<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 3, 1997
REGISTRATION NO.
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
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>
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PER UNIT* PRICE* REGISTRATION FEE
- -----------------------------------------------------------------------------------------------------------
Collateralized Mortgage Bonds...... $1,000,000 100% $1,000,000 $303.03
===========================================================================================================
</TABLE>
* Estimated for the purpose of calculating the registration fee.
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 MARCH 3, 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-42
of this Prospectus Supplement and on page 84 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.
Under certain circumstances, the Issuer may pledge additional Pledged
Mortgages ("Additional Mortgage Collateral") to the Bond Trustee and issue
additional Bonds ("Additional Bonds"). Any such pledge of Additional Mortgage
Collateral and issuance of such Additional Bonds may affect the timing and
amount of payments on any outstanding Class of Offered Bonds and an investor's
yield on any such outstanding Bonds. See "SECURITY FOR THE BONDS -- Pledge of
Additional Mortgage Collateral and Issuance of Additional Bonds" 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-42 of this Prospectus Supplement and page 84
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.
Additional Collateral...... The Issuer may pledge additional Pledged Mortgages
("Additional Mortgage Collateral") to the Bond
Trustee and issue Additional Bonds within [one
year] following the date of initial issuance of the
Bonds upon the satisfaction of certain conditions
set forth in the Indenture. Although the pledge of
any Additional Mortgage Collateral will not result
in any change in any Bond Interest Rate, Stated
Maturity or Payment Dates of any Class of Offered
Bonds, the pledge of Additional Mortgage Collateral
may result in a variance of up to years in the
weighted average life of the Offered Bonds at %
of the Prepayment Assumption (as defined herein),
and the characteristics of the Additional Mortgage
Collateral may vary within the parameters described
herein. Furthermore, no assurance can be given that
the pledge of Additional Mortgage Collateral and
issuance of Additional Bonds would not affect the
timing or amount of payments received by holders of
the Offered Bonds. Provided that the conditions
described herein and in the Indenture are
satisfied, the pledge of Additional Mortgage
Collateral and the issuance of Additional Bonds
will not be subject to the prior consent of the
Bondholders. See "SECURITY FOR THE BONDS -- Pledge
of Additional Mortgage Collateral and Issuance of
Additional Bonds" 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
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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 applicable
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
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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.
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.
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RISK FACTORS
YIELD, PREPAYMENT AND MATURITY RISKS
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).
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.
[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.]
[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.]
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 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
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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.
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 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.
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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.
LIMITED LIQUIDITY
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.
BOOK-ENTRY BONDS
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.
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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.
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.
ISSUANCE OF ADDITIONAL BONDS
Subject to certain conditions set forth herein, in the Prospectus and in
the Indenture, the Issuer may pledge additional mortgage loans ("Additional
Mortgage Collateral") to the Bond Trustee and issue Additional Bonds within [one
year] following the date of initial issuance of the Bonds. Although the pledge
of any Additional Mortgage Collateral will not result in any change in the Bond
Interest Rate, Stated Maturity or Payment Dates of the Bonds, the pledge of
Additional Mortgage Collateral may result in a variance of up to years in the
weighted average life of the Bonds at % of the Prepayment Assumption (as
described herein), and the characteristics of the Additional Mortgage Collateral
may vary within the parameters described herein. Furthermore, no assurance can
be given that any pledge of Additional Mortgage Collateral and issuance of
Additional Bonds would not affect the timing or amount of payments received by
the holders of the Offered Bonds. Provided that the conditions described herein,
and in the Indenture are satisfied, the pledge of Additional Mortgage Collateral
and the issuance of Additional Bonds will not be subject to the prior consent of
the Bondholders. See "SECURITY FOR THE BONDS -- Pledge of Additional Mortgage
Collateral and Issuance of Additional Bonds" herein and in the Prospectus.
DELINQUENCIES
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.
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.
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
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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.
RATING
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.
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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 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").
Under certain circumstances, the Issuer may issue Additional Bonds ranking
pari passu with the Offered Bonds without the consent of the Bondholders. See
"SECURITY FOR THE BONDS -- Pledge of Additional Mortgage Collateral and Issuance
of Additional Bonds" herein.
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
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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 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
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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.
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
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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
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.
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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 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
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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 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
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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.
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
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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
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.
S-22
<PAGE> 24
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.
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
S-23
<PAGE> 25
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.
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.
S-24
<PAGE> 26
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 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
Pledge of Additional Collateral and the issuance of Additional Bonds also could
have an effect on the weighted average life of the Offered Bonds. See "SECURITY
FOR THE BONDS -- Pledge of Additional Collateral and Issuance of Additional
Bonds" herein and in the Prospectus.
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 Assump-
S-25
<PAGE> 27
tions 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 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.
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.
S-26
<PAGE> 28
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.
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.]
S-27
<PAGE> 29
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.]
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
S-28
<PAGE> 30
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%.
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.
PLEDGE OF ADDITIONAL MORTGAGE COLLATERAL AND ISSUANCE OF ADDITIONAL BONDS
Subject to certain conditions set forth herein and in the Indenture, the
Issuer may pledge Additional Mortgage Collateral to the Bond Trustee and issue
Additional Bonds within [one year] of the initial issuance of the Bonds. Such
Additional Bonds may represent additional Bonds of one or more outstanding
Classes of Offered Bonds or may represent one or more new Classes of Bonds. Any
pledge of Additional Mortgage Collateral and issuance of Additional Bonds will
be subject to satisfaction of the following conditions: (a) confirmation by each
Rating Agency that the pledge of Additional Mortgage Collateral and the
corresponding issuance of Additional Bonds will not result in the downgrading of
the credit rating of any outstanding Class of Offered Bonds, (b) the pledge of
Additional Mortgage Collateral will effect no change in the Bond Interest Rate,
Stated Maturity or Payment Dates of the Bonds without the consent of each
Bondholder affected thereby, and (c) the weighted average lives of the Bonds
calculated at an assumed prepayment rate of % Prepayment Assumption will
not vary by more than years from the weighted average lives disclosed
herein.
