exchange for or in lieu of any such mutilated, destroyed, lost
or stolen Investor Certificates, a new Investor Certificate of like tenor and
denomination. In connection with the issuance of any new Investor Certificate
under this Section 3.04, the Owner Trustee or the Certificate Registrar may
require the payment of a sum sufficient to cover any expenses of the Owner
Trustee or the Certificate Registrar (including fees and expenses of counsel)
and any tax or other governmental charge that may be imposed in connection
therewith. Any duplicate Investor Certificate issued pursuant to this Section
3.04 shall constitute conclusive evidence of ownership in the Trust, as if
originally issued, whether or not the lost, stolen or destroyed Investor
Certificate shall be found at any time.
3.05. Persons Deemed Certificateholders. Prior to due
presentation of a Certificate for registration of transfer, the Owner Trustee,
the Certificate Registrar or any Certificate Paying Agent may treat the Person
in whose name any Investor Certificate is registered in the Certificate Register
as the owner of such Investor Certificate for the purpose of receiving
distributions pursuant to Section 5.02 and for all other purposes whatsoever,
and none of the Trust, the Owner
16
<PAGE> 22
Trustee, the Certificate Registrar or any Certificate Paying Agent shall be
bound by any notice to the contrary.
3.06. Access to List of Certificateholders' Names and
Addresses. The Certificate Registrar shall furnish or cause to be furnished to
the Depositor or the Owner Trustee, within 15 days after receipt by the
Certificate Registrar of a written request therefor from the Depositor or the
Owner Trustee, a list, in such form as the Depositor or the Owner Trustee, as
the case may be, may reasonably require, of the names and addresses of the
Certificateholders as of the most recent Record Date. Each Holder, by
receiving and holding an Investor Certificate, shall be deemed to have agreed
not to hold any of the Trust, the Depositor, the Certificate Registrar or the
Owner Trustee accountable by reason of the disclosure of its name and address,
regardless of the source from which such information was derived.
3.07. Covenants of Certificateholders to Indemnify Indenture
Trustee. The Certificateholders shall be liable to the Indenture Trustee for
the payment of the Indenture Trustee's fees, indemnity and expenses pursuant to
Section 6.07 of the Indenture in the event that the Trust fails to pay such
fees, indemnity and expenses but only to the extent payable out of amounts
actually received by the Certificateholders from distributions of the Trust
pursuant to Section 4.01 hereof made on or before the date of demand for such
payment by the Indenture Trustee.
3.08. Maintenance of Office or Agency. The Owner Trustee on
behalf of the Trust, shall maintain in ___________, Delaware, an office or
offices or agency or agencies where Investor Certificates may be surrendered
for registration of transfer or exchange and where notices and demands to or
upon the Owner Trustee in respect of the Investor Certificates and the
Operative Documents may be served. The Owner Trustee initially designates the
Corporate Trust Office as its office for such purposes. The Owner Trustee
shall give prompt written notice to the Depositor and the Certificateholders of
any change in the location of the Certificate Register or any such office or
agency.
17
<PAGE> 23
3.09. Certificate Paying Agent. (a) The Certificate Paying
Agent shall make distributions to Certificateholders from the Certificate
Distribution Account on behalf of the Trust in accordance with the provisions
of the Investor Certificates and Section 4.01 hereof from payments remitted to
the Certificate Paying Agent by the Trustee pursuant to Section 3.01 of the
Indenture. The Trust hereby appoints _________________________ as Certificate
Paying Agent and _______________________________ hereby accepts such
appointment and further agrees that it will be bound by the provisions of this
Trust Agreement relating to the Certificate Paying Agent and shall:
(i) hold all sums held by it for the payment of
amounts due with respect to the Investor Certificates in trust for the
benefit of the Persons entitled thereto until such sums shall be paid
to such Persons or otherwise disposed of as herein provided;
(ii) give the Owner Trustee notice of any default by
the Trust of which it has actual knowledge in the making of any
payment required to be made with respect to the Investor Certificates;
(iii) at any time during the continuance of any such
default, upon the written request of the Owner Trustee forthwith pay
to the Owner Trustee on behalf of the Trust all sums so held in Trust
by such Certificate Paying Agent;
(iv) immediately resign as Certificate Paying Agent
and forthwith pay to the Owner Trustee on behalf of the Trust all sums
held by it in trust for the payment of Investor Certificates if at any
time it ceases to meet the standards under this Section 3.09 required
to be met by the Certificate Paying Agent at the time of its
appointment;
(v) comply with all requirements of the Code with
respect to the withholding from any payments made by it on any
Investor Certificates of any applicable withholding taxes imposed
thereon and with respect to any applicable reporting requirements in
connection therewith;
18
<PAGE> 24
(vi) deliver to the Owner Trustee a copy of the
report to Bondholders prepared with respect to each Payment Date by
the Master Servicer pursuant to Section 8.06 of the Indenture; and
(vii) not institute bankruptcy proceedings against
the Issuer in connection with this Trust Agreement.
(b) The Trust may revoke such power and remove the
Certificate Paying Agent if it determines in its sole discretion that the
Certificate Paying Agent shall have failed to perform its obligations under
this Trust Agreement in any material respect. _________________________________
shall be permitted to resign as Certificate Paying Agent upon 30 days written
notice to the Owner Trustee; provided _________________________________________
is also resigning as Paying Agent under the Indenture at such time. In the
event that ___________________________________________ shall no longer be the
Certificate Paying Agent under this Trust Agreement and Paying Agent under the
Indenture, the Owner Trustee shall appoint a successor to act as Certificate
Paying Agent (which shall be a bank or trust company) and which shall also be
the successor Paying Agent under the Indenture. The Owner Trustee shall cause
such successor Certificate Paying Agent or any additional Certificate Paying
Agent appointed by the Owner Trustee to execute and deliver to the Owner Trustee
an instrument to the effect set forth in this Section 3.09 as it relates to the
Certificate Paying Agent. The Certificate Paying Agent shall return all
unclaimed funds to the Trust and upon removal of a Certificate Paying Agent such
Certificate Paying Agent shall also return all funds in its possession to the
Trust. The provisions of Sections 6.01, 6.04, 6.06 and 7.01 shall apply to the
Certificate Paying Agent to the extent applicable. Any reference in this
Agreement to the Certificate Paying Agent shall include any co-paying agent
unless the context requires otherwise.
(c) The Certificate Paying Agent shall establish and maintain
with itself a trust account (the "Certificate Distribution Account") in which
the Certificate Paying Agent shall, deposit, on the same day as it is received
from the Trustee, each remittance received by the Certificate Paying Agent
19
<PAGE> 25
with respect to payments made pursuant to the Indenture. The Certificate
Paying Agent shall make all distributions to Investor Certificates, from moneys
on deposit in the Certificate Distribution Account.
(d) The Certificate Paying Agent shall be paid by the
Indenture Trustee.
ARTICLE IV
PAYMENTS AND DISTRIBUTIONS
4.01. Payments. (a) Any amounts paid to the Owner Trustee
by the Indenture Trustee free and clear of the lien of the Indenture shall be
applied in the following order:
(i) to pay any amounts owing to the Owner Trustee or the
Bank, as the case may be, as then due under this Agreement;
(ii) to pay fees then due under the Management Agreement;
and
(iii) to pay any operating expenses of the Trust.
Any sums remaining after such application shall be distributed monthly to the
Certificateholders pursuant to Section 3(h)(viii) of the Master Servicing
Agreement no later than the ____________ day of each [month] or, if such day is
not a Business Day, on the next succeeding Business Day. All Net Proceeds from
the Bonds shall be distributed to, or at the direction of, the Depositor in
immediately available funds.
All payments to be made under this Agreement by the Owner
Trustee shall be made only from the income and proceeds, including Net Proceeds
From the Bonds, of the Trust Estate and only to the extent that the Owner
Trustee has received such income or proceeds. The Bank shall not be liable to
the Owner, the Indenture Trustee or the Manager for any amounts payable
pursuant to this Section 4.01 except to the extent that non-
20
<PAGE> 26
payment is due to the Owner Trustee's acts or omissions amounting to willful
misconduct or gross negligence.
(b) In the event that any withholding tax is imposed on the
distributions (or allocations of income) to the Certificateholders, such tax
shall reduce the amount otherwise distributable to the Certificateholders in
accordance with this Section 4.01. The Certificate Paying Agent is hereby
authorized and directed to retain or cause to be retained from amounts
otherwise distributable to the Certificateholders sufficient funds for the
payment of any tax that is legally owed by the Trust (but such authorization
shall not prevent the Owner Trustee from contesting any such tax in appropriate
proceedings, and withholding payment of such tax, if permitted by law, pending
the outcome of such proceedings). The amount of any withholding tax imposed
with respect to a Certificateholder shall be treated as cash distributed to
such Certificateholder at the time it is withheld by the Certificate Paying
Agent and remitted to the appropriate taxing authority. If there is a
possibility that withholding tax is payable with respect to a distribution
(such as a distribution to a non-U.S. Certificateholder), the Certificate
Paying Agent may in its own discretion withhold such amounts in accordance with
this paragraph (b).
(c) Distributions to Certificateholders shall be subordinated to the
creditors of the Trust, including the Bondholders.
4.02. Method of Payment. Subject to Section 8.01(c),
distributions required to be made to the Certificateholders on any Payment Date
as provided in Section 4.01 shall be made to the Certificateholders of record
on the preceding Record Date either by, in the case of any Certificateholder
owning Certificates having a Percentage Interest of 100%, wire transfer, in
immediately available funds, to the account of such Holder at a bank or other
entity having appropriate facilities therefor, if such Certificateholder shall
have provided to the Certificate Registrar appropriate written instructions at
least five Business Days prior to such Payment Date or, if not, by check mailed
to such Certificateholder at the address of such Holder appearing in the
Certificate Register.
21
<PAGE> 27
4.03. Tax Returns. The Manager shall (a) maintain (or cause
to be maintained) the books of the Trust on a calendar year basis using the
accrual method of accounting, (b) deliver (or cause to be delivered) to each
Certificateholder as may be required by the Code and applicable Treasury
Regulations, such information as may be required to enable each
Certificateholder to prepare its federal and state income tax returns, (c)
prepare and file or cause to be prepared and filed such tax returns relating to
the Trust as may be required by the Code and applicable Treasury Regulations
(making such elections as may from time to time be required or appropriate
under any applicable state or federal statutes, rules or regulations) and (d)
collect or cause to be collected any withholding tax as described in and in
accordance with Section 4.01 of this Trust Agreement with respect to income or
distributions to Certificateholders and prepare or cause to be prepared the
appropriate forms relating thereto. The Owner Trustee shall sign all tax and
information returns prepared or caused to be prepared by the Manager
pursuant to this Section 4.03 at the request of the Manager, and in
doing so shall rely entirely upon, and shall have no liability for information
or calculations provided by, the Master Servicer or the Manager.
[If the Trust is classified as a partnership for federal income tax purposes,
the Manager shall cause the Trust to (i) maintain capital accounts and make
partnership allocations in accordance with Section 704 of the code and (ii) file
Form 8832 with the Internal Revenue Service and make an election for the Trust
be classified as a partnership for federal income tax purposes. The holder of
the Investor Certificate shall be designated as the "tax matters partner" of the
Trust]
4.04. Statements to Certificateholders. On each Payment
Date, the Certificate Paying Agent shall send to each Certificateholder the
statement or statements provided to the Owner Trustee and the Certificate
Paying Agent by the Master Servicer pursuant to Section 8.06 of the Indenture
with respect to such Payment Date.
4.05. Reports to Internal Revenue Service and Others. The
Trust will (i) cause to be prepared all Periodic Filings, (ii) make such
elections and file such tax returns relating to the Trust as the Depositor may
direct in a notice delivered to the Owner Trustee in accordance with Section
10.05, and (iii) cause to be mailed to the Depositor any or all of such reports
and tax returns within 90 days of the end of the Fiscal Year; provided,
however, that the Trust shall be deemed to be in compliance with this provision
by its execution of the Management Agreement.
22
<PAGE> 28
ARTICLE V
AUTHORITY AND DUTIES OF THE OWNER TRUSTEE; ACTION BY CERTIFICATEHOLDERS
5.01. General Authority. The Owner Trustee is authorized and
directed to execute and deliver the Operative Documents to which the Trust is
to be a party and each certificate or other document attached as an exhibit to
or contemplated by the Operative Documents to which the Trust is to be a party
and any amendment or other agreement or instrument described herein, as
evidenced conclusively by the Owner Trustee's execution thereof. In addition
to the foregoing, the Owner Trustee is authorized, but shall not be obligated,
to take all actions required of the Trust pursuant to the Operative Documents.