In addition, following the pledge of Additional Mortgage Collateral, the
following parameters will be satisfied.
S-34
<PAGE> 36
[1. The percentage of Pledged Mortgages which are [fixed interest
rate] mortgage loans will not exceed %.]
[2. The percentage of Pledged Mortgages which are [adjustable rate]
mortgage loans will not exceed %.]
3. The percentage of Pledged Mortgages that contain "due-on-sale"
clauses will not exceed %.
4. The percentage of Pledged Mortgages secured by investor properties
will not exceed %.
5. The weighted average original Loan-to-Value Ratio of the Pledged
Mortgages will not exceed %.
6. The percentage of Pledged Mortgages originated pursuant to a
"limited documentation" program will not exceed %.
7. The percentage of Pledged Mortgages having an original
Loan-to-Value Ratio in excess of 80% that will be covered by a Primary
Mortgage Insurance Policy will equal at least %.
8. The percentage of Pledged Mortgages which are cash-out refinance
mortgages will not exceed %.
9. The percentage of Pledged Mortgages that are delinquent by one or
more scheduled payments will not exceed %.
10. The weighted average maturity of the Pledged Mortgages will not
increase or decrease by more than %.
If the foregoing conditions are satisfied, the pledge of Additional
Mortgage Collateral and the issuance of Additional Bonds will not be subject to
the prior consent of the Bondholders; however, there can be no assurance that
any pledge of Additional Mortgage Collateral and issuance of Additional Bonds
will not affect the timing or amount of payments received by the holders of the
Offered Bonds.
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
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.
S-35
<PAGE> 37
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.
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
S-36
<PAGE> 38
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 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.
S-37
<PAGE> 39
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.
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
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-
S-38
<PAGE> 40
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.
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 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
S-39
<PAGE> 41
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.
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
S-40
<PAGE> 42
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-41
<PAGE> 43
INDEX OF CERTAIN DEFINITIONS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Additional Mortgage Collateral........................................................ S-7
Adjustment Date....................................................................... S-28
Advance............................................................................... S-38
Available Funds....................................................................... S-19
Belgian Cooperative.........................................................S-17, S-19, S-36
Beneficial owner...................................................................... S-15
Bond Account.......................................................................S-7, S-20
Bond Distribution Amount.............................................................. S-19
Bond Interest Rate.................................................................... S-20
Bond Owners........................................................................... S-15
Bond Trustee.......................................................................... S-3
Bonds..............................................................................S-1, S-15
Book-Entry Bonds...................................................................... S-15
CEDEL Participants.................................................................... S-17
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-15
Class B-1 Principal Carryover Shortfall............................................... S-22
Class B-1 Principal Payment Amount.................................................... S-22
Class B-2 Interest Carryover Shortfall................................................ S-20
Class B-2 Interest Payment Amount..................................................... S-20
Class B-2 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-15
Code...............................................................................S-8, S-39
Company.............................................................................S-2, S-3
CPR................................................................................... S-25
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-29
ERISA..............................................................................S-8, S-39
Euroclear Operator.................................................................... S-17
Euroclear Participants................................................................ S-17
European Depositaries................................................................. S-15
FHLMC................................................................................. S-28
</TABLE>
S-42
<PAGE> 44
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Financial Intermediary................................................................ S-16
FNMA.................................................................................. S-28
Index..............................................................................S-7, S-28
Insurance Proceeds.................................................................... S-19
Interest Accrual Period............................................................... S-5
Interest Payment Amount............................................................... S-20
Invested Amount....................................................................... S-15
Invested Amount Payment............................................................... S-22
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-28
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-15
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
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-39
Plan Investors.....................................................................S-8, S-39
Pledged Mortgage Pool..............................................................S-7, S-27
Pledged Mortgages..................................................................... S-2
Pool Principal Balance................................................................ S-21
Prepayment Assumption................................................................. S-25
Prepayment Interest Shortfall......................................................... S-21
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
REMIC................................................................................. S-39
REO Property.......................................................................... S-38
</TABLE>
S-43
<PAGE> 45
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Replacement Pledged Mortgage.......................................................... S-34
Rules................................................................................. S-16
Scheduled Payments.................................................................... S-27
Seller................................................................................ S-36
Senior Bond Interest Rate............................................................. S-1
Senior Bonds.......................................................................S-1, S-15
Senior Class Principal Amount......................................................... S-15
Senior Interest Payment Amount........................................................ S-20
Senior Percentage..................................................................... S-21
Shortfalls............................................................................ S-10
SMMEA................................................................................. S-9
Stated Principal Balance.............................................................. S-21
Structuring Assumptions............................................................... S-24
Subordinated Bonds.................................................................S-1, S-15
Substitution Adjustment Amount........................................................ S-34
Terms and Conditions.................................................................. S-17
Underwriter........................................................................... S-1
Variable Rate Debt Instruments........................................................ S-8
</TABLE>
S-44
<PAGE> 46
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
S-45
<PAGE> 47
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.
S-46
<PAGE> 48
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 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
S-47
<PAGE> 49
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.
S-48
<PAGE> 50
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 MARCH 3, 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-43
of this Prospectus Supplement and on page 84 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.
Under certain circumstances, the Issuer may pledge additional Pledged
Mortgages ("Additional Mortgage Collateral") to the Bond Trustee and issue
additional Bonds ("Additional Bonds"). Any such pledge of Additional Mortgage
Collateral and issuance of such Additional Bonds may affect the timing and
amount of payments on any outstanding Class of Bonds and an investor's yield on
any such outstanding Bonds. See "SECURITY FOR THE BONDS -- Pledge of Additional
Mortgage Collateral and Issuance of Additional Bonds" 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> 51
(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.
S-2
<PAGE> 52
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> 53
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-43 of this Prospectus Supplement and page 84
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> 54
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> 55
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> 56
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> 57
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> 58
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.
Additional Collateral...... The Issuer may pledge additional Pledged Mortgages
("Additional Mortgage Collateral") to the Bond
Trustee and issue Additional Bonds within [one
year] following the date of initial issuance of the
Bonds upon the satisfaction of certain conditions
set forth in the Indenture. Although the pledge of
any Additional Mortgage Collateral will not result
in any change in any Bond Interest Rate, Stated
Maturity or Payment Dates of any Class of Bonds,
the pledge of Additional Mortgage Collateral may
result in a variance of up to years in the
weighted average life of the Bonds at % of the
Prepayment Assumption (as defined herein), and the
characteristics of the Additional Mortgage
Collateral may vary within the parameters described
herein. Furthermore, no assurance can be given that
the pledge of Additional Mortgage Collateral and
issuance of Additional Bonds would not affect the
timing or amount of payments received by holders of
the Bonds. Provided that the conditions described
herein and in the Indenture are satisfied, the
pledge of Additional Mortgage Collateral and the
issuance of Additional Bonds will not be subject to
the prior consent of the Bondholders. See "SECURITY
FOR THE BONDS -- Pledge of Additional Mortgage
Collateral and Issuance of Additional Bonds" 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
S-9
<PAGE> 59
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 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
S-10
<PAGE> 60
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 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.
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RISK FACTORS
YIELD, PREPAYMENT AND MATURITY RISKS
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).
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.
[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.]
[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.]
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 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
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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.
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 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
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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.
LIMITED LIQUIDITY
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.
BOOK-ENTRY BONDS
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.
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.
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
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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.
ISSUANCE OF ADDITIONAL BONDS
Subject to certain conditions set forth herein, in the Prospectus and in
the Indenture, the Issuer may pledge additional mortgage loans ("Additional
Mortgage Collateral") to the Bond Trustee and issue Additional Bonds within [one
year] following the date of initial issuance of the Bonds. Although the pledge
of any Additional Mortgage Collateral will not result in any change in the Bond
Interest Rate, Stated Maturity or Payment Dates of the Bonds, the pledge of
Additional Mortgage Collateral may result in a variance of up to years in
the weighted average life of the Bonds at % of the Prepayment Assumption (as
described herein), and the characteristics of the Additional Mortgage Collateral
may vary within the parameters described herein. Furthermore, no assurance can
be given that any pledge of Additional Mortgage Collateral and issuance of
Additional Bonds would not affect the timing or amount of payments received by
the holders of the Bonds. Provided that the conditions described herein, and in
the Indenture are satisfied, the pledge of Additional Mortgage Collateral and
the issuance of Additional Bonds will not be subject to the prior consent of the
Bondholders. See "SECURITY FOR THE BONDS -- Pledge of Additional Mortgage
Collateral and Issuance of Additional Bonds" herein and in the Prospectus.
DELINQUENCIES
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.
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
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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.
RATING
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 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
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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 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").
Under certain circumstances, the Issuer may issue Additional Bonds ranking
pari passu with the Bonds without the consent of the Bondholders. See "SECURITY
FOR THE BONDS -- Pledge of Additional Mortgage Collateral and Issuance of
Additional Bonds" herein.
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).
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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
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-
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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.
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
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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.
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
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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 "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
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<PAGE> 71
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 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.
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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 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
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<PAGE> 73
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 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
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<PAGE> 74
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 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>
S-25
<PAGE> 75
(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 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).
S-26
<PAGE> 76
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 Pledge of
Additional Collateral and the issuance of Additional Bonds also could have an
effect on the weighted average life of the Bonds. See "SECURITY FOR THE BONDS --
Pledge of Additional Mortgage Collateral and Issuance of Additional Bonds"
herein and in the Prospectus.
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.
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.
S-27
<PAGE> 77
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.
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
S-28
<PAGE> 78
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 ( %), 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
S-29
<PAGE> 79
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.
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%.
S-30
<PAGE> 80
<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 %.
<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.
S-31
<PAGE> 81
<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 $ .
<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.
S-32
<PAGE> 82
<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.
<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.
S-33
<PAGE> 83
<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.
<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 %.
S-34
<PAGE> 84
<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.
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,
S-35
<PAGE> 85
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.
PLEDGE OF ADDITIONAL COLLATERAL AND ISSUANCE OF ADDITIONAL BONDS
Subject to certain conditions set forth herein and in the Indenture, the
Issuer may pledge Additional Mortgage Collateral to the Bond Trustee and issue
Additional Bonds within [one year] of the initial issuance of the Bonds. Such
Additional Bonds may represent additional Bonds of one or more outstanding
Classes of Bonds or may represent one or more new Classes of Bonds. Any pledge
of Additional Mortgage Collateral and issuance of Additional Bonds will be
subject to satisfaction of the following conditions: (a) confirmation by each
Rating Agency that the pledge of Additional Mortgage Collateral and the
corresponding issuance of Additional Bonds will not result in the downgrading of
the credit rating of any outstanding Class of Bonds (without regard to the Bond
Insurance Policy), (b) the prior written approval of the Insurer and the
guaranty of amounts due with respect to such Additional Bonds pursuant to the
terms of a policy issued by the Insurer, (c) the pledge of Additional Mortgage
Collateral will effect no change in the Bond Interest Rate, Stated Maturity or
Payment Dates of the Bonds without the consent of each Bondholder affected
thereby, and (d) the weighted average lives of the Bonds calculated at an
assumed prepayment rate of % Prepayment Assumption will not vary by more
than years from the weighted average lives disclosed herein.