5.02. General Duties. It shall be the duty of the Owner
Trustee to discharge (or cause to be discharged) all of its responsibilities
pursuant to the terms of this Trust Agreement and the Operative Documents to
which the Trust is a party and to administer the Trust in the interest of the
Certificateholders, subject to the Operative Documents and in accordance with
the provisions of this Trust Agreement.
5.03. Action Upon Instruction. (a) Subject to Article V and
in accordance with the terms of the Operative Documents, the Certificateholders
may by written instruction direct the Owner Trustee in the management of the
Trust. Such direction may be exercised at any time by written instruction of
the Certificateholders pursuant to Article V.
(b) Notwithstanding the foregoing, the Owner Trustee
shall not be required to take any action hereunder or under any Operative
Document if the Owner Trustee shall have reasonably determined, or shall have
been advised by counsel, that such action is likely to result in liability on
the part of the Owner Trustee or is contrary to the terms hereof or of any
Operative Document or is otherwise contrary to law.
(c) Whenever the Owner Trustee is unable to decide
between alternative courses of action permitted or required by
23
<PAGE> 29
the terms of this Trust Agreement or under any Operative Document, or in the
event that the Owner Trustee is unsure as to the application of any provision
of this Trust Agreement or any Operative Document or any such provision is
ambiguous as to its application, or is, or appears to be, in conflict with any
other applicable provision, or in the event that this Trust Agreement permits
any determination by the Owner Trustee or is silent or is incomplete as to the
course of action that the Owner Trustee is required to take with respect to a
particular set of facts, the Owner Trustee shall promptly give notice (in such
form as shall be appropriate under the circumstances) to the Certificateholders
(with a copy to the Insurer) requesting instruction as to the course of action
to be adopted, and to the extent the Owner Trustee acts in good faith in
accordance with any written instruction of the Certificateholders received, the
Owner Trustee shall not be liable on account of such action to any Person. If
the Owners Trustee shall not have received appropriate instruction within 10
days of such notice (or within such shorter period of time as reasonably may be
specified in such notice or may be necessary under the circumstances) it may,
but shall be under no duty to, take or refrain from taking such action not
inconsistent with this Trust Agreement or the Operative Documents, as it shall
deem to be in the best interests of the Certificateholders, and the Owner
Trustee shall have no liability to any Person for such action or inaction.
5.04. No Duties Except as Specified under Specified Documents
or in Instructions. The Owner Trustee shall not have any duty or obligation to
manage, make any payment with respect to, register, record, sell, dispose of,
or otherwise deal with the Trust Estate, or to otherwise take or refrain from
taking any action under, or in connection with, any document contemplated
hereby to which the Owner Trustee is a party, except as expressly provided (i)
in accordance with the powers granted to and the authority conferred upon the
Owner Trustee pursuant to this Trust Agreement, (ii) in accordance with the
Operative Documents and (iii) in accordance with any document or instruction
delivered to the Owner Trustee pursuant to Section 5.03; and no implied duties
or obligations shall be read into this Trust Agreement or any Operative
Document against the Owner Trustee. The Owner Trustee shall have no
responsibility for filing any financing or
24
<PAGE> 30
continuation statement in any public office at any time or to otherwise perfect
or maintain the perfection of any security interest or lien granted to it
hereunder or to prepare or file any Securities and Exchange Commission filing
for the Trust or to record this Trust Agreement or any Operative Document. The
Owner Trustee nevertheless agrees that it will, at its own cost and expense,
promptly take all action as may be necessary to discharge any liens on any part
of the Trust Estate that result form actions by, or claims against the Owner
Trustee that are not related to the ownership or the administration of the
Trust Estate.
5.05. Restrictions. (a) The Owner Trustee shall not take
any action (x) that is inconsistent with the purposes of the Trust set forth in
Section 2.03 or (y) that, to the actual knowledge of the Owner Trustee, would
result in the Trust becoming taxable as a corporation (other than as a
Qualified REIT Subsidiary) for federal income tax purposes or (z) would result
in the amendment or modification of the Operative Documents or this Trust
Agreement without the prior written consent of the Insurer. The
Certificateholders shall not direct the Owner Trustee to take action that would
violate the provisions of this Section 5.05.
(b) The Owner Trustee shall not convey or transfer any of
the Trust's properties or assets, including those included in the Trust Estate,
to any person unless (a) it shall have received an Opinion of Counsel to the
effect that such transaction will not have any material adverse tax consequence
to the Trust or any Certificateholder and (b) such conveyance or transfer shall
not violate the provisions of Section [3.09(a)] of the Indenture.
5.06. Prior Notice to Certificateholders with Respect to
Certain Matters. With respect to the following matters, the Owner Trustee
shall not take action unless at least 30 days before the taking of such action,
the Owner Trustee shall have notified the Certificateholders in writing of the
proposed action and the Certificateholders shall not have notified the Owner
Trustee in writing prior to the 30th day after such notice is given that such
Certificateholders have withheld consent or provided alternative direction:
25
<PAGE> 31
(a) the initiation of any claim or lawsuit by the Trust
(except claims or lawsuits brought in connection with the collection of cash
distributions due and owning under the Pledged Mortgages) and the compromise of
any action, claim or lawsuit brought by or against the Trust (except with
respect to the aforementioned claims or lawsuits for collection of cash
distributions due and owning under the Pledged Mortgages);
(b) the election by the Trust to file an amendment to the
Certificate of Trust (unless such amendment is required to be filed under the
Business Trust Statute);
(c) the amendment of the Indenture by a supplemental
indenture in circumstances where the consent of any Bondholder is required;
(d) the amendment of the Indenture by a supplemental
indenture in circumstances where the consent of any Bondholder is not required
and such amendment materially adversely affects the interests of the
Certificateholders; or
(e) the appointment pursuant to the Indenture of a
successor Bond Registrar, Paying Agent or Indenture Trustee or pursuant to this
Trust Agreement of a successor Certificate Registrar or Certificate Paying
Agent or the consent to the assignment by the Bond Registrar, Paying Agent,
Indenture Trustee, Certificate Registrar or Certificate Paying Agent of its
obligations under the Indenture or this Trust Agreement, as applicable.
5.07. Action by Certificateholders with Respect to Certain
Matters. (a) The Owner Trustee shall not have the power, except upon the
direction of the Certificateholders, and with the consent of the Insurer, to
(i) remove the Master Servicer under the Master Servicing Agreement pursuant to
Sections 7(a) thereof or (ii) except as expressly provided in the Operative
Documents, sell the Pledged Mortgages after the termination of the Indenture.
The Owner Trustee shall take the actions referred to in the preceding sentence
only upon written instructions signed by the Certificateholders and with the
consent of the Insurer.
26
<PAGE> 32
(b) Upon the written request of any Certificateholder (a
"Proposer"), the Owner Trustee shall distribute promptly to all
Certificateholders any request for action or consent of Certificateholders
submitted by such Proposer, with a copy to the Manager and the Insurer. The
Owner Trustee shall provide a reasonable method for collecting responses to
such request and shall tabulate and report the results thereof to the
Certificateholders, the Manager and the Insurer. The Owner Trustee shall have
no responsibility or duty to determine if any such proposed action or consent
is permitted under the terms of this Trust Agreement or applicable law.
5.08. Action by Certificateholders with Respect to
Bankruptcy. The Owner Trustee shall not have the power to commence a voluntary
proceeding in bankruptcy relating to the Trust without the unanimous prior
approval of all Certificateholders and with the consent of the Insurer, the
Bondholders and the Owner Trustee and the delivery to the Owner Trustee by each
such Certificateholder of a certificate certifying that such Certificateholder
reasonably believes that the Trust is insolvent. This paragraph shall survive
for one year and one day following termination of this Trust Agreement.
5.09. Restrictions on Certificateholders' Power. The
Certificateholders shall not direct the Owner Trustee to take or to refrain
from taking any action if such action or inaction would be contrary to any
obligation of the Trust or the Owner Trustee under this Trust Agreement or any
of the Operative Documents or would be contrary to Section 2.03 nor shall the
Owner Trustee be obligated to follow any such direction, if given.
5.10. Majority Control. Except as expressly provided herein,
any action that may be taken by the Certificateholders under this Trust
Agreement may be taken by the Holders of Investor Certificates evidencing not
less than a majority of the outstanding Percentage Interests of the Investor
Certificates. Except as expressly provided herein, any written notice of the
Certificateholders delivered pursuant to this Trust Agreement shall be
effective if signed by Holders of Investor Certificates evidencing not less
than a majority of the outstanding Percentage
27
<PAGE> 33
Interests of the Investor Certificates at the time of the delivery of such
notice.
5.11. Optional Redemption. Upon receipt of written
instructions provided to the Owner Trustee by the Holder or Holders of 100% of
the Investor Certificates, the Owner Trustee shall cause the Issuer to redeem
the Bonds in accordance with Section 10.01 of the Indenture and shall provide
all necessary notices on behalf of the Issuer to effect the foregoing, provided
that such Holder or Holders shall deposit with the Indenture Trustee an amount
equal to the aggregate redemption price specified under Section 10.01 of the
Indenture, which shall be applied by the Indenture Trustee solely to make such
redemption payments. The Owner Trustee shall not have the power to exercise
the right of the Issuer to redeem the Bonds pursuant to Section 10.01 of the
Indenture, except as provided above.
ARTICLE VI
CONCERNING THE OWNER TRUSTEE
6.01. Acceptance of Trusts and Duties. The Owner Trustee
accepts the trusts hereby created and agrees to perform the same but only upon
the terms of this Agreement. The Owner Trustee also agrees to disburse all
moneys actually received by it constituting part of the Trust Estate upon the
terms of this Agreement. The Bank shall not be answerable or accountable under
any circumstances, except (i) for its own wilful misconduct or gross
negligence, (ii) in the case of the inaccuracy of any representation or
warranty contained in Section 6.04, (iii) for liabilities arising from the
failure by the Bank to perform obligations expressly undertaken by it in the
last sentence of Section 5.04(a), or (iv) for taxes, fees or other charges on
based on or measured by any fees, commissions or compensation received by the
Bank in connection with any of the transactions contemplated by this Agreement,
the Operative Agreements or the Bonds. In particular, but not by way of
limitation:
(a) The Bank shall not be liable for any error of
judgment, not constituting gross negligence, made in good faith by a
responsible officer of the Owner Trustee;
28
<PAGE> 34
(b) The Bank shall not be liable with respect to
any action taken or omitted to be taken by the Owner Trustee in good
faith in accordance with the instructions of the Certificateholders;
(c) No provision of this Agreement shall require
the Bank to expend or risk funds or otherwise incur any financial
liability in the performance of any of the Owner Trustee's rights or
powers hereunder if the Bank shall have reasonable grounds for
believing that repayment of such funds or adequate indemnity against
such risk or liability is not reasonably assured or provided to it;
(d) Under no circumstance shall the Bank be
liable for indebtedness evidenced by any Bond;
(e) The Bank shall not be liable with respect to
any action taken or omitted to be taken by the Manager under the
Management Agreement and the Bank shall not be obligated to perform
any obligations or duties under this Agreement or the Bond Agreements
which are to be performed by the Manager under the Management
Agreement;
(f) The Bank shall not be responsible for or in
respect of the recitals herein, the validity or sufficiency of this
Agreement or for the due execution hereof by the Depositor or for the
form, character, genuineness, sufficiency, value or validity of any
Collateral or for or in respect of the validity or sufficiency of the
Indenture, and the Bank shall in no event assume or incur any
liability, duty or obligation to any Bondholder, the Depositor or to
the Certificateholders, other than as expressly provided for herein;
and
(g) Under no circumstances shall the Bank be
responsible for the action or inaction of the Officers, the Manager or
the Master Servicer, nor shall the Bank be responsible for monitoring
the performance of the Officers' duties hereunder, the Manager's
duties under the Management Agreement or the Master Servicer's duties
under the Master Servicing Agreement.
29
<PAGE> 35
6.02. Furnishing of Documents. The Owner Trustee will
furnish to the Certificateholders and the Manager, promptly upon receipt
thereof, duplicates or copies of all reports, notices, requests, demands,
certificates, financial statements and any other instruments furnished to the
Owner Trustee hereunder or under the Bond Agreements unless the
Certificateholders and the Manager shall have already received the same.
6.03. Books and Records. The Owner Trustee shall keep or
cause to be kept proper books of record and account of all the transactions
under this Agreement, including a record of the name and address of the Holders
of the Investor Certificates.