In addition, following the pledge of Additional Mortgage Collateral, the
following parameters will be satisfied.
[1. The percentage of Pledged Mortgages which are [fixed interest
rate] mortgage loans will not exceed %.]
[2. The percentage of Pledged Mortgages which are [adjustable rate]
mortgage loans will not exceed %.]
3. The percentage of Pledged Mortgages that contain "due-on-sale"
clauses will not exceed %.
4. The percentage of Pledged Mortgages secured by investor properties
will not exceed %.
5. The weighted average original Loan-to-Value Ratio of the Pledged
Mortgages will not exceed %.
6. The percentage of Pledged Mortgages originated pursuant to a
"limited documentation" program will not exceed %.
7. The percentage of Pledged Mortgages having an original
Loan-to-Value Ratio in excess of 80% that will be covered by a Primary
Mortgage Insurance Policy will equal at least %.
8. The percentage of Pledged Mortgages which are cash-out refinance
mortgages will not exceed %.
9. The percentage of Pledged Mortgages that are delinquent by one or
more scheduled payments will not exceed %.
S-36
<PAGE> 86
10. The weighted average maturity of the Pledged Mortgages will not
increase or decrease by more than %.
If the foregoing conditions are satisfied, the pledge of Additional Mortgage
Collateral and the issuance of Additional Bonds will not be subject to the prior
consent of the Bondholders; however, there can be no assurance that any pledge
of Additional Mortgage Collateral and issuance of Additional Bonds will not
affect the timing or amount of payments received by the holders of the Bonds.
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
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,
S-37
<PAGE> 87
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.
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.
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<PAGE> 88
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 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.
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<PAGE> 89
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 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
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 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
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<PAGE> 90
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.
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.
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,
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<PAGE> 91
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.
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.
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<PAGE> 92
INDEX OF DEFINED TERMS
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
Additional Mortgage Collateral....................................................... S-9
Adjustment Date...................................................................... S-29
Advance.............................................................................. S-40
Available Funds...................................................................... S-21
Belgian Cooperative.................................................................. S-19
Beneficial owner..................................................................... S-17
Bond Account..................................................................S-9, S-21, S-39
Bond Distribution Amount............................................................. S-21
Bond Interest Rate................................................................... S-22
Bond Owners.......................................................................... S-17
Bond Trustee......................................................................... S-4
Bonds..........................................................................S-1, S-4, S-17
Book-Entry Bonds..................................................................... S-17
CEDEL Participants................................................................... S-19
Certificate Interest Payment Amount.................................................. S-22
Certificate Interest Rate............................................................ S-5
Class Principal Amount............................................................... S-17
Code...............................................................................S-10, S-41
Company..............................................................................S-2, S-4
CPR.................................................................................. S-26
Cut-off Date Pool Principal Balance.................................................. S-29
Definitive Bond...................................................................... S-17
Deleted Pledged Mortgage............................................................. S-36
Deposit Trust Agreement.............................................................. S-5
Distribution Account................................................................S-9, S-21
DTC.................................................................................. S-17
Due Date............................................................................. S-29
ERISA..............................................................................S-10, S-40
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-18
Insurance Proceeds................................................................... S-21
Interest Accrual Period.............................................................S-6, S-22
Interest Payment Amount.............................................................. S-22
Invested Amount...................................................................... S-17
Invested Amount Payment.............................................................. S-24
Investor Certificate................................................................S-1, S-16
Investor Percentage.................................................................. S-23
Issuer............................................................................... S-2
Liquidated Pledged Mortgage.......................................................... S-25
</TABLE>
S-43
<PAGE> 93
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
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
Owner Trustee........................................................................ S-4
Participants......................................................................... S-17
Payment Date...................................................................S-1, S-5, S-21
Periodic Rate Cap.................................................................... S-29
Plan...............................................................................S-10, S-41
Plan Asset Regulations.............................................................S-10, S-41
Plan Investors.....................................................................S-10, S-41
Pledged Mortgage Pool...............................................................S-7, S-29
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-41
REO Property......................................................................... S-40
Replacement Pledged Mortgage......................................................... S-36
Rules................................................................................ S-18
Scheduled Payments................................................................... S-29
Seller............................................................................... S-37
Senior Bond Interest Rate............................................................ S-1
Senior Bonds........................................................................S-1, S-16
Senior Class Principal Amount........................................................ S-17
Senior Interest Payment Amount....................................................... S-22
Senior Percentage.................................................................... S-23
</TABLE>
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<PAGE> 94
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
Senior Principal Payment Amount...................................................... S-23
Servicing Fee........................................................................ S-39
Shortfalls........................................................................... S-12
SMMEA................................................................................ S-11
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-22
Subordinated Percentage.............................................................. S-23
Subordinated Principal Carryover Shortfall........................................... S-24
Subordinated Principal Payment Amount................................................ S-23
Substitution Adjustment Amount....................................................... S-36
Terms and Conditions................................................................. S-19
Underwriter.......................................................................... S-1
Variable Rate Debt Instruments....................................................... S-19
"Investor............................................................................ S-1
</TABLE>
S-45
<PAGE> 95
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
S-46
<PAGE> 96
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.
S-47
<PAGE> 97
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
S-48
<PAGE> 98
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.
S-49
<PAGE> 99
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 MARCH 3, 1997
PROSPECTUS
SEQUOIA MORTGAGE FUNDING CORPORATION
DEPOSITOR
$
(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 primarily 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,
reinvestment income, guaranties, letters of credit or other assets 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
84 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.
UNDER CERTAIN CIRCUMSTANCES, A TRUST MAY PLEDGE ADDITIONAL MORTGAGE
COLLATERAL ("ADDITIONAL MORTGAGE COLLATERAL") TO THE RELATED BOND TRUSTEE AND
ISSUE ADDITIONAL BONDS ("ADDITIONAL BONDS") OF A SERIES. ANY SUCH PLEDGE OF
ADDITIONAL MORTGAGE COLLATERAL AND ISSUANCE OF ADDITIONAL BONDS MAY AFFECT THE
TIMING AND AMOUNT OF PAYMENTS ON ANY OUTSTANDING BONDS OF THAT SERIES AND AN
INVESTOR'S YIELD ON ANY SUCH OUTSTANDING BONDS. SEE "SECURITY FOR THE
BONDS -- PLEDGE OF ADDITIONAL MORTGAGE COLLATERAL AND ISSUANCE OF ADDITIONAL
BONDS" HEREIN.
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.
, 1997.
<PAGE> 100
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, letters of credit or other instruments or agreements, 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> 101
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.
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> 102
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 84 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 primarily 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. 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, reinvestment income, guaranties,
letters of credit or other assets, 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
4
<PAGE> 103
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"). 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
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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.
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
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<PAGE> 105
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 (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
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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
pledge Additional Mortgage Collateral (as defined
herein) to the Bond Trustee or 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", "SECURITY FOR THE
BONDS -- Substitution of Mortgage Collateral" and
"Pledge of Additional Mortgage Collateral and
Issuance of Additional Bonds" 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 or
another entity or entities, in each case to the
extent, subject to the conditions and at the
redemption prices specified in such Prospectus
Supplement. 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 Collateral 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.
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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 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.
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<PAGE> 108
(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 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
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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.
The Agency Securities may consist of pass-through
securities issued under FHLMC's Cash or Guarantor
Program, the GNMA I Program, the GNMA II Program or
another program specified in the related Prospectus
Supplement. The payment characteristics of the
mortgage loans underlying the Agency Securities
will be described in the related Prospectus
Supplement. 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
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Securities; (vi) the issuer of the Private
Mortgage-Backed Securities (the "PMBS Issuer"), the
servicer of the Private Mortgage-Backed 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 or other call feature; 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
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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 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.
Additional Collateral...... If so specified in the related Prospectus
Supplement, subject to certain conditions set forth
herein and in such Prospectus Supplement, the
Issuer may pledge additional Pledged Mortgages or
Certificates ("Additional Mortgage Collateral") to
the Bond Trustee and issue Additional Bonds of the
related Series within five years of the date of
initial issuance of the Bonds of such Series.
Although the pledge of any Additional Mortgage
Collateral generally will not result in any change
in the interest rate, Stated Maturity or Payment
Dates of any outstanding Bonds of such Series, the
pledge of Additional Mortgage Collateral may result
in a variance in the weighted average life of any
outstanding Class of Bonds of such Series at the
prepayment rate assumed for the pricing of the
initial issuance of such Class, and the
characteristics of the Additional Mortgage
Collateral may vary within the parameters specified
in the related Prospectus Supplement. Furthermore,
no assurance can be given that any pledge of
Additional Mortgage Collateral and issuance of
Additional Bonds would not affect the timing or
amount of payments received by Holders of the
outstanding Bonds of that Series. See "SECURITY FOR
THE BONDS -- Additional Mortgage Collateral and
Issuance of Additional Bonds" 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
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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. 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 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")
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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") 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 bankruptcy bonds or other insurance 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
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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 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. Other Arrangements...... If so specified and to the extent described in the
related Prospectus Supplement, one or more other
insurance policies, guaranties, surety bonds,
letters of credit, cash accounts, guaranteed
investment contracts, cross support, reinvestment
income or other similar instruments or agreements
may be used to provide coverage for certain risks
of default or various types of losses. Other
arrangements may include any type of derivative
arrangement, including a guaranteed rate agreement,
maturity liquidity facility, interest rate cap or
floor agreement, interest rate or
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currency swap agreement or other similar
arrangement. See "CREDIT ENHANCEMENT -- Other
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 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 debt instruments for federal income tax
purposes. 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.
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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 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.
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RISK FACTORS
Investors should consider, among other things, the following factors in
connection with an investment in the Bonds.
LIMITED LIQUIDITY
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.
BOOK-ENTRY REGISTRATION
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.
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.
NATURE OF PLEDGED MORTGAGES
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
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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.
PLEDGED MORTGAGES WITH 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
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.
CREDIT CONSIDERATIONS
LIMITED ASSETS. 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
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respect to the Mortgage Collateral or the Bonds of any Series will be pursuant
to certain representations and warranties. The Depositor does not have, and is
not expected in the future to have, any significant assets with which to meet
any obligation to repurchase 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.
NATURE 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
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
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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, reinvestment income, guarantees, letters of credit or other assets 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 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. 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.
PLEDGE OF ADDITIONAL COLLATERAL
Subject to certain conditions set forth herein and in the Prospectus
Supplement for a Series of Bonds, the Issuer may pledge additional Pledged
Mortgages or Certificates ("Additional Mortgage Collateral") to the Bond Trustee
and issue Additional Bonds of that Series within five years of the date of
initial issuance of the Bonds of such Series. Although the pledge of any
Additional Mortgage Collateral generally will not result in any change in the
interest rate, Stated Maturity or Payment Dates of any outstanding Bonds of such
Series, the pledge of Additional Mortgage Collateral may result in a variance in
the weighted average life of any outstanding Class of Bonds of such Series at
the prepayment rate assumed for the pricing of the initial issuance of such
Class, and the characteristics of the Mortgage Collateral may vary within the
parameters specified in the related Prospectus Supplement. Furthermore, no
assurance can be given that any pledge of Additional Mortgage Collateral and
issuance of Additional Bonds would not affect the timing or amount of payments
received by holders of the outstanding Bonds of that Series. Provided that the
conditions described in the related Prospectus Supplement are satisfied, the
pledge of Additional Mortgage Collateral and the issuance of Additional Bonds
will not be subject to the prior consent of the holders of the outstanding Bonds
of such Series. See "SECURITY FOR THE BONDS -- Pledge of Additional Mortgage
Collateral and Issuance of Additional Bonds" herein.