6.04. Representations and Warranties of the Bank. The Bank
represents and warrants as follows:
(a) the Bank is a banking corporation duly
created, validly existing and in good standing under the laws of the
State of Delaware and has the full corporate power, authority and
legal right to execute, deliver and perform this Agreement, the
Indenture and each of the other Operative Agreements to which it or
the Owner Trustee, as the case may be, is a party; the execution and
delivery by the Bank of this Agreement, and by the Owner Trustee of
the Indenture and each of the other Operative Agreements to which it
is a party and the performance by the Bank or the Owner Trustee, as
the case may be, of its obligations under this Agreement, the
Indenture and each of the other Operative Documents to which it is a
party have been duly authorized by all necessary corporate action on
the part of the Bank and, assuming the due authorization, execution
and delivery thereof by the other parties thereto, constitutes a
legal, valid and binding obligation of the Bank or the Owner Trustee,
as the case may be, enforceable against the Bank or the Owner Trustee,
as the case may be, in accordance with its terms, except that (a) the
enforceability thereof may be limited by bankruptcy, insolvency,
moratorium, receivership and other similar laws relating to creditors'
rights generally and (b) the remedy of specific performance and
injunctive and other forms of equitable relief may be
30
<PAGE> 36
subject to equitable defenses and to the discretion of the court
before which any proceeding therefor may be brought;
(b) neither the Bank nor anyone authorized to act
on its behalf has offered any interest in and to the Trust for sale
to, or solicited any offer to acquire any of the same from, anyone;
(c) the execution and delivery by the Bank of,
and the performance by it and the Owner Trustee, as the case may be,
of their obligations under this Agreement, the Indenture and the other
Operative Documents to which they are a party are not in violation of
any indenture, agreement or other instrument, license, judgment or
order applicable to the Bank;
(d) the execution and delivery by the Bank of,
and its and the Owner Trustee's performance of their obligations
under, this Agreement, the Indenture and the other Operative Documents
to which they are a party do not require the consent or approval of,
the giving of notice to, or the registration with, or the taking of
any other action with respect to, any governmental authority or agency
of the State of Delaware (except as may be required by the Delaware
securities law or the Business Trust Statute or as may be required to
enforce the lien of the Indenture); and
(e) no litigation is pending or, to the best of
the Bank's knowledge, threatened against the Bank or the Owner
Trustee, as the case may be, that would materially and adversely
affect the execution, delivery or enforceability of this Agreement,
the Investor Certificates, the Bonds, the Indenture or any of the
other Operative Documents to which it is a party, or the ability of
the Bank or the Owner Trustee, as the case may be, to perform any of
its obligations thereunder in accordance with the terms thereof.
6.05. No Segregation of Moneys; No Interest. Except as
otherwise provided herein or in the Indenture, moneys received by the Owner
Trustee hereunder need not be segregated in any manner except to the extent
required by law and may be deposited
31
<PAGE> 37
under such general conditions as may be prescribed by law, and neither the
Owner Trustee nor the Bank shall be liable for any interest thereon.
6.06. Reliance; Advice of Counsel. (a) The Owner Trustee
shall incur no liability to anyone in acting upon any signature, instrument,
notice, resolution, request, consent, order, certificate, report, opinion, bond
or other document or paper believed by it to be genuine and believed by it to
be signed by the proper party or parties. The Owner Trustee may accept a
certified copy of a resolution of the board of directors or other governing
body of any corporate party as conclusive evidence that such resolution has
been duly adopted by such body and that the same is in full force and effect.
As to any fact or matter the manner of ascertainment of which is not
specifically prescribed herein, the Owner Trustee may for all purposes hereof
rely on a certificate, signed by the president or any vice president and by the
treasurer or any assistant treasurer or the secretary or any assistant
secretary of the relevant party, as to such fact or matter, and such
certificate shall constitute full protection to the Owner Trustee for any
action taken or omitted to be taken by it in good faith in reliance thereon.
(b) In its exercise or administration of the trusts and
powers hereunder, including its obligations under Section 5.02(b) and any
duties or obligations under the Indenture and under the other Operative
Documents, the Owner Trustee may employ agents and attorneys and enter into
agreements (including the Management Agreement and the Master Servicing
Agreement) with any of them, and the Owner Trustee shall not be answerable for
the default or misconduct of any such agents or attorneys if such agents or
attorneys shall have been selected by the Owner Trustee with reasonable care.
If, and to the extent, the Depositor shall have failed to reimburse the Trustee
for all reasonable expenses incurred pursuant to this Section 6.06(b), as
provided in Section 7.01, the Owner Trustee may seek reimbursement therefor
from the Trust Estate.
(c) In the administration of the trusts hereunder or in
the performance of its duties and obligations under any of the Bond Agreements,
the Owner Trustee may consult with counsel,
32
<PAGE> 38
accountants and other skilled Persons to be selected and employed by it, and
the Owner Trustee shall not be liable for anything done, suffered or omitted in
good faith by it in accordance with the reasonable advice or opinion of any
such counsel, accountants or other skilled Persons and not contrary to this
Agreement. If, and to the extent, the Depositor shall have failed to reimburse
the Trustee for all reasonable expenses incurred pursuant to this Section
6.06(c), as provided in Section 7.01, the Owner Trustee may seek reimbursement
therefor from the Trust Estate.
6.07. Not Acting in Individual Capacity. Except as provided
in this Article VI, in accepting the trusts hereby created the Owner Trustee
acts solely as trustee hereunder and not in its individual capacity, and all
persons having any claim against the Owner Trustee by reason of the
transactions contemplated by the Bond Agreements shall look only to the Trust
Estate for payment or satisfaction thereof.
6.08. Corporate Existence. Subject to Section 9.01, the Bank
will keep in full effect its existence, rights and franchises as a bank and
trust company under the laws of the State of Delaware.
ARTICLE VII
INDEMNIFICATION BY DEPOSITOR
7.01. Trust Expenses. The Depositor shall pay (or reimburse
the Bank for) all reasonable expenses of the Owner Trustee hereunder,
including, without limitation, the reasonable compensation, expenses and
disbursements of such agents, representatives, experts and counsel as the Owner
Trustee may employ in connection with the exercise and performance of its
rights and duties under the Bond Agreements.
7.02. Indemnification. The Depositor hereby agrees to assume
liability for, and indemnify the Bank and its successors, assigns, agents and
servants, against and from, any and all liabilities, obligations, losses,
damages, taxes, claims, actions, suits, costs, expenses and disbursements
(including reasonable legal fees and expenses) of any kind and nature
33
<PAGE> 39
whatsoever (collectively, "Expenses") which may be imposed on, incurred by or
asserted at any time against the Bank (whether or not indemnified against by
other parties) in any way relating to or arising out of this Agreement, any
Bond Agreement, the Collateral, the administration of the Trust Estate or the
action or inaction of the Owner Trustee hereunder, except only that the
Depositor shall not be required to indemnify the Bank for Expenses arising or
resulting from any of the matters described in the third sentence of Section
6.01. The indemnities contained in this Section 7.02 shall survive the
termination of this Agreement.
7.03. Compensation. The Bank shall receive as compensation
for the Owner Trustee's services hereunder such ordinary fees as are fair,
reasonable and customary for the performance of such services and as may
heretofore and from time to time hereafter be separately agreed upon between
the Depositor and the Owner Trustee. The Bank shall be compensated reasonably
for any extraordinary services rendered by the Owner Trustee hereunder.
7.04. Lien on Trust Estate. The Bank shall have a lien on
the Trust Estate for any compensation or indemnity due hereunder, such lien to
be subject only to prior liens of the Indenture. The Bank shall not bring any
proceedings to foreclose on such lien if and to the extent the Trust Estate is
subject to the lien of the Indenture.
ARTICLE VIII
TERMINATION OF TRUST AGREEMENT
8.01. Termination of Trust Agreement. (a) This Agreement
and the trusts created hereby shall terminate and the Trust Estate shall,
subject to the Indenture and Section 4.01, be distributed to the
Certificateholders, and this Agreement shall be of no further force or effect,
upon the earlier of (i) the sale or other final disposition by the Indenture
Trustee or the Owner Trustee, as the case may be, of all the Trust Estate and
the final distribution by the Indenture Trustee or the Owner Trustee, as the
case may be, of all moneys or other property or
34
<PAGE> 40
proceeds of the Trust Estate in accordance with the terms of the Indenture and
Section 4.01, and (ii) the expiration of 21 years from the death of the
survivor of the descendants of Joseph P. Kennedy, the late ambassador of the
United States to the Court of St. James's, living on the date of this
Agreement. The bankruptcy of any Certificateholder shall not operate to
terminate this Agreement, nor entitle such Certificateholder's legal
representatives to claim an accounting or to take any action or proceeding in
any court for a partition or winding up of the Trust Estate, nor otherwise
affect the rights, obligations and liabilities of the parties hereto.
(b) Except as provided in Section 8.01(a), neither the
Depositor nor the Certificateholders shall be entitled to revoke the Trust
established hereunder.
(c) Notice of any termination of the Trust, specifying
the Payment Date upon which Certificateholders shall surrender their Investor
Certificates to the Certificate Paying Agent for payment of the final
distribution and cancellation, shall be given by the Certificate Paying Agent
by letter to Certificateholders and the Insurer mailed within five Business
Days of receipt of notice of the final payment on the Bonds from the Indenture
Trustee, stating (i) the Payment Date upon or with respect to which final
payment of the Investor Certificates shall be made upon presentation and
surrender of the Investor Certificates at the office of the Certificate Paying
Agent therein designated, (ii) the amount of any such final payment and (iii)
that the Record Date otherwise applicable to such Payment Date is not
applicable, payments being made only upon presentation and surrender of the
Investor Certificates at the office of the Certificate Payment Agent therein
specified. The Certificate Paying Agent shall give such notice to the Owner
Trustee and the Certificate Registrar at the time such notice is given to
Certificateholders. Upon presentation and surrender of the Investor
Certificates, the Certificate Paying Agent shall cause to be distributed to
Certificateholders amounts distributable on such Payment Date pursuant to
Section 4.01.
In the event that all of the Certificateholders shall not
surrender their Investor Certificates for cancellation within
35
<PAGE> 41
six months after the date specified in the above mentioned written notice, the
Certificate Paying Agent shall give a second written notice to the remaining
Certificateholders to surrender their Investor Certificates for cancellation
and receive the final distribution with respect thereto. Subject to applicable
laws with respect to escheat of funds, if within one year following the Payment
Date on which final payment of the Investor Certificates was to have been made
pursuant to Section 3.03 of the Indenture, all the Investor Certificates shall
not have been surrendered for cancellation, the Certificate Paying Agent may
take appropriate steps, or may appoint an agent to take appropriate steps, to
contact the remaining Certificateholders concerning surrender of their Investor
Certificates, and the cost thereof shall be paid out of the funds and other
assets that shall remain subject to this Trust Agreement. Any funds remaining
in the Certificate Distribution Account after exhaustion of such remedies shall
be distributed by the Certificate Paying Agent to the Holders of the Investor
Certificates.
(d) Upon the winding up of the Trust and its termination,
the Owner Trustee shall cause the Certificate of Trust to be cancelled by
filing a certificate of cancellation with the Secretary of State in accordance
with the provisions of Section 3810 of the Business Trust Statute.
ARTICLE IX
SUCCESSOR OWNER TRUSTEES AND ADDITIONAL TRUSTEES
9.01. Resignation of Owner Trustee; Appointment of Successor.
(a) The Owner Trustee may resign at any time without cause by giving at least
60 days' prior written notice to the Owner, such resignation to be effective on
the acceptance of appointment by a successor Owner Trustee under (b) below. In
addition, the Owner Trustee may be removed (i) at any time by the Depositor,
without cause, by an instrument in writing delivered to the Owner Trustee, such
removal to be effective upon the acceptance of appointment by a successor Owner
Trustee under Section 9.01(b) or (ii) by action of the Certificateholders
holding Percentage Interests aggregating at least 66 2/3%. In
36
<PAGE> 42
case of the resignation or removal of the Owner Trustee, the Depositor may
appoint a successor Owner Trustee by an instrument signed by the Depositor. If
a successor Owner Trustee shall not have been appointed within 30 days after
the giving of written notice of such resignation or the delivery of the written
instrument with respect to such removal, the Owner Trustee or the Depositor may
apply to any court of competent jurisdiction to appoint a successor Owner
Trustee to act until such time, if any, as a successor shall have been
appointed as above provided. Any successor Owner Trustee so appointed by such
court shall immediately and without further act be superseded by any successor
Owner Trustee appointed as above provided within one year from the date of the
appointment by such court.