PRE-FUNDING ACCOUNTS
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
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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.
BANKRUPTCY AND INSOLVENCY RISKS
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, this
position, if argued before or accepted by a court, could prevent timely payments
of amounts due on the Bonds and result in a reduction of payments due on the
Bonds.
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.
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 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.
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PREPAYMENT AND YIELD CONSIDERATIONS
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 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. 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", 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.
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RATING OF THE BONDS
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.
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.
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 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.
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 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.
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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.
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
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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 , 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 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) 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. Unless otherwise specified in the
related Prospectus Supplement, the Pledged Mortgages so acquired by the
Depositor will have been originated in accordance with the underwriting criteria
specified below under "Underwriting Standards."
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.
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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. Generally, 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 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.
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 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
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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 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 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.
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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.
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
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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 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
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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 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)
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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 or another
entity or entities, in each case to the extent, subject to the conditions and at
the prices specified in such Prospectus Supplement. Unless otherwise provided in
the related Prospectus Supplement, notice of any such redemption must be given
by the Issuer or such other entity to the Bond Trustee not less than 30 days
prior to the redemption date and must be mailed by the Issuer, such other entity
or the Bond Trustee to affected Bondholders at least five days prior to the
redemption date. (Indenture, Sections 10.01 and 10.02)
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, (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
or (iii) such other guarantees as may be specified in the related Prospectus
Supplement. 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. 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. In addition, the exercise by the Issuer of its right to pledge
Additional Mortgage Collateral and issue Additional Bonds may result in a
variance in the weighted average life of any Class of Bonds of the related
Series as described herein under "SECURITY FOR THE
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BONDS -- Pledge of Additional Mortgage Collateral and Issuance of Additional
Bonds." 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 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.
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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 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
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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 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.
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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, 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 other accounts, obligations, insurance policies,
guarantees or agreements, as specified in the related Prospectus Supplement,
(vi) to the extent applicable, the reinvestment income on all of the foregoing,
(vii) to the extent applicable, the Issuer's rights to Additional Mortgage
Collateral, (viii) the Issuer's rights under the Master Servicing Agreement with
respect to the Series of Bonds, (ix) the Issuer's rights under the Mortgage Loan
Purchase Agreement with respect to the Series of Bonds, (x) amounts (excluding
any reinvestment income thereon) deposited in the related early remittance
account, if any, under the Indenture for such Series of Bonds and (xi) 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,
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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 some other form of credit enhancement 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 (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
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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 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
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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, certain other
credit enhancement or alternative arrangements, 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 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
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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 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.
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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 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.
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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.
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
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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 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.
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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 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
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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 or participation 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.
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 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
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the Private Mortgage-Backed Securities after a certain date or under other
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 any other
conditions upon which Mortgage Collateral may be substituted for Mortgage
Collateral initially securing such Series.
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
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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))
Unless otherwise provided in the related Prospectus Supplement, "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 related Series of Bonds by each such 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 assigned to each
related Series of Bonds by each such Rating Agency; and (xi) such other
investments having a specified stated maturity and bearing interest or sold at a
discount acceptable to each applicable Rating Agency 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; 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
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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.
PLEDGE OF ADDITIONAL MORTGAGE COLLATERAL AND ISSUANCE OF ADDITIONAL BONDS
If so specified in the related Prospectus Supplement, the Issuer may pledge
additional Mortgage Collateral ("Additional Mortgage Collateral") to the Bond
Trustee and issue additional Bonds ("Additional Bonds") of that Series within
five years of the date of initial issuance of the Bonds of such Series. Such
Additional Bonds may represent additional Bonds of one or more outstanding
Classes of Bonds or may represent one or more new Classes of Bonds of such
Series. Any such Additional Bonds will be issued pursuant to a Prospectus
Supplement, which will describe the characteristics of the Additional Mortgage
Collateral and the material terms of the Additional Bonds. Unless otherwise
specified in the related Prospectus Supplement, any pledge of Additional
Mortgage Collateral and issuance of Additional Bonds will be subject to
satisfaction of the following conditions: (a) each Rating Agency rating any
outstanding Class of Bonds of the related Series will confirm that the pledge of
Additional Mortgage Collateral and other additional Collateral, if any, and the
corresponding issuance of Additional Bonds will not result in the downgrading of
the credit rating of any outstanding Class of Bonds of such Series, (b) the
pledge of Additional Mortgage Collateral will not affect the interest rate,
Stated Maturity Date or Payment Dates of any outstanding Bonds of such Series,
(c) the weighted average life of each outstanding Class of Bonds calculated at
the prepayment rate assumed for the pricing of the initial issuance of such
Class of Bonds will not vary by more than the non-material amount disclosed in
the Prospectus Supplement for the initial issuance of the Bonds of such Series,
and (d) the characteristics of the Additional Mortgage Collateral and the
Mortgage Collateral as augmented by the Additional Mortgage Collateral will
conform to the parameters for Mortgage Collateral disclosed in the Prospectus
Supplement for the initial issuance of Bonds of such Series. However, there can
be no assurance that any pledge of Additional Mortgage Collateral and issuance
of Additional Bonds would not affect the timing or amount of payments received
by holders of the outstanding Bonds of that Series. Provided that the conditions
described in the related Prospectus Supplement for the outstanding Bonds are
satisfied, the pledge of Additional Mortgage Collateral and the issuance of
Additional Bonds will not be subject to the prior consent of the holders of the
outstanding Bonds of such Series.
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. 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 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
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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.
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 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. 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,
surety bond, letter of credit, guaranteed investment contract or other method of
credit enhancement described 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
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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 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
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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.
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
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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 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 any other
instrument acceptable to each applicable Rating Agency 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
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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 any other
instrument acceptable to each applicable Rating Agency 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 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 other 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 payment on each Pledged Mortgage or Certificate, as the
case may be, as an additional payment in respect of principal to
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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 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.
OTHER ARRANGEMENTS
If so specified in the related Prospectus Supplement, other types of 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.
Credit enhancement may be in the form of other insurance policies, guaranties,
surety bonds, letters of credit, guaranteed investment contracts, cross support,
cash accounts, reinvestment income or similar arrangements 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. 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. In addition, if
so specified in the related Prospectus Supplement, other arrangements may
include any type of derivative arrangement, including a guaranteed rate
agreement, maturity liquidity facility, interest rate cap or floor agreement,
interest rate or currency swap agreement or other similar arrangement. Such
arrangements will support the payments on the Bonds and may be used for other
purposes, 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 amount covered by credit
enhancement or which are not covered by the credit enhancement, Bondholders will
bear their allocable share of any deficiencies.
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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 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.
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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 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
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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.
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
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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 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.
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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 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
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Supplement, the obligations of the Master Servicer to make Advances may be
supported by a cash advance reserve fund, a surety bond or other arrangement, 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 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
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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 actual provisions (including definitions of terms) are
incorporated by reference as part of such summaries.
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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. The Indenture provides that
additional Bonds may be issued for any outstanding Class of Bonds or Series up
to the aggregate principal amount authorized from time to time by the Issuer,
subject to the provisions of the related Indenture.
MODIFICATION OF INDENTURE
With the consent of the holders of not less than 66 2/3% of the then
outstanding principal amount each Class of Bonds of the related Series affected
thereby, 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 each Class of Bonds of such
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Series affected thereby; (d) any representation or warranty made by the Issuer
in the Indenture or in any certificate 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 each Class
of Bonds of such Series affected thereby; 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 each Class of Bonds of such Series affected thereby 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)
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, 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
addition, 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)
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 of the 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 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 each Class of Bonds of the Series
affected thereby 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 provides that the trust shall not have the power to perform any act or
engage in any business whatsoever except
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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 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 Property is located.
Deeds of trust are used almost exclusively in California instead of mortgages. A
mortgage
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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.
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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.
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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
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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
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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.
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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.
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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
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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 general discussion of the anticipated material federal
income tax consequences of the purchase, ownership and disposition of the Bonds.
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 discussion also takes into
account regulations issued on February 2, 1994, regarding the taxation of debt
instruments with original issue discount (the "OID Regulations"). The discussion
below 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.
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. Giancarlo & Gnazzo, A Professional
Corporation, tax counsel to the Issuer, will advise the Issuer, however, that in
its opinion such Bonds will be treated for federal income tax purposes as
indebtedness of the Issuer 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.
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Because, in such counsel's opinion, 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).
ORIGINAL ISSUE DISCOUNT
GENERAL. All Deferred Interest Bonds will be, and some or all of the other
Bonds may be, issued with "original issue discount" within the meaning of Code
Section 1273(a). 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.
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
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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 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
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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.
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.
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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 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
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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.
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 were applicable, interest payments made to
Bondholders who are foreign persons would 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 would 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 would 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. In the case of such a disposition 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 would 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.
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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.
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
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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 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
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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 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.
81
<PAGE> 180
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 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.
82
<PAGE> 181
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.
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.
83
<PAGE> 182
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>
Additional Bonds..................................................................... 1, 49
Additional Mortgage Collateral..................................................1, 13, 22, 49
Advance.............................................................................. 17
Agency Securities.................................................................... 1, 4
Assumed Reinvestment Rate............................................................ 31
Available Funds...................................................................... 6, 31
Balloon payments..................................................................... 9, 39
Bankruptcy Bond........................................................................15, 53
Basic Principal Payment.............................................................. 6
Belgian Cooperative.................................................................. 36
Beneficial owner..................................................................... 34
Bond Account...........................................................................12, 57
Bond Distribution Amount............................................................. 12
Bond Insurance Policy................................................................ 15
Bond Owners.......................................................................... 34
Bond Trustee......................................................................... 4, 26
Bond Value........................................................................... 6
Bond Values.......................................................................... 6