(b) Any successor Owner Trustee, however appointed, shall
execute and deliver to the predecessor Owner Trustee an instrument accepting
such appointment, and thereupon such successor Owner Trustee, without further
act, shall become vested with all the estates, properties, rights, powers,
duties and trusts of the predecessor Owner Trustee in the trusts hereunder with
like effect as if originally named the Owner Trustee herein; but nevertheless,
upon the written request of such successor Owner Trustee, such predecessor
Owner Trustee shall execute and deliver an instrument (presented to it in
execution form) transferring to such successor Owner Trustee, upon the trusts
herein expressed, all the estates, properties, rights, powers, duties and
trusts of such predecessor Owner Trustee, and such predecessor Owner Trustee
shall duly assign, transfer, deliver and pay over to such successor Owner
Trustee all moneys or other property then held or subsequently received by such
predecessor Owner Trustee upon the trusts herein expressed.
(c) Any successor Owner Trustee, however appointed, shall
be a bank or trust company satisfying the provisions of Section 3807(a) of the
Business Trust Statute and having a combined capital and surplus of at least
$50,000,000, if there be such an institution willing, able and legally
qualified to perform the duties of the Owner Trustee hereunder upon reasonable
or customary terms.
37
<PAGE> 43
(d) Any corporation into which the Owner Trustee may be
merged or converted or with which it may be consolidated, or any corporation
resulting from any merger, conversion or consolidation to which the Owner
Trustee shall be a party, or any corporation to which substantially all the
corporate trust business of the Owner Trustee may be transferred, shall,
subject to the terms of (c) above, be the Owner Trustee under this Agreement
without further act.
(e) Upon the happening of any of the events described in
this Section 9.01, the successor Owner Trustee shall cause an amendment to the
Certificate of Trust to be filed with the Secretary of State, in accordance
with the provisions of Section 3810 of the Business Trust Statute, indicating
the change with respect to the Owner Trustee's identity.
9.02. Appointment of Additional Trustees. At any time or
times for the purpose of meeting any legal requirements of any jurisdiction in
which any part of the Trust Estate may at the time be located, the Owner
Trustee, by an instrument in writing, may appoint one or more individuals or
corporations to act as separate trustee or separate trustees of all or any part
of the Trust Estate to the full extent that a local law makes it necessary for
such separate trustee or separate trustees to act alone. No trustee shall be
liable for the acts or omissions of any other trustee appointed hereunder.
ARTICLE X
MISCELLANEOUS
10.01. Supplements and Amendments. At the written request of
the Depositor, this Agreement (other than Sections 8.01 and 10.02 and this
Section 10.01) shall be amended by a written instrument signed by the Owner
Trustee and the Depositor, but if in the opinion of the Owner Trustee any
instrument required to be so executed adversely affects any right, duty or
liability of, or immunity or indemnity in favor of, the Owner Trustee under
this Agreement or any of the documents contemplated hereby to which the Owner
Trustee is a party, or would cause or result in any conflict with or breach of
any terms, conditions or
38
<PAGE> 44
provisions of, or default under, the charter documents or bylaws of the Bank or
any Operative Agreement, the Owner Trustee may in its sole discretion decline
to execute such instrument.
10.02. No Legal Title to Trust Estate in Certificateholders.
The Certificateholders shall not have legal title to any part of the Trust
Estate and shall only be entitled to receive distributions with respect to its
undivided beneficial interest therein pursuant to Section 4.01 once all amounts
then owing with respect to the Bonds have been paid in accordance with the
Indenture. No transfer, by operation of law of any right, title and interest
of the Certificateholders in and to its undivided beneficial interest in the
Trust Estate or hereunder shall operate to terminate this Agreement or the
trusts hereunder or entitle any successor transferee to an accounting or to the
transfer to it of legal title to any part of the Trust Estate.
10.03. Pledge of Collateral by Owner Trustee Is Binding. The
pledge of the Collateral to the Indenture Trustee by the Trust made under the
Indenture and pursuant to the terms of this Agreement shall bind the
Certificateholders and shall be effective to transfer or convey the rights of
the Trust and the Certificateholders in and to such Collateral to the extent
set forth in the Indenture. No purchaser or other grantee shall be required to
inquire as to the authorization, necessity, expediency or regularity of such
pledge or as to the application of any proceeds with respect thereto by the
Owner Trustee.
10.04. Limitations on Rights of Others. Nothing in this
Agreement, whether express or implied (except for Section 7.04), shall be
construed to give to any Person other than the Trust and the Certificateholders
any legal or equitable right in the Trust Estate or under or in respect of this
Agreement or any covenants, conditions or provisions contained herein;
provided, however, that the parties hereto acknowledge and agree that the
Indenture Trustee is a third-party beneficiary under Section 3.05 hereof.
10.05. Notices. Unless otherwise expressly specified or
permitted by the terms hereof, all notices shall be in writing and delivered by
hand or mailed by certified mail, postage
39
<PAGE> 45
prepaid, if to the Owner Trustee or the Trust, addressed to it at
_______________________________________________________________________________
__________________________________, Attention: Corporate Trust Administration or
to such other address as the Owner Trustee may have set forth in a written
notice to the Certificateholders and the Depositor addressed to it at the
address set forth for such Certificateholders in the register maintained by the
Owner Trustee. Whenever any notice in writing is required to be given by the
Owner Trustee or the Manager, such notice shall be deemed given and such
requirement satisfied if such notice is mailed by certified mail, postage
prepaid, addressed as provided above.
10.06. Severability. Any provision of this Agreement which
is prohibited or unenforceable in any jurisdiction shall, as to such
jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof, and any
such prohibition or unenforceability in any jurisdiction shall not invalidate
or render unenforceable such provision in any other jurisdiction.
10.07. Separate Counterparts. This Agreement may be executed
by the parties hereto in separate counterparts, each of which when so executed
and delivered shall be an original, but all such counterparts shall together
constitute but one and the same instrument.
10.08. Successors and Assigns. All representations,
warranties, covenants and agreements contained herein shall be binding upon,
and inure to the benefit of, the Owner Trustee and its successors and assigns
and the Depositor and each Certificateholder and its respective successors, all
as herein provided. Any request, notice, direction, consent, waiver or other
instrument or action by any Certificateholder shall bind the successors of such
Certificateholder.
10.09. Headings. The headings of the various Articles and
Sections herein are for convenience of reference only and shall not define or
limit any of the terms or provisions hereof.
40
<PAGE> 46
10.10. Governing Law. This Agreement shall in all respects
be governed by, and construed in accordance with, the laws of the State of
Delaware without reference to the conflict of laws provisions thereof,
including all matters of construction, validity and performance.
10.11. No Petition. The Owner Trustee, by entering into this
Agreement, the Certificateholders, by accepting the Investor Certificates, and
the Indenture Trustee and each Bondholder, by accepting the benefits of this
Agreement, hereby covenant and agree that they will not at any time institute
against the Depositor or the Issuer, or join in any institution against the
Depositor or the Issuer of, any bankruptcy proceedings under any United States
federal or state bankruptcy or similar law in connection with any obligations
relating to the Investor Certificate, the Bonds, this Agreement or any of the
Operative Agreements.
ARTICLE XI
OFFICERS
11.01. Appointment of Officers. The Trust may have one or
more Officers who are hereby empowered to take and are responsible for
performing all ministerial duties on behalf of the Trust pursuant to this
Agreement and Operative Agreements, including, without limitation, the
execution of the Officers' Certificate (as defined in the Indenture), the
Issuer Order (as defined in the Indenture), the Issuer Request (as defined in
the Indenture), the annual compliance report required under Section 3.10 of the
Indenture, and annual reports, documents and other reports which the Trust is
required to file with the Securities and Exchange Commission pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended. Each
of the Chairman of the Board, the Chief Executive Officer, the President, each
Senior Vice President and each Vice President of the Depositor is hereby
appointed as an Officer of the Trust. The Depositor shall promptly deliver to
the Owner Trustee and the Indenture Trustee a list of its officers who shall
become the Officers of the Trust pursuant to this Section 11.01.
41
<PAGE> 47
11.02. Officers to Provide Information to the Owner Trustee.
It shall be the duty of each Officer to keep the Owner Trustee reasonably
informed as to material events relating to the Trust, including, without
limitation, all claims pending or threatened against the Trust, the purchase
and sale of any material portion of the Trust Estate and the execution by such
Officer on behalf of the Trust of any material agreements or instruments.
42
<PAGE> 48
IN WITNESS WHEREOF, the parties hereto have caused this
Deposit Trust Agreement to be duly executed by their respective officers
hereunto duly authorized, as of the day and year first above written.
,
---------------------------------------
not in its individual capacity
but solely as Owner Trustee
By:
------------------------------------
Its:
-----------------------------------
SEQUOIA MORTGAGE FUNDING
CORPORATION
By:
------------------------------------
Its:
-----------------------------------
43
<PAGE> 49
EXHIBIT A
[Form of Investor Certificate]
[Face]
THIS INVESTOR CERTIFICATE HAS NOT BEEN AND WILL NOT BE REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE AND MAY
NOT BE RESOLD OR TRANSFERRED UNLESS IT IS REGISTERED PURSUANT TO SUCH ACT AND
LAWS OR IS SOLD OR TRANSFERRED IN TRANSACTIONS WHICH ARE EXEMPT FROM
REGISTRATION UNDER SUCH ACT AND UNDER APPLICABLE STATE LAW AND IS TRANSFERRED
IN ACCORDANCE WITH THE PROVISIONS OF SECTION 3.03 OF THE TRUST AGREEMENT
REFERRED TO HEREIN.
NO TRANSFER OF THIS INVESTOR CERTIFICATE SHALL BE MADE UNLESS THE CERTIFICATE
REGISTRAR SHALL HAVE RECEIVED EITHER (I) A REPRESENTATION LETTER FROM THE
TRANSFEREE OF THIS INVESTOR CERTIFICATE TO THE EFFECT THAT SUCH TRANSFEREE IS
NOT AN EMPLOYEE BENEFIT PLAN SUBJECT TO THE FIDUCIARY RESPONSIBILITY PROVISIONS
OF THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED ("ERISA"),
OR SECTION 4975 OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE "CODE"),
OR A PERSON ACTING ON BEHALF OF ANY SUCH PLAN OR USING THE ASSETS OF ANY SUCH
PLAN, OR (II) IF THIS INVESTOR CERTIFICATE IS PRESENTED FOR REGISTRATION IN THE
NAME OF A PLAN SUBJECT TO THE FIDUCIARY RESPONSIBILITY PROVISIONS OF ERISA, OR
SECTION 4975 OF THE CODE (OR COMPARABLE PROVISIONS OF ANY SUBSEQUENT
ENACTMENTS), OR A TRUSTEE OF ANY SUCH PLAN, OR ANY OTHER PERSON WHO IS USING
THE ASSETS OF ANY SUCH PLAN TO EFFECT SUCH ACQUISITION, AN OPINION OF COUNSEL
TO THE EFFECT THAT THE PURCHASE OR HOLDING OF THIS INVESTOR CERTIFICATE WILL
NOT RESULT IN THE ASSETS OF THE TRUST ESTATE BEING DEEMED TO BE "PLAN ASSETS"
AND SUBJECT TO THE FIDUCIARY RESPONSIBILITY PROVISIONS OF ERISA OR THE
PROHIBITED TRANSACTION PROVISIONS OF THE CODE, WILL NOT CONSTITUTE OR RESULT IN
A PROHIBITED TRANSACTION WITHIN THE MEANING OF SECTION 406 OR SECTION 407 OF
ERISA OR SECTION 4975 OF THE CODE, AND WILL NOT SUBJECT THE OWNER TRUSTEE OR
THE DEPOSITOR TO ANY OBLIGATION OR LIABILITY.
NO TRANSFER OF THIS INVESTOR CERTIFICATE SHALL BE MADE UNLESS THE CERTIFICATE
REGISTRAR SHALL HAVE RECEIVED A CERTIFICATE OF
A-1
<PAGE> 50
NON-FOREIGN STATUS CERTIFYING AS TO THE TRANSFEREE'S STATUS AS A U.S. PERSON OR
CORPORATION UNDER U.S. LAW.
THIS CERTIFICATE DOES NOT REPRESENT AN INTEREST IN OR OBLIGATION OF THE
DEPOSITOR, THE MASTER SERVICER, THE INDENTURE TRUSTEE, OR THE OWNER TRUSTEE OR
ANY OF THEIR RESPECTIVE AFFILIATES, EXCEPT AS EXPRESSLY PROVIDED IN THE TRUST
AGREEMENT OR THE OPERATIVE DOCUMENTS.
A-2
<PAGE> 51
Certificate No.
Original principal amount ("Denomination") of this
Investor Certificate: $___________
Aggregate Denominations of all Investor Certificates: $
Pass-Through Rate:
Cut-Off Date:
First Payment Date ____________, _______
CUSIP NO. ___________
SEQUOIA MORTGAGE TRUST 199_-_
Evidencing a fractional undivided equity interest in the Trust Estate,
the property of which consists primarily of the Mortgage Collateral in Sequoia
Mortgage Trust 199_-_ (the "Trust"), a Delaware business trust formed by
SEQUOIA MORTGAGE FUNDING CORP., AS DEPOSITOR,
pursuant to the Trust Agreement referred to below.
This certifies that [name of Holder] is the registered owner of the
Percentage Interest represented hereby.
The Trust was created pursuant to a Trust Agreement dated as of
___________ (as amended and supplemented from time to time, the "Trust
Agreement") between the Depositor and ___________________, as owner trustee (as
amended and supplemented from time to time, the "Owner Trustee", which term
includes any successor entity under the Trust Agreement), a summary of certain
of the pertinent provisions of which is set forth hereinafter. This Investor
Certificate is issued under and is subject to the terms, provisions and
conditions of the Trust Agreement, to which Trust Agreement the Holder of this
Investor Certificate by virtue of the acceptance hereof assents and by which
such Holder is bound.
A-3
<PAGE> 52
This Investor Certificate is one of a duly authorized issue of Trust
Certificates, Series 199_-_ (herein called the "Investor Certificates") issued
under the Trust Agreement to which reference is hereby made for a statement of
the respective rights thereunder of the Depositor, the Owner Trustee and the
Holders of the Investor Certificates and the terms upon which the Investor
Certificates are executed and delivered. All terms used in this Investor
Certificate which are defined in the Trust Agreement shall have the meanings
assigned to them in the Trust Agreement. The Trust Estate consists of the
Mortgage Collateral in the Sequoia Mortgage Trust 199_-_ [and a Bond Insurance
Policy]. The rights of the Holders of the Investor Certificates are
subordinated to the rights of the Holders of the Bonds, as set forth in the
Indenture.
There will be distributed on the ___________ day of each month or, if
such ___________ day is not a Business Day, the next Business Day (each, a
"Payment Date"), commencing in ___________, to the Person in whose name this
Investor Certificate is registered at the close of business on the last
Business Day of the month preceding the month of such Payment Date (the "Record
Date"), such Certificateholder's Percentage Interest (obtained by dividing the
Denomination of this Investor Certificate by the aggregate Denominations of all
Investor Certificates) in the amount to be distributed to Certificateholders on
such Payment Date.
The Certificateholder, by its acceptance of this Investor Certificate,
agrees that it will look solely to the funds on deposit in the [Certificate
Distribution Account] that have been released from the Lien of the Indenture
for payment hereunder and that neither the Owner Trustee in its individual
capacity nor the Depositor is personally liable to the Certificateholders for
any amount payable under this Investor Certificate or the Trust Agreement or,
except as expressly provided in the Trust Agreement. Subject to any liability
under the Trust Agreement.
The Holder of this Investor Certificate acknowledges and agrees that
its rights to receive distributions in respect of this Investor Certificate are
subordinated to the rights of the Bondholders as described in the Indenture,
dated as of
A-4
<PAGE> 53
__________, between the Trust and _____________, as Indenture Trustee (the
"Indenture").
The Depositor and each Certificateholder, by acceptance of an Investor
Certificate, agree to treat, and to take no action inconsistent with the
treatment of, the Investor Certificates for federal, state and local income tax
purposes as an equity interest in the Trust.
Each Certificateholder, by its acceptance of an Investor Certificate,
covenants and agrees that such Certificateholder will not at any time institute
against the Depositor, or join in any institution against the Depositor or the
Trust of, any bankruptcy, reorganization, arrangement, insolvency or
liquidation proceedings, or other proceedings under any United States federal
or state bankruptcy or similar law in connection with any obligations relating
to the Investor Certificates, the Bonds, the Trust Agreement or any of the
Operative Documents.
Distributions on this Investor Certificate will be made as provided in
the Trust Agreement by the Certificate Paying Agent by wire transfer or check
mailed to the Certificateholder of record in the Certificate Register without
the presentation or surrender of this Investor Certificate or the making of any
notation hereon. Except as otherwise provided in the Trust Agreement and
notwithstanding the above, the final distribution on this Investor Certificate
will be made after due notice by the Certificate Paying Agent of the pendency
of such distribution and only upon presentation and surrender of this Investor
Certificate at the office or agency maintained by the Certificate Registrar for
that purpose by the Trust in the Borough of Manhattan, The City of New York.
Reference is hereby made to the further provisions of this Investor
Certificate set forth on the reverse hereof, which further provisions shall for
all purposes have the same effect as if set forth at this place.
Unless the certificate of authentication hereon shall have been
executed by an authorized officer of the Owner Trustee, or an authenticating
agent by manual signature, this Investor
A-5
<PAGE> 54
Certificate shall not entitle the Holder hereof to any benefit under the Trust
Agreement or be valid for any purpose.
THIS INVESTOR CERTIFICATE SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE
STATE OF DELAWARE, WITHOUT REFERENCE TO ITS CONFLICT OF LAW PROVISIONS, AND THE
OBLIGATIONS, RIGHTS AND REMEDIES OF THE PARTIES HEREUNDER SHALL BE DETERMINED
IN ACCORDANCE WITH SUCH LAWS.
A-6
<PAGE> 55
IN WITNESS WHEREOF, the Owner Trustee, on behalf of the Trust and not
in its individual capacity, has caused this Investor Certificate to be duly
executed.
__________________________, not in its
individual capacity but solely as Owner
Trustee
Dated: By:
-----------------------------------
Authorized Signatory
A-7
<PAGE> 56
[REVERSE OF INVESTOR CERTIFICATE]
The Investor Certificates do not represent an obligation of, or an
interest in, the Depositor, the Master Servicer, the Indenture Trustee, the
Owner Trustee or any Affiliates of any of them and no recourse may be had
against such parties or their assets, except as expressly set forth or
contemplated herein or in the Trust Agreement or the Operative Documents. In
addition, this Investor Certificate is not guaranteed by any governmental
agency or instrumentality and is limited in right of payment to certain
collections and recoveries with respect to the Mortgage Collateral, all as more
specifically set forth herein. A copy of the Trust Agreement may be examined
by any Certificateholder upon written request during normal business hours at
the principal office of the Depositor and at such other places, if any,
designated by the Depositor.
The Trust Agreement permits the amendment thereof as specified below,
provided that any amendment be accompanied by the consent of the Insurer and an
Opinion of Counsel to the Owner Trustee to the effect that such amendment
complies with the provisions of the Trust Agreement and, if the Depositor was
not the holder of 100% of the Investor Certificates, would not cause the Trust
to be subject to an entity level tax. If the purpose of the amendment is to
correct any mistake, eliminate any inconsistency, cure any ambiguity or deal
with any matter not covered, it shall not be necessary to obtain the consent of
any Holder, but the Owner Trustee shall be furnished with a letter from the
Rating Agencies that the amendment will not result in the downgrading or
withdrawal of the rating then assigned to any Bond. If the purpose of the
amendment is to prevent the imposition of any federal or state taxes at any
time that any Bond or Investor Certificate is outstanding, it shall not be
necessary to obtain the consent of the any Holder, but the Owner Trustee shall
be furnished with an Opinion of Counsel that such amendment is necessary or
helpful to prevent the imposition of such taxes and is not materially adverse
to any Holder. If the purpose of the amendment is to add or eliminate or
change any provision of the Trust Agreement, other than as specified in the
preceding two sentences, the amendment shall require either (a) a
A-8
<PAGE> 57
letter from the Rating Agencies that the amendment will not result in the
downgrading or withdrawal of the rating then assigned to any Bond or (b) the
consent of Holders of the Investor Certificates evidencing a majority of the
Percentage Interests of the Investor Certificates and the Indenture Trustee;
PROVIDED, HOWEVER, that no such amendment shall (i) reduce in any manner the
amount of, or delay the time of, payments received that are required to be
distributed on any Investor Certificate without the consent of the related
Certificateholder, or (ii) reduce the aforesaid percentage of Investor
Certificates the Holders of which are required to consent to any such amendment
without the consent of the Holders of all such Investor Certificates then
outstanding.
As provided in the Trust Agreement and subject to certain limitations
therein set forth, the transfer of this Investor Certificate is registerable in
the Certificate Register upon surrender of this Investor Certificate for
registration of transfer at the offices or agencies of the Certificate
Registrar maintained by the Trust in the Borough of Manhattan, The City of New
York, accompanied by a written instrument of transfer in form satisfactory to
the Certificate Registrar duly executed by the Holder hereof or such Holder's
attorney duly authorized in writing, and thereupon one or more new Investor
Certificates of authorized denominations evidencing the same aggregate interest
in the Trust will be issued to the designated transferee. The initial
Certificate Registrar appointed under the Trust Agreement is
_____________________.
Except as provided in the Trust Agreement, the Investor Certificates
are issuable only in a minimum Percentage Interest of 10%. As provided in the
Trust Agreement and subject to certain limitations therein set forth, Investor
Certificates are exchangeable for new Investor Certificates of authorized
denominations evidencing the same aggregate denomination, as requested by the
Holder surrendering the same. No service charge will be made for any such
registration of transfer or exchange, but the Owner Trustee or the Certificate
Registrar may require payment of a sum sufficient to cover any tax or
governmental charge payable in connection therewith.
A-9
<PAGE> 58
The Owner Trustee, the Certificate Paying Agent, the Certificate
Registrar and any agent of the Owner Trustee, the Certificate Paying Agent, or
the Certificate Registrar may treat the Person in whose name this Investor
Certificate is registered as the owner hereof for all purposes, and none of the
Owner Trustee, the Certificate Paying Agent, the Certificate Registrar or any
such agent shall be affected by any notice to the contrary.
The obligations and responsibilities created by the Trust Agreement
and the Trust created thereby shall terminate as and when provided in
accordance with the terms of the Trust Agreement.
A-10
<PAGE> 59
ASSIGNMENT
FOR VALUE RECEIVED the undersigned hereby sells, assigns and transfers
unto
PLEASE INSERT SOCIAL SECURITY OR
OTHER IDENTIFYING NUMBER OF ASSIGNEE
- --------------------------------------------------------------------------------
(Please print or type name and address, including postal zip code, of assignee)
- --------------------------------------------------------------------------------
the within Investor Certificate, and all rights thereunder, hereby irrevocably
constituting and appointing
- --------------------------------------------------------------------------------
to transfer said Investor Certificate on the books of the Certificate
Registrar, with full power of substitution in the premises.
Dated:
*/
-----------------------------------
Signature Guaranteed:
*/
-----------------------------------
- ---------
*/ NOTICE: The signature to this assignment must correspond with the name as it
appears upon the face of the within Investor Certificate in every particular,
without alteration, enlargement or any change whatever. Such signature must be
guaranteed by a member firm of the New York Stock Exchange or a commercial bank
or trust company.
A-11
<PAGE> 60
DISTRIBUTION INSTRUCTIONS
The assignee should include the following for the information of the
Certificate Paying Agent:
Distribution shall be made by wire transfer in immediately available
funds __________________ to for the account of ______________________________,
account number _______________, or, if mailed by check, to __________________.
Applicable statements should be mailed to _______________.
---------------------------------------------
Signature of assignee or agent
(for authorization of wire transfer only)
A-12
<PAGE> 61
EXHIBIT B
CERTIFICATE OF TRUST OF
SEQUOIA MORTGAGE TRUST 199_-_
THIS Certificate of Trust of Sequoia Mortgage Trust 199_-_
(the "Trust"), dated ________, __, is being duly executed and filed by
_________________________, a Delaware banking corporation, as trustee, to form
a business trust under the Delaware Business Trust Act (12 DEL. CODE, Sections
3801 ET SEQ.)
1. NAME. The name of the business trust formed hereby is
Sequoia Mortgage Trust 199_-_.
2. DELAWARE TRUSTEE. The name and business address of the
trustee of the Trust in the State of Delaware is ___________,
__________________________, _________, __________, Attention:
_________________________________.
IN WITNESS WHEREOF, the undersigned, being the sole trustee of
the Trust, has executed this Certificate of Trust as of the date first above
written.
,
--------------------------------------
not in its individual capacity but
solely as owner trustee under a
Trust Agreement dated as of ____, __,
By:
------------------------------------
Name:
Title:
B-1
<PAGE> 62
EXHIBIT C
[FORM OF RULE 144A INVESTMENT REPRESENTATION]
Description of Rule 144A Securities, including numbers:
_______________________________________________________
_______________________________________________________
_______________________________________________________
_______________________________________________________
The undersigned seller, as registered holder (the "Seller"),
intends to transfer the Rule 144A Securities described above to the undersigned
buyer (the "Buyer").