Bondholders.......................................................................... 4, 34
Bonds................................................................................ 1, 4
Book-Entry Bonds..................................................................... 34
Buydown Fund......................................................................... 39
Buydown Loans........................................................................ 39
Capitalized Interest Account......................................................... 50
CEDEL Participants................................................................... 35
CERCLA.................................................................................24, 70
Certificates......................................................................... 1, 4
Closing Date......................................................................... 12
Code............................................................................5, 18, 26, 73
Collateral........................................................................... 37
Collateral Group..................................................................... 31
Commission........................................................................... 2
Company..............................................................................1, 5, 26
Conventional Loans................................................................... 33
Cooperative Loans.................................................................... 9, 41
Cooperatives......................................................................... 9, 41
Custodial Account.................................................................... 56
Cut-off Date......................................................................... 14
Deferred Interest Bonds.............................................................. 30
Definitive Bond...................................................................... 34
Depositor............................................................................ 5, 26
Detailed Description................................................................. 38
Distribution Account................................................................. 12
Distribution Account Deposit Date......................................................12, 48
DTC.................................................................................. 19, 34
</TABLE>
84
<PAGE> 183
<TABLE>
<S> <C>
Due Period........................................................................... 6
Eligible Substitute Pledged Mortgage................................................. 41
EPA.................................................................................. 70
ERISA..................................................................................18, 80
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, 23
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.........................................................................16, 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
</TABLE>
85
<PAGE> 184
<TABLE>
<S> <C>
Mortgagor............................................................................ 29
NCUA................................................................................. 80
OID Regulations...................................................................... 73
Owner Trustee........................................................................ 5, 26
Parties in interest.................................................................. 80
Payment Date......................................................................... 5
Permitted Investments................................................................ 48
Plan Asset Regulation................................................................ 81
Plans................................................................................ 80
Pledged Mortgages.................................................................... 1, 4
PMBS Agreement....................................................................... 46
PMBS Issuer.......................................................................... 12, 46
PMBS Servicer........................................................................ 12, 46
PMBS Trustee......................................................................... 12, 46
Policy Statement..................................................................... 80
Pool Insurer......................................................................... 51
Pre-Funded Amount.................................................................... 22
Pre-Funding Account.................................................................. 13, 23
Primary Mortgage Insurance Policy.................................................... 38
Private Mortgage-Backed Securities................................................... 4
PTCE................................................................................. 81
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...................................................................... 38
Reserve Fund......................................................................... 51
Rules................................................................................ 35
Securities Act....................................................................... 2
Seller............................................................................... 27
Senior Bondholders................................................................... 14, 50
Senior Bonds......................................................................... 4
Senior Liens......................................................................... 40
Servicer............................................................................. 5, 56
Servicers............................................................................ 40
Servicing Agreement.................................................................. 56
Servicing Default.................................................................... 62
SMMEA................................................................................ 18
Special Hazard Insurance Policy...................................................... 14
Special Hazard Insurer............................................................... 52
Special Servicer..................................................................... 5
Special Servicing Agreement.......................................................... 61
Spread............................................................................... 6
Stand-by Master Servicer............................................................. 61
</TABLE>
86
<PAGE> 185
<TABLE>
<S> <C>
Subordinated Bondholders...............................................................13, 50
Subordinated Bonds................................................................... 4
Subsequent Mortgage Collateral....................................................... 23
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>
87
<PAGE> 186
======================================================
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-28
Security for the Bonds.................... S-28
Servicing of the Pledged Mortgages........ S-37
Use of Proceeds........................... S-40
Federal Income Tax Consequences........... S-40
State Tax Consideration...................
ERISA Matters............................. S-41
Method of Distribution.................... S-41
Legal Matters............................. S-42
Ratings................................... S-42
Index of Defined Terms.................... S-43
PROSPECTUS
Prospectus Supplements.................... 2
Available Information..................... 2
Incorporation of Certain Documents by
Reference............................... 3
Summary of Terms.......................... 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 the Pledged
Mortgages............................... 65
Federal Income Tax Consequences........... 73
State Tax Considerations.................. 79
Legal Investment.......................... 79
ERISA Matters............................. 80
Rating.................................... 82
Plan of Distribution...................... 83
Legal Matters............................. 83
Index of Certain Definitions.............. 84
</TABLE>
======================================================
======================================================
SEQUOIA MORTGAGE TRUST
COLLATERALIZED
MORTGAGE
BONDS
-------------------------------------------
PROSPECTUS SUPPLEMENT
-------------------------------------------
[LOGO]
, 199
======================================================
<PAGE> 187
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.**
<TABLE>
<S> <C>
SEC Registration Fee............................................... $303.03
Printing and Engraving Expenses.................................... *
Accounting Fees and Expenses....................................... *
Legal Fees and Expenses............................................ *
Trustee Fees and Expenses.......................................... *
Blue Sky Fees and Expenses......................................... *
Rating Agency Fees................................................. *
Miscellaneous...................................................... *
--------
Total.................................................... $ *
========
</TABLE>
- ---------------
* To be filed by Amendment.
** 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 $ 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.
II-1
<PAGE> 188
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 .*
25.2 Statement of Eligibility and Qualification of Trustee under the Trust Indenture Act of
1939 for .*
</TABLE>
- ---------------
* To be filed by Amendment
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
II-2
<PAGE> 189
the Securities Exchange Act of 1934 that is incorporated by reference in this
Registration Statement 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.
(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> 190
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 Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of San Francisco, State of California, on February 28,
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.
- ---------------
* For itself and on behalf of each trust acting as an Issuer hereunder.
II-4
<PAGE> 191
Pursuant to the requirements of the Securities Act of 1933, this
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 February 28, 1997
- --------------------------------------------- Directors
George G. Bull III (Principal Executive
Officer)
/s/ DOUGLAS B. HANSEN President and Director February 28, 1997
- --------------------------------------------- (Principal Financial
Douglas B. Hansen Officer)
/s/ FREDERICK H. BORDEN Security and Director February 28, 1997
- ---------------------------------------------
Frederick H. Borden
/s/ JOHN CONNOLLY IV Director February 28, 1997
- ---------------------------------------------
John Connolly IV
/s/ CRAIG A. SEVERANCE Director February 28, 1997
- ---------------------------------------------
Craig A. Severance
/s/ VICKIE L. RATH Treasurer (Principal February 28, 1997
- --------------------------------------------- Accounting Officer)
Vickie L. Rath
</TABLE>
II-5
<PAGE> 192
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 .*
25.2 -- Statement of Eligibility and Qualification of Trustee under the Trust Indenture Act
of 1939 for .*
</TABLE>
- ---------------
* To be filed by Amendment