1. In connection with such transfer and in accordance with the
agreements pursuant to which the Rule 144A Securities were issued, the Seller
hereby certifies the following facts: Neither the Seller nor anyone acting on
its behalf has offered, transferred, pledged, sold or otherwise disposed of the
Rule 144A Securities, any interest in the Rule 144A Securities or any other
similar security to, or solicited any offer to buy or accept a transfer, pledge
or other disposition of the Rule 144A Securities, any interest in the Rule 144A
Securities or any other similar security from, or otherwise approached or
negotiated with respect to the Rule 144A Securities, any interest in the Rule
144A Securities or any other similar security with, any person in any manner,
or made any general solicitation by means of general advertising or in any
other manner, or taken any other action that would constitute a distribution of
the Rule 144A Securities under the Securities Act of 1933, as amended (the
"1933 Act"), or that would render the disposition of the Rule 144A Securities a
violation of Section 5 of the 1933 Act to require registration pursuant
thereto, and that the Seller has not offered the Rule 144A Securities to any
person other than the Buyer or another "qualified institutional buyer" as
defined in Rule 144A under the 1933 Act.
2. The Buyer warrants and represents to, and covenants with, the
Owner Trustee and the Depositor (as defined in the
C-1
<PAGE> 63
Trust Agreement (the "Agreement"), dated as of ______, ___ between Sequoia
Mortgage Funding Corporation, as Depositor and ____________, as Owner Trustee
pursuant to Section 3.03 of the Agreement and _________________ as indenture
trustee, as follows:
a. The Buyer understands that Rule 144A Securities have not
been registered under the 1933 Act or the securities laws of any state.
b. The Buyer considers itself a substantial, sophisticated
institutional investor having such knowledge and experience in
financial and business matters that it is capable of evaluating the
merits and risks of investment in the Rule 144A Securities.
c. The Buyer has been furnished with all information
regarding the Rule 144A Securities that it has requested from the
Seller, the Trustee, the Owner Trustee or the Master Servicer.
d. Neither the Buyer nor anyone acting on its behalf has
offered, transferred, pledged, sold or otherwise disposed of the Rule
144A Securities, any interest in the Rule 144A Securities or any other
similar security to, or solicited any offer to buy or accept a
transfer, pledge or other disposition of the Rule 144A Securities, any
interest in the Rule 144A Securities or any other similar security
from, or otherwise approached or negotiated with respect to the Rule
144A Securities, any interest in the Rule 144A Securities or any other
similar security with, any person in any manner, or made any general
solicitation by means of general advertising or in any other manner,
or taken any other action, that would constitute a distribution of the
Rule 144A Securities under the 1933 Act or that would render the
disposition of the Rule 144A Securities a violation of Section 5 of
the 1933 Act or require registration pursuant thereto, nor will it
act, nor has it authorized or will it authorize any person to act, in
such manner with respect to the Rule 144A Securities.
C-2
<PAGE> 64
e. The Buyer is a "qualified institutional buyer" as that
term is defined in Rule 144A under the 1933 Act and has completed
either of the forms of certification to that effect attached hereto as
Annex 1 or Annex 2. The Buyer is aware that the sale to it is being
made in reliance on Rule 144A. The Buyer is acquiring the Rule 144A
Securities for its own account or the accounts of other qualified
institutional buyers, understands that such Rule 144A Securities may
be resold, pledged or transferred only (i) to a person reasonably
believed to be a qualified institutional buyer that purchases for its
own account or for the account of a qualified institutional buyer to
whom notice is given that the resale, pledge or transfer is being made
in reliance on Rule 144A, or (ii) pursuant to another exemption from
registration under the 1933 Act.
[3. The Buyer warrants and represents to, and covenants with, the
Seller, the Trustee, Owner Trustee, Master Servicer and the Depositor that
either (1) the Buyer is (A) not an employee benefit plan (within the meaning of
Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA")), or a plan (within the meaning of Section 4975(e)(1) of the Internal
Revenue Code of 1986 ("Code"), which (in either case) is subject to ERISA or
Section 4975 of the Code (both a "Plan"), and (B) is not directly or indirectly
purchasing the Rule 144A Securities on behalf of, as investment manager of, as
named fiduciary of, a trustee of, or with "plan assets" of a Plan, or (2) the
Buyer understands that registration of transfer of any Rule 144A Securities to
any Plan, or to any Person acting on behalf of any Plan, will not be made
unless such Plan delivers an opinion of its counsel, addressed and satisfactory
to the Certificate Registrar and the Depositor, to the effect that the purchase
and holding of the Rule 144A Securities by, on behalf of or with "plan assets"
of any Plan would not constitute or result in a prohibited transaction under
Section 406 of ERISA or Section 4975 of the Code, and would not subject the
Depositor, the Master Servicer, the Trustee or the Trust to any obligation or
liability (including liabilities under ERISA or Section 4975 of the Code) in
addition to those undertaken in the Agreement or any other liability.]
C-3
<PAGE> 65
4. This document may be executed in one or more counterparts and by
the different parties hereto on separate counterparts, each of which, when so
executed, shall be deemed to be an original; such counterparts, together, shall
constitute one and the same document.
IN WITNESS WHEREOF, each of the parties has executed this
document as of the date set forth below.
- ------------------------------------ ------------------------------------
Print Name of Seller Print Name of Buyer
By: By:
--------------------------------- ---------------------------------
Name: Name:
Title: Title:
Taxpayer Identification Taxpayer Identification
No. No.
--------------------------------- ---------------------------------
Date: Date:
------------------------------- -------------------------------
C-4
<PAGE> 66
ANNEX 1 TO EXHIBIT C
QUALIFIED INSTITUTIONAL BUYER STATUS UNDER SEC RULE 144A
[For Buyers Other Than Registered Investment Companies]
The undersigned hereby certifies as follows in connection with the
Rule 144A Investment Representation to which this Certification is attached:
1. As indicated below, the undersigned is the President, Chief
Financial Officer, Senior Vice President or other executive officer of the
Buyer.
2. In connection with purchases by the Buyer, the Buyer is a
"qualified institutional buyer" as that term is defined in Rule 144A under the
Securities Act of 1933 ("Rule 144A") because (i) the Buyer owned and/or
invested on a discretionary basis $_____________(1) in securities (except for
the excluded securities referred to below) as of the end of the Buyer's most
recent fiscal year (such amount being calculated in accordance with Rule 144A)
and (ii) the Buyer satisfies the criteria in the category marked below.
___ CORPORATION, ETC. The Buyer is a corporation (other than a
bank, savings and loan association or similar institution),
Massachusetts or similar business trust, partnership, or
charitable organization described in Section 501(c)(3) of the
Internal Revenue Code.
___ BANK. The Buyer (a) is a national bank or banking institution
organized under the laws of any State, territory or the
District of Columbia, the business of
- ----------
(1) Buyer must own and/or invest on a discretionary basis at least $100,000,000
in securities unless Buyer is a dealer, and, in that case, Buyer must own and/or
invest on a discretionary basis at least $10,000,000 in securities.
C-5
<PAGE> 67
which is substantially confined to banking and is supervised
by the State or territorial banking commission or similar
official or is a foreign bank or equivalent institution, and
(b) has an audited net worth of at least $25,000,000 as
demonstrated in its latest annual financial statements, A COPY
OF WHICH IS ATTACHED HERETO.
___ SAVINGS AND LOAN. The Buyer (a) is a savings and loan
association, building and loan association, cooperative bank,
homestead association or similar institution, which is
supervised and examined by a State or Federal authority having
supervision over any such institutions or is a foreign savings
and loan association or equivalent institution and (b) has an
audited net worth of at least $25,000,000 as demonstrated
units latest annual financial statements.
___ BROKER-DEALER. The Buyer is a dealer registered pursuant to
Section 15 of the Securities Exchange Act of 1934.
___ INSURANCE COMPANY. The Buyer is an insurance company whose
primary and predominant business activity is the writing of
insurance or the reinsuring of risks underwritten by insurance
companies and which is subject to supervision by the insurance
commissioner or a similar official or agency of a State or
territory or the District of Columbia.
___ STATE OR LOCAL PLAN. The Buyer is a plan established and
maintained by a State, its political subdivisions, or any
agency or instrumentality of the State or its political
subdivisions, for the benefit of its employees.
___ ERISA PLAN. The Buyer is an employee benefit plan within the
meaning of Title I of the Employee Retirement Income Security
Act of 1974.
C-6
<PAGE> 68
___ INVESTMENT ADVISOR. The Buyer is an investment adviser
registered under the Investment Advisers Act of 1940.
___ SBIC. The Buyer is a Small Business Investment Company
licensed by the U.S. Small Business Administration under
Section 301(c) or (d) of the Small Business Investment Act of
1958.
___ BUSINESS DEVELOPMENT COMPANY. The Buyer is a business
development company as defined in Section 202(a)(22) of the
Investment Advisers Act of 1940.
___ TRUST FUND. The Buyer is a trust fund whose trustee is a bank
or trust company and whose participants are exclusively (a)
plans established and maintained by a State, its political
subdivisions, or any agency or instrumentality of the State or
its political subdivisions, for the benefit of its employees,
or (b) employee benefit plans within the meaning of Title I of
the Employee Retirement Income Security Act of 1974, but is
not a trust fund that includes as participants individual
retirement accounts of H.R. 10 plans.
3. The term "Securities" as used herein DOES NOT INCLUDE (i)
securities of issuers that are affiliated with the Buyer, (ii) securities that
are part of an unsold allotment to or subscription by the Buyer, if the Buyer
is a dealer, (iii) bank deposit notes and certificates of deposit, (iv) loan
participations, (v) repurchase agreements, (vi) securities owned but subject to
a repurchase agreement and (vii) currency, interest rate and commodity swaps.
4. For purposes of determining the aggregate amount of securities
owned and/or invested on a discretionary basis by the Buyer, the Buyer used the
cost of such securities to the Buyer and did not include any of the securities
referred to in the preceding paragraph. Further, in determining such aggregate
amount, the Buyer may have included securities owned by subsidiaries of the
Buyer, but only if such subsidiaries are consolidated with the Buyer in its
financial statements prepared in accordance with generally accepted accounting
principles and
C-7
<PAGE> 69
if the investments of such subsidiaries are managed under the Buyer's
direction. However, such securities were not included if the Buyer is a
majority-owned, consolidated subsidiary of another enterprise and the Buyer is
not itself a reporting company under the Securities and Exchange Act of 1934.
5. The Buyer acknowledges that it is familiar with Rule 144A and
understands that the seller to it and other parties related to the Certificates
are relying and will continue to rely on the statements made herein because one
or more sales to the Buyer may be in reliance on Rule 144A.
____ ____ Will the Buyer be purchasing the Rule 144A
Yes No Securities only for the Buyer's own account?
6. If the answer to the foregoing question is "no", the Buyer agrees
that, in connection with any purchase of securities sold to the Buyer for the
account of a third party (including any separate account) in reliance on Rule
144A, the Buyer will not only purchase for the account of a third party that at
the time is a "qualified institutional buyer" within the meaning of Rule 144A.
In addition, the Buyer agrees that the Buyer will not purchase securities for a
third party unless the Buyer has obtained a current representation letter from
such third party or taken other appropriate steps contemplated by Rule 144A to
conclude that such third party independently meets the definition of "qualified
institutional buyer" set forth in Rule 144A.
7. The Buyer will notify each of the parties to which this
certification is made of any changes in the information and conclusions herein.
Until such notice is given, the Buyer's purchase of Rule 144A Securities will
constitute a reaffirmation of this certification as of the date of such
purchase.
----------------------------------------
Print Name of Buyer
By:
-------------------------------------
Name:
Title:
Date:
-----------------------------------
C-8
<PAGE> 70
ANNEX 2 TO EXHIBIT C
QUALIFIED INSTITUTIONAL BUYER STATUS UNDER SEC RULE 144A
[FOR BUYERS THAT ARE REGISTERED INVESTMENT COMPANIES]
The undersigned hereby certifies as follows in connection with the
Rule 144A investment representation to which this certification is attached:
1. As indicated below, the undersigned is the President, Chief
Financial Officer or Senior Vice President of the Buyer or, if the Buyer is a
"qualified institutional buyer" as that term is defined in Rule 144A under the
Securities Act of 1933 ("Rule 144A") because Buyer is part of a family of
investment companies (as defined below), is such an officer of the adviser.
2. In connection with purchases by Buyer, the Buyer is a
"qualified institutional buyer" as defined in SEC Rule 144A because (i) the
Buyer is an investment company registered under the Investment Company Act of
1940, and (ii) as marked below, the Buyer alone, or the Buyer's family of
Investment Companies, owned at least $100,000,000 in securities (other than the
excluded securities referred to below) as of the end of the Buyer's most recent
fiscal year. For purposes of determining the amount of securities owned by the
Buyer of the Buyer's family of Investment Companies, the cost of such
securities was used.
____ The Buyer owned $__________ in securities (other that the excluded
securities referred to below) as of the end of the Buyer's most recent
fiscal year (such amount being calculated in accordance with Rule
144A).
____ The Buyer is part of a Family of Investment Companies which owned in
the aggregate $__________ in securities (other than the excluded
securities referred to below) as of the end of the Buyer's most recent
fiscal year (such amount being calculated in accordance with Rule
144A).
C-9
<PAGE> 71
3. The term "Family of Investment Companies" as used herein means
two or more registered investment companies (or series thereof) that have the
same investment advisor or investment advisers that are affiliated (by virtue
of being majority owned subsidiaries of the same parent or because one
investment adviser is a majority owned subsidiary of the other).
4. The term "Securities" as used herein does not include (i)
securities of issuers that are affiliated with the Buyer or are part of the
Buyer's Family of Investment Companies, (ii) bank deposit notes and
certificates of deposit, (iii) loan participations, (iv) repurchase
agreements, (v) securities owned but subject to a repurchase agreement and (vi)
currency, interest rate and commodity swaps.
5. The Buyer is familiar with Rule 144A and understands that each
of the parties to which this certification is made are relying and will
continue to rely on the statements made herein because one or more sales to the
Buyer will be in reliance on Rule 144A. In addition, the Buyer will only
purchase for the Buyer's own account.
6. The undersigned will notify each of the parties to which this
certification is made of any changes in the information and conclusions herein.
Until such notice, the Buyer's purchase of Rule 144A securities will constitute
a reaffirmation of this certification by the undersigned as of the date of such
purchase.
----------------------------------------
PRINT NAME OF BUYER
BY:
-------------------------------------
NAME:
--------------------------------
TITLE:
-------------------------------
IF AN ADVISER:
----------------------------------------
PRINT NAME OF BUYER
DATE:
-----------------------------------
C-10
<PAGE> 72
EXHIBIT D
CERTIFICATE OF NON-FOREIGN STATUS
This certificate of Non-Foreign status ("certificate") is delivered
pursuant to Section 3.03 of the Trust Agreement, dated as of _________ __,
19____ (the "Trust Agreement") between Sequoia Mortgage Funding Corporation, as
depositor and ___________________, as owner trustee, in connection with the
acquisition of, transfer to or possession by the undersigned, whether as
beneficial owner (the "Beneficial Owner"), or nominee on behalf of the
Beneficial Owner of the Investor Certificates, (the "Investor Certificate").
Capitalized terms used but not defined in this certificate have the respective
meanings given them in the Trust Agreement.
Each holder must complete Part I, Part II (if the holder is a nominee), and in
all cases sign and otherwise complete Part III. In addition, each holder shall
submit with the certificate an IRS Form W-9 relating to such holder.
To confirm to the Trust that the provisions of Sections 871, 881 or 1446 of the
Internal Revenue Code (relating to withholding tax on foreign partners) do not
apply in respect of the Investor Certificate held by the undersigned, the
undersigned hereby certifies:
PART I - COMPLETE EITHER A OR B
A. Individual as Beneficial Owner
1. I am (The Beneficial Owner is) not an
Non-resident alien for purposes of U.S.
Income Taxation;
2. My (The Beneficial Owner's) name and home
address are:
________________________________________
________________________________________
________________________________________; and
D-1
<PAGE> 73
3. My (The Beneficial Owner's) U.S. Taxpayer
Identification Number (Social Security
Number) is ____________________________.
B. Corporate, Partnership or other entity as Beneficial
Owner
1. _____________________ (Name of the Beneficial
Owner) is not a foreign corporation, foreign
partnership, foreign trust or foreign estate
(as those terms are defined in the Code and
Treasury Regulations)
2. The Beneficial Owner's office address and
place of incorporation (if applicable) is
_____________________________; and
3. The Beneficial Owner's U.S. employer
identification number is ___________________.
PART II - NOMINEES
If the undersigned is the nominee for the Beneficial Owner,
the undersigned certifies that this certificate has been made in reliance upon
information contained in:
_____ an IRS Form W-9
_____ a form such as this or substantially similar
provided to the undersigned by an appropriate person and (i) the undersigned
agrees to notify the Trust at least thirty (30) days prior to the date that the
form relied upon becomes obsolete, and (ii) in connection with change in
Beneficial Owners, the undersigned agrees to submit a new Certificate of
Non-Foreign Status to the Trust promptly after such change.
PART III - DECLARATION
The undersigned, as the Beneficial Owner or a nominee thereof, agrees
to notify the Trust within sixty (60) days of the date that the Beneficial
Owner becomes a foreign person. The undersigned understands that this
certificate may be disclosed to the Internal Revenue Service by the Trust and
any false statement contained therein could be punishable by fines,
imprisonment or both.
D-2
<PAGE> 74
Under penalties of perjury, I declare that I have examined this
certificate and to the best of my knowledge and belief it is true, correct and
complete and will further declare that I will inform the Trust of any change in
the information provided above, and, if applicable, I further declare that I
have the authority* to sign this document.
- ------------------------------------
Name
- ------------------------------------
Title (if applicable)
- ------------------------------------
Signature and Date
*NOTE: If signed pursuant to a power of attorney, the power of attorney must
accompany this certificate.
D-3
<PAGE> 75
EXHIBIT E
FORM OF INVESTMENT LETTER [NON-RULE 144A]
[DATE]
[CERTIFICATE REGISTRAR]
RE: SEQUOIA MORTGAGE TRUST 199_-_
INVESTOR CERTIFICATES, 199_-_,
(THE "INVESTOR CERTIFICATES")
Ladies and Gentlemen:
In connection with our acquisition of the above-captioned
certificates, we certify that (a) we understand that the Investor Certificates
are not being registered under the Securities Act of 1933, as amended (the
"Act"), or any state securities laws and are being transferred to us in a
transaction that is exempt from the registration requirements of the Act and
any such laws, (b) we are an "accredited investor," as defined in Regulation D
under the Act, and have such knowledge and experience in financial and business
matters that we are capable of evaluating the merits and risks of investments
in the Investor Certificates, (c) we have had the opportunity to ask questions
of and receive answers from the depositor concerning the purchase of the
Investor Certificates and all matters relating thereto or any additional
information deemed necessary to our decision to purchase the Investor
Certificates, (d) we are not an employee benefit plan that is subject to the
Employee Retirement Income Security Act of 1974, as amended, or a plan that is
subject to Section 4975 of the Internal Revenue Code of 1986, as amended, nor
are we acting on behalf of any such plan, (e) we are acquiring the Investor
Certificates for investment for our own account and not with a view to any
distribution of such Investor Certificates (but without prejudice to our right
at all times to sell or otherwise dispose of the Investor Certificates in
accordance with clause (g) below), (f) we have not offered or sold any Investor
Certificates to, or solicited offers to buy any Investor Certificates from, any
person, or otherwise approached or
E-1
<PAGE> 76
negotiated with any person with respect thereto, or taken any other action
which would result in a violation of Section 5 of the Act, and (g) we will not
sell, transfer or otherwise dispose of any Investor Certificates unless (1)
such sale, transfer or other disposition is made pursuant to an effective
registration statement under the Act or is exempt from such registration
requirements, and if requested, we will at our expense provide an opinion of
counsel satisfactory to the addressees of this Investment Letter that such
sale, transfer or other disposition may be made pursuant to an exemption from
the Act, (2) the purchaser or transferee of such Investor Certificate has
executed and delivered to you an Investment Letter to substantially the same
effect as this Investment Letter, and (3) the purchaser or transferee has
otherwise complied with any conditions for transfer set forth in the Trust
Agreement.
Very truly yours,
[TRANSFEREE]
By:
-----------------------------------
Authorized Officer
E-2
<PAGE> 77
EXHIBIT F
TRANSFER CERTIFICATE
[Owner Trustee]
[Certificate Paying Agent]
Re: PROPOSED TRANSFER OF INVESTOR CERTIFICATES
Ladies and Gentlemen:
This certification is being made by __________________ (the "Proposed
Transferee") in connection with the proposed transfer to the Proposed
Transferee of a trust certificate (the "Investor Certificate") representing __%
fractional undivided interest in Sequoia Mortgage Trust 199_-_ (the "Trust")
created pursuant to a Deposit Trust Agreement, dated as of ___________ __, 199_
(such agreement, as amended, being referred to herein as the "Deposit Trust
Agreement") between Sequoia Mortgage Funding Corporation and
____________________, as Owner Trustee. Initially capitalized terms used but
not defined herein have the meanings assigned to them in the Deposit Trust
Agreement. The Proposed Transferee hereby certifies as follows:
1. The undersigned is a Person involved in the organization or
operation of the Trust or an affiliate of such a Person within the meaning of
Rule 3a-7 of the Investment Company Act.
2. The Proposed Transferee understands that (a) the Investor
Certificates have not been and will not be registered or qualified under the
Securities Act, or the securities laws of any state, (b) neither the Trust nor
the Owner Trustee is required, and neither intends, to so register or qualify
the Investor Certificates, and (c) the Investor Certificates cannot be resold
unless (i) they are registered and qualified under the Securities Act and the
applicable state securities laws or (ii) an exemption from registration and
qualification is available.
F-1
<PAGE> 78
3. The Proposed Transferee is acquiring the Investor Certificate for
its own account for investment only and not with a view to or for sale or other
transfer in connection with any distribution of the Investor Certificate in any
manner that would violate the Securities Act or any applicable state securities
laws.
4. The Proposed Transferee (a) is an accredited investor having such
knowledge and experience in financial and business matters,and in particular in
such matters related to securities similar to the Investor Certificate, such
that it is capable of evaluating the merits and risks of investment in the
Investor Certificate and (b) is able to bear the economic risks of such an
investment.
5. The Proposed Transferee will not authorize nor has it authorized
any person (a) to offer, pledge, sell, dispose of or otherwise transfer any
Investor Certificate, any interest in any Investor Certificate or any other
similar security to any person in any manner, (b) to solicit any offer to buy
or to accept a pledge, disposition or other transfer of any Investor
Certificate, any interest in any Investor Certificate or any other similar
security from any person in any manner, (c) otherwise to approach or negotiate
with respect to any Investor Certificate, any interest in any Investor
Certificate or any other similar security with any person in any manner, (d) to
make any general solicitation by means of general advertising or in any other
manner, or (e) to take any other action that would constitute a distribution of
any Investor Certificate under the Securities Act, that would render the
disposition of any Investor Certificate a violation of Section 5 of the
Securities Act or any state securities law, or that could require registration
or qualification pursuant thereto. Neither the Proposed Transferee nor anyone
acting on its behalf has offered any Investor Certificate for sale or made any
general solicitation by means of general advertising or in any other manner
with respect to the Investor Certificate. The Proposed Transferee will not
sell or otherwise transfer any Investor Certificates, except in compliance with
the provisions of the Deposit Trust Agreement.
F-2
<PAGE> 79
Date:
---------------------- ---------------------------------------
Name of Proposed Transferee
---------------------------------------
Signature
---------------------------------------
Name
---------------------------------------
Title
F-3
<PAGE> 1
Exhibit 8.1
[Letterhead of Giancarlo & Gnazzo]
May 14, 1997
Sequoia Mortgage Funding Corporation
591 Redwood Highway
Suite 3100
Mill Valley, CA 94941
Re: Sequoia Mortgage Funding Corporation Shelf Registration
Ladies and Gentlemen:
We have acted as your special tax counsel and have assisted in the
preparation of the tax summary for the Shelf Registration Statement on Form
S-3, dated May 14, 1997 (the "Registration Statement") which has been filed
by Sequoia Mortgage Funding Corporation (the "Company") with the Securities and
Exchange Commission the (the "SEC") in connection with the registration of
certain Collateralized Mortgage Bonds (issuable in series) (the "Bonds").
Each series of Bonds will be issued by a trust (the "Issuer") formed by the
Company pursuant to a deposit trust agreement (the"Deposit Trust Agreement")
and pursuant to an indenture (the "Indenture") entered into by the Issuer. You
have requested our opinion regarding certain descriptions of federal income tax
consequences contained in the prospectus and prospectus supplement to be used
in connection with offers and sales of the Bonds (the "Prospectus" and
"Prospectus Supplement", respectively).
In formulating our opinions, we have reviewed (i) the Registration
Statement and the related forms of Prospectus and Prospectus Supplement filed
with the SEC on the date hereof , (ii) the forms of the Deposit Trust
Agreement, the Indenture and the Bonds and such other transaction documents as
we have considered necessary, and (iii) the Articles of Incorporation and other
organizational documents of the Company, as amended and supplemented to date,
and such resolutions, certificates, records, and other documents provided by
the Company as we have deemed necessary or appropriate as a basis for the
opinions set forth below.
In our examination, we have assumed the legal capacity of all natural
persons, the genuineness of all signatures, the authenticity of all documents
submitted to us as originals, the conformity to original documents of all
documents submitted to us as certified, conformed or other copies, and the
authenticity of the originals of such copies.
In rendering our opinions, we have assumed that the transactions
described in or contemplated by the foregoing documents have been or will be
consummated in accordance with such operative documents, and that such documents
accurately reflect the material facts of such transactions. As to any facts
material to this opinion which we did not independently establish or verify, we
have relied upon statements and representations of the underwriter and officers
and other representatives of the Issuer or its affiliates. Our opinion is also
based on the Internal Revenue Code of 1986, as amended, administrative rulings,
judicial decisions, Treasury regulations and other applicable authorities. The
statutory provisions, regulations, and interpretations on which
<PAGE> 2
Sequoia Funding Corporation
May 14, 1997
Page 2
our opinion is based are subject to change, possibly retroactively. In
addition, there can be no complete assurance that the Internal Revenue Service
will not take positions contrary to those stated in our opinion.
Subject to the qualifications and assumptions set forth herein, and
based upon the application of the overall authorities to the facts of this
transaction, we are of the opinion that for federal income tax purposes (i) the
Bonds will be treated as indebtedness and not as an ownership interest in the
Collateral, or an equity interest in the Issuer or in a separate association
taxable as a corporation and (ii) the Issuer will not be classified as a
taxable mortgage pool within the meaning of Section 7701(i) of the Internal
Revenue Code.
We are further of the opinion that, although the discussion in the
Prospectus and the Prospectus Supplement under the heading "Federal Income Tax
Consequences" does not purport to discuss all possible United States federal
income tax consequences of the purchase, ownership and disposition of the Bonds,
such discussion constitutes in all material respects, a fair and accurate
summary of the United States federal income tax consequences of the purchase,
ownership and disposition of the Bonds under existing law. We note that the
Prospectus Supplement relates to a specific transaction and that the above
referenced description of "Federal Income Tax Consequences" may, under certain
circumstances, require modification when additional transactions are done.
Other than as expressly stated above, we express no opinion on any
issue relating to the Company, or any series of Bonds other than the Bonds
described in the Prospectus Supplement, under any law other than the federal
income tax laws.
We consent to the filing of this opinion as an Exhibit to the
Registration Statement and to the reference to Giancarlo & Gnazzo, A
Professional Corporation under the caption "Federal Income Tax Considerations"
in the Prospectus and Prospectus Supplement included in the Registration
Statement.
Very truly yours,
/s/ Giancarlo & Gnazzo
Giancarlo & Gnazzo
<PAGE> 1
EXHIBIT 25.1
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM T-1
-----------------------
STATEMENT OF ELIGIBILITY AND QUALIFICATION
UNDER THE TRUST INDENTURE ACT FOR 1939, AS AMENDED,
OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE
-----------------------
FIRST UNION NATIONAL BANK OF NORTH CAROLINA
(Exact name of Trustee as specified in its charter)
<TABLE>
<CAPTION>
<S> <C> <C>
230 SOUTH TRYON STREET, 9TH FLOOR
CHARLOTTE, NORTH CAROLINA 28288-1179 56-0900030
(Address of principal executive office) (Zip Code) (I.R.S. Employer Identification No.)
</TABLE>
-----------------------
SEQUOIA MORTGAGE FUNDING CORPORATION
(Exact name of obligor as specified in its charter)
<TABLE>
<CAPTION>
<S> <C>
Delaware 91-1771827
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
591 Redwood Highway
Mill Valley, CA 94941
(Address of principal executive offices) (Zip Code)
</TABLE>
-----------------------
Collateralized Mortgage Bonds
(Title of the indenture securities)
===============================================================================
<PAGE> 2
1. GENERAL INFORMATION.
(a) The following are the names and addresses of each examining or
supervising authority to which the Trustee is subject:
<TABLE>
<S> <C>
Board of Governors of the Federal Reserve System Washington, D.C.
The Comptroller of the Currency Washington, D.C.
Securities and Exchange Commission,
Division of Market Regulation Washington, D.C.
Federal Deposit Insurance Corporation Washington, D.C.
</TABLE>
(b) The Trustee is authorized to exercise corporate trust powers.
2. AFFILIATIONS WITH OBLIGOR.
The obligor is not an affiliate of the Trustee.
(See Note 1 on Page 4)
3. VOTING SECURITIES OF THE TRUSTEE.
The following information is furnished as to each class of
voting securities of the Trustee:
As of April 30, 1997
- -------------------------------------------------------------------------------
Column A Column B
- -------------------------------------------------------------------------------
Title of Class Amount Outstanding
- -------------------------------------------------------------------------------
Common Stock, par value $3.33-1/3 a share 278,327,749 shares
4. TRUSTEESHIPS UNDER OTHER INDENTURES.
The Trustee is not a trustee under another indenture under which
any other securities, or certificates of interest or participation in
any other securities, of the obligor are outstanding.
5. INTERLOCKING DIRECTORATES AND SIMILAR RELATIONSHIPS WITH THE OBLIGOR OR
UNDERWRITERS.
Neither the Trustee nor any of the directors or executive
officers of the Trustee is a director, officer, partner, employee,
appointee or representative of the obligor or of any underwriter for the
obligor.
6. VOTING SECURITIES OF THE TRUSTEE OWNED BY THE OBLIGOR OR ITS OFFICIALS.
The amount of voting securities of First Union Corporation, the
parent of the trustee owned, beneficially by the obligor and its
directors, partners, executive officers, taken as a group, do not exceed
one (1) percent of the outstanding voting securities of First Union
Corporation.
7. VOTING SECURITIES OF THE TRUSTEE OWNED BY UNDERWRITERS OR THEIR
OFFICIALS.
The amount of voting securities of First Union Corporation, the
parent of the Trustee, owned beneficially by any underwriter for the
obligor and its directors, partners, and executive officers, taken as a
group, do not exceed one (1) percent of the outstanding voting
securities of First Union Corporation.
8. SECURITIES OF THE OBLIGOR OWNED OR HELD BY THE TRUSTEE.
The trustee does not own beneficially or hold as collateral
security for obligations in default any securities of any class of the
obligor in excess of one (1) percent of the outstanding securities of
such class.
2
<PAGE> 3
9. SECURITIES OF UNDERWRITERS OWNED OR HELD BY THE TRUSTEE.
The trustee does not own beneficially or hold as collateral
security for obligations in default any securities of an underwriter for
the obligor in excess of one (1) percent of the outstanding securities
of such class.
10. OWNERSHIP OR HOLDINGS BY THE TRUSTEE OF VOTING SECURITIES OF CERTAIN
AFFILIATES OR SECURITY HOLDERS OF THE OBLIGOR.
The Trustee does not own beneficially or hold as collateral
security for obligations in default any voting securities of any class
of a person who, to the knowledge of the Trustee (1) owns 10% or more of
the voting securities of the obligor or (2) is an affiliate, other than
a subsidiary, of the obligor, in excess of one (1) percent of the
outstanding voting securities of such class.
11. OWNERSHIP OF HOLDERS BY THE TRUSTEE OF ANY SECURITIES OF A PERSON
OWNING 50 PERCENT OR MORE OF THE VOTING SECURITIES OF THE OBLIGOR.
The Trustee does not own beneficially or hold as collateral
security for obligations in default any securities of any class of a
person who, to the knowledge of Trustee, owns 50% or more of the voting
securities of the obligor, in excess of one (1) percent of the
outstanding securities of such class.
12. INDEBTEDNESS OF THE OBLIGOR TO THE TRUSTEE.
$20,000,000 revolving line of credit to Redwood (parent company)
maturing September 1997 and secured by mortgage assets.
13. DEFAULTS BY THE OBLIGOR.
Not applicable.
14. AFFILIATIONS WITH THE UNDERWRITERS.
No underwriter is an affiliate of the Trustee.
15. FOREIGN TRUSTEE.
Not applicable.
16. LIST OF EXHIBITS.
(1) Articles of Association of the Trustee as now in effect.
Incorporated in Exhibit (1) filed with Form T-1 Statement included
in Registration Statement No. 33-45946.
(2) Certificate of Authority of the Trustee to commence business.
Incorporated by reference in Exhibit (2) filed with Form T-1
Statement included in Registration Statement No. 33-45946.
(3) Authorization of the Trustee to exercise corporate trust powers, if
such authorization is not contained in the documents specified in
exhibits (1) and (2) above. Included at Page 6 of this Form T-1
Statement.
(4) By-Laws of the Trustee. Incorporated by reference in Exhibit (4)
filed with Form T-1 Statement included in Registration Statement No.
33-45946.
(5) Not applicable.
(6) Consent by the Trustee required by Section 321(b) of the Trust
Indenture Act of 1939. Included at Page 6 of this Form T-1
Statement.
(7) Report of condition of Trustee. Incorporated by reference in Exhibit
(7) filed with Form T-1 Statement included in Registration Statement
No. 33-45946.
(8) Not applicable.
(9) Not applicable.
3
<PAGE> 4
---------------------------------
NOTES
---------------------------------
1. Since the trustee is a member of First Union Corporation, a bank
holding company, all of the voting securities of the trustee are held by First
Union Corporation. The securities of First Union Corporation are described in
Item 3.
5
<PAGE> 5
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939, as
amended, the Trustee, FIRST UNION NATIONAL BANK OF NORTH CAROLINA, a national
banking organization, has duly caused this statement of eligibility and
qualification to be signed on its behalf by the undersigned, thereunto duly
authorized, all in the City of Charlotte, and State of North Carolina on the
9th day of May, 1997.
FIRST UNION NATIONAL BANK OF NORTH CAROLINA
(Trustee)
BY: /s/ PABLO DE LA CANAL
-------------------------------------------
Pablo de la Canal, Assistant Vice President
EXHIBIT T-1 (6)
CONSENTS OF TRUSTEE
Pursuant to the requirements of section 321(b) of the Trust Indenture
Act of 1939 and in connection with the proposed issuance by Sequoia Mortgage
Funding Corporation of its Collateralized Mortgage Bonds, First Union National
Bank of North Carolina, as the Trustee herein named, hereby consents that
reports of examinations of said Trustee by Federal, State, Territorial or
District authorities may be furnished by such authorities to the Securities and
Exchange Commission upon requests therefor.
FIRST UNION NATIONAL BANK OF NORTH CAROLINA
BY: /s/ DANIEL J. OBER
------------------------------------------
Daniel J. Ober, Vice President
Dated: May 9, 1997
<PAGE> 6
EXHIBIT T-1 (3)
EXTRACT FROM THE BY-LAWS OF
FIRST UNION NATIONAL BANK OF NORTH CAROLINA
Section 8.2. Execution of instruments. All agreements, indentures,
mortgages, deeds, conveyances, transfers, certificates, declarations, receipts,
discharges, releases, satisfactions, settlements, petitions, schedules,
accounts, affidavits, bonds, undertakings, proxies, and other instruments or
documents may be signed, executed, acknowledged, verified, delivered or
accepted in behalf of the Association by the Chairman of the Board, or the
President, or any Vice Chairman of the Board, any Vice President or Assistant
Vice President, or the Secretary or Assistant Secretary, Cashier, or Assistant
Cashier, or, if in connection with the exercise of fiduciary powers of the
Association, by any of said officers or by any Trust Officer or Assistant Trust
Office; provided, however, that where required, any such instruments may also
be executed, acknowledged, verified, delivered, or accepted in behalf of The
Association in such other manner and by such other officers as the Board of
Directors may from time to time direct, the provisions of this Section 8.2 are
supplementary to any other provision of these By-Laws.
I HEREBY CERTIFY THAT THE foregoing is a true and complete extract from the
By-Laws of First Union National Bank of North Carolina, a national banking
association, now in full force and effect.
IN WITNESS WHEREOF, I have hereunto subscribed my name and affixed the seal of
said Association on May 9, 1997.
/s/ PABLO DE LA CANAL
----------------------------
Pablo de La Canal
Assistant Secretary
7
